The World According to Warren Buffett: He Makes It Seem So Easy

Did you catch the interview with Warren Buffett on CNBC yesterday talking about the Mars/Wrigley merger? Buffett’s Berkshire Hathaway is providing $6.5 billion in financing for the deal.

Buffett loves brand name companies. He owns Sees Candies, Dairy Queen and Pampered Chef. He also owns shares in Coca-Cola- one of his longtime favorites.

Investing Rule No. 1: Buy Great Brands

What he has encouraged investors to do, over the years, is to buy stock in companies in which you know their product and it has withstood the test of time.

Yesterday, he talked about the “70-year taste test” for both the Mars and the Wrigley brands. If people bought gum and candy bars 10 years ago- the likelihood that they’ll be buying those items in another ten years is pretty high. From the interview:

Buffett: Yeah. Both companies have great brands. When I talk to classes of university students, for a dozen years or more I’ve used Wrigley as an example … I haven’t known about Mars except that they’re a provate company. But there is really nothing that can go wrong with something like the Wrigley or the Mars brands. It’s literally true that they have, ah, faced the test of time over decades and decades and people use more and more of their products every day.

That makes sense, right?

Investing Rule No. 2: Watch out for Inflation

Carl Quintanilla: Warren, we all know that a lot of the companies in this space are leveraged to the price of commodities, whether it’s cocoa, or what have you. Do you have a comment on what we’ve just been talking about the past week, whether it’s grains, or just global commodities in general. Does it feel toppy to you?

Buffett: Well, I’ve got a son that’s a farmer. He’s a very happy fellow. They used to tell the story out here in Nebraska about the farmer that won the lottery, and they sent a television crew out to see him. And the television interviewer said, ‘You know, you’ve just won twenty million dollars in the lottery, what are you going to do with it? And the farmer said, ‘Well, I think I’ll just keep farming until it’s all gone.’ (Laughter.)

Well, that was the situation in farming until the last year or so, but it’s a different world now. And I don’t know how much ethanol contributed to it, but, you know, you get twelve dollar soybeans and six dollar corn and that sort of thing, and it’s going to have an effect. I’m amazed we haven’t seen more inflationary effect so far with the CPI, when you consider what steel is doing, what oil is doing, what grains are doing, there is a lot of potential inflation down the road.

If all the underlying commodity prices are soaring- isn’t that inflationary? Of course it is. Be warned.

Investing Rule No. 3: We’re in a recession

Buffett: Yeah. I think we’re in a recession. I mean, a recession is defined in a certain way by the National Bureau of Economic Research, but I think it’s defined by the man in the street a little differently than whether there have been two quarters of reported (negative) GDP growth.

And incidentally, when GDP growth is below 1% a year it’s really falling on a per capita basis because our population increases about one percent. So even though the National Bureau uses an absolute figure, it’s up one-tenth they don’t count that as a recessionary quarter, but the GDP per capita has gone down in a quarter where the gain is half a percent or something of the sort. We are in a recession, unless you want to stick strictly to the technical definition, which I really don’t think has much meaning to the fellow who has lost his job or is facing a money-market fund that isn’t paying him out, or whatever it might be.

Berkshire Hathaway owns many consumer-friendly businesses such as furniture stores, jewelry stores and food. Berkshire has seen the consumer slowdown and he/she hasn’t started picking up.

Investing Rule No. 4: When you see an opportunity, take it

Farr: When you look at this deal, why now? The economy, if things are contracting and we’ve got rates where they are, why is this a good time for an acquisition? And do you have any integration concerns as Mars begins to take on this public company?

Buffett: Well, I think a good time to buy a really great business is when you can do it. Many, many years ago, as I remember, Herman Lay offered the Frito-Lay company to Coca-Cola. And he offered them the company first, as I understand it, and they decided for one reason or another they didn’t want to do it then. And of course Pepsico bought it and it’s the best thing they ever did. So if you get a chance to buy a wonderful business, then my advice is, grab it. As Yogi Berra would say, ‘When you come to a fork in the road, take it.”

You never know when an opportunity will present itself. Opportunities don’t wait for the “right” economy or the bull economy. They can happen in recessions, depressions, downturns, bears etc. Be prepared.

Investing Rule No. 5: Don’t Buy What you Don’t Know

Joe: And I know, you have a lot of utilities. And you had a big Petrochina investment in China. You sold out. Should we read into that, that maybe you’re not as active in that area as the situation seems to dictate at this point? Are we getting toppy? That’s the question I’m trying to ask you. I guess nobody knows. But is it crazy right now in commodities or is this the state of the world?

Buffett: Well, who knows on that? But I don’t play sectors, Joe. When I — the thing that makes my job fun is when I go to work in the morning, I don’t really know what’s going to happen. So, two months ago, I didn’t have the faintest idea I would be investing 6-1/2 billion of Berkshire’s money in this particular transaction. You know, and then the phone rings. I love it when the phone rings. Usually it’s the wrong number but every now and then something happens.

Becky: Although Warren, you have played some sectors in the past, with the transports playing on the rails, and other areas. You have not made broad commodities plays. Is there a reason for that?

Buffett: Well, it’s probably because I don’t know what commodities are going to do. The thing about commodities, if I knew what commodities were going to do, I wouldn’t have to play them through stocks. I could just go on the commodity market and do it. So, I, I don’t know what oil or wheat or soybeans or cocoa or anything like that’s going to be selling for next week or next month or next year. I do know people are going to be chewing Wrigley gum and eating Mars bars.

Buffett doesn’t follow the grain markets everyday, so why would he invest in them? Who knows what grains will do?

But, again, he KNOWS what Wrigley gum is going to do- because it has essentially done it for the last 70 years. The history is there. The market is there. It’s not speculative.

Lessons from Warren:

Buy what you know and understand. Buy great brands. Be patient and look for opportunities. They may present themselves when you least expect it.

Again, it sounds simple, doesn’t it?

He makes it look so easy.