April, 1999 - Volume 3, Number 7
WARREN BUFFETT ON INVESTING AND LEADERSHIP:
by Mukul Pandya, Senior Editor, The Wharton School
"I'm Wired for This Game"
If you were asked to select a person and told that you could retain
10 percent of his or her earnings for the rest of your life, whom would
you choose? Someone with the highest SAT or IQ test scores? Probably not.
Chances are that you would pick someone with a steadfast character, whom
you could trust to function well through life. Conversely, what kind of
person would you shun? Most likely, the type who cuts corners and is generally
undependable. Each of these qualities is a characteristic of choice and
can make the difference between success and failure. That insight into
the link between character and success comes from Warren Buffett, CEO
of Berkshire-Hathaway, the world's second richest man after Microsoft
CEO Bill Gates and arguably the most successful investor the world has
Developing characteristics such as trustworthiness and integrity, Buffett
believes, is a matter of forming the right habits. "The chains of habit
are too light to be noticed until they are too heavy to be broken," he
says. People who stray from these values often show up on Wall Street;
they may initially even shine; but eventually they self-destruct. "That
is sad, because it does not need to happen," says Buffett. "You need integrity,
intelligence and energy to succeed. Integrity is totally a matter of choice
and it is habit-forming."
Speaking to a packed audience of students, faculty members and staff
at the Wharton School on April 21, Buffett offered insights into the investment
philosophy that has turned Berkshire-Hathaway into a $120 billion powerhouse,
with holdings in industries ranging from soft drinks to insurance. Jeremy
Siegel, a professor of finance at Wharton, reckons that a person who had
invested $1,000 with Buffett when he was starting out four decades ago
would have turned that investment into $61 million today. In contrast,
had that $1,000 been invested in S&P 500 stocks, it would have grown to
Asked what advice he could provide to young people on the verge of careers
in managing investments, Buffett boiled down his principles into four
1. Understand the business in which you are investing. "You can't
make money in stocks unless you understand the business," he said. "I
look for businesses within my circle of competence." Having a large circle
of competence is less important than having one with a well-defined perimeter.
2. Look for sound fundamental economics. Investors should seek
out companies that have a sustainable economic advantage a phenomenon
Buffett called "a castle with a moat around it." Consider Coca Cola, for
example. The company's brand name has represented enjoyment for generations,
which no competitor can buy for millions of dollars. "Share of market
follows share of mind," noted Buffett.
3. Find competent leadership. Companies with a sustainable economic
advantage need honest, capable and hardworking leaders to retain their
lead. Berkshire-Hathaway's managers have one instruction: Widen the moat.
That keeps the castle valuable.
4. Buy at the right price. Purchases must be made at the right
price if they are to pay off.
Buffett cited example after example to show how he had used these principles
to make investment decisions during his career. As a young investment
manager, he took Moody's manuals and went through them page by page until
he found the companies he sought. A bus company in Bedford, for example,
had $100 a share in cash, but its stock was being traded at $40 a share.
Buffett found such deals because he went looking for them. "No one will
tell you about them," he said. "You only get told about things someone
is pushing for some reason." Buffett invested in companies like Coca Cola
and The Washington Post for similar reasons. Berkshire-Hathaway built
its empire on the success of these investments.
Asked why he has not retired despite his phenomenal wealth, Buffett said
the reason is that he has more fun doing what he does than anything else.
"The fundamental thing is that the process should be fun," he said. "I
had just as much fun when I had $10,000 to invest as I do now. It's crazy
to do things for your resume. It's like saving up sex for your old age.
You should do what you enjoy as you go along, and work with people you
admire. I look forward every day to the next day. I'm wired for this game."
Mukul Pandya can be contacted at email@example.com.
Leadership Lessons from King David
Richard Phillips holds an MBA from the Wharton School, a master's in
divinity from Westminster Theological Seminary, served as a combat officer
in the US. Army, and taught leadership at West Point. He finds inspiration
in the life of David, the biblical figure who slays Goliath and later
becomes King of Israel, and he writes of David's life and its leadership
lessons. The "story of David," writes Phillips, "is that of a career,
an executive career."
David's battle with Goliath can be seen as the start-up's struggle against
the dominant competitor. The appearance of Goliath himself was a product
of inaction: "The executive who stands pat, whose thinking is dominated
by only the pressures facing him this week or month or quarter, is bound
to wake up someday to find some fearsome giant standing before him in
the valley." David resorts to a novel way of defeating brute strength,
and Phillips draws a lesson: "How do we sow the seeds of innovation? The
same way David prepared for that once-in-a-lifetime slingshot. By drawing
upon the distinct skills and experiences that have shaped our past, and
by applying them to new areas where no one could possibly have anticipated
In David's initiatives to solve the many problems left resolved by the
regime of King Saul, Phillips finds the paragon of the change agent: "A
woman or man with too much responsibility, too little authority, and a
willingness to embrace career disaster that is all to often rewarded with
Phillips has turned to the story of David because, he writes, "our time
is crying out for leaders like David. Not the leader who celebrates his
own abilities, but the leader who rejoices in the character and ability
being cultivated in the precious human lives entrusted to him. Our generation
is thirsting for the shepherds, men and women of heart." And it is the
shepherd's legacy that will ultimately count: "The truly worthy career
does not end with its own story, but in the story of those who follow."
Source: Richard D. Phillips, The Heart of an Executive: Lessons
on Leadership from the Life of King David.(New York: Doubleday, 1999).
The author can be reached at phillips@AllianceNet.org,
and the book can be ordered at http://www.amazon.com,
Helps When Used by Some but Not All Managers
researchers Bruce Avolio, Jane Howell, and John Sosik (respectively of
SUNY-Binghamton, University of Western Ontario, and Pennsylvania State
University) distinguished three managerial styles, and then asked whether
humor serves all equally well. The three styles are:
Transformational leaders: Encourage followers to question convention
and redefine the future.
Contingent-reward leaders: Persuade followers to comply through rewards
for performance. Laissez-faire leaders:
Provider followers with little direction or guidance.
The researchers forecast that when transformational and contingent-reward
leaders use humor, their followers will perform better, but when laissez-faire
leaders employs humor, it will have the opposite effect. For the first
two, humor can serve to build culture and muster energy, but for the latter,
humor may seem only to further obfuscate their goals, adding insult to
A large Canadian financial institution cooperated in the study, and the
researchers asked 322 subordinates of 115 managers to appraise their boss's
use of humor. They asked the direct reports, for instance, whether their
manager "uses humor to take the edge off during stressful periods," and
"makes us laugh at ourselves when we are too serious."
Drawing on two measures of performance - the manager's own annual performance
appraisal by his or her boss, and the extent to which the manager reached
annual targeted goals - the study found that:
- For all leaders combined, the use of humor is correlated with better
- Transformational leaders use humor most often, laissez-faire leaders
- Those transformational leaders who make greatest use of humor also
generate greatest performance.
- Both contingent-reward and laissez-faire leaders who use more humor
find that it backfires, leading to poorer performance.
An explanation for the contrary findings on the contingent-reward leaders
may be in the restructuring that the company had been undergoing as the
result of the deregulation of its industry. With a focus on reducing costs
and raising productivity, hard-driving contingent-reward leaders who use
humor may be only adding fuel to the fire of anxiety and resentment arising
from the restructuring and their leadership style for making it happen.
Source: Bruce J. Avolio, Jane M. Howell, and John J. Sosik, "A
Funny Thing Happened on the Way to the Bottom Line: Humor as a Moderator
of Leadership Style Effect," Academy of Management Journal, April,1999,
Vol. 42, pp. 219-227. Bruce Avolio can be reached at Lead3@binghamton.edu,
and information for ordering the article is available at http://www.aom.pace.edu/announcement.stm.
LEADERSHIP CONFERENCE: Building the Top Management Team
The 1999 Wharton Leadership Conference on May 13 at the Four Seasons
Hotel in Philadelphia is focusing on how to create and lead a top management
team, and speakers include:
- Adam Bryant, Senior Writer, Newsweek
- Howard Fischer, Chief Executive, Howard Fischer Associates International
- Cheryl Getty, Director, Executive Resources Planning & Development,
- Joseph Haberman, Vice President, A. T. Kearney Executive Search
- Donald C. Hambrick, Columbia Business School, co-author of Strategic
- Jon Katzenbach, McKinsey & Co., author of The Wisdom of Teams and
Teams at the Top
- Kenneth Kring, Consultant, Heidrick and Struggles
- Ken Miller, Vice Chairman, CS First Boston, merger & acquisition deal
- Joseph Neubauer, Chairman and Chief Executive, ARAMARK Corporation
- Raymond Smith, former Chairman and Chief Executive, Bell Atlantic
- Janet Spencer, Delta Consulting Group, co-author of Executive Teams
- Edward Zajac, Kellogg Graduate School of Management, Northwestern
University, author of numerous articles on governance, management, and
LEADERSHIP PROGRAM: Wharton in Argentina,
Colombia, and Mexico
The Wharton Management Congress is scheduled for three Latin American
cities in 1999:
Bogota, Columbia: September 27 to October 1
Buenos Aires, Argentina: June 28 to July 2
Mexico City, Mexico: June 28 to July 2
Organized in collaboration with Seminarium, the Congress presents strategies
and tools for managing and leading enterprises facing competitive and
fast-changing markets. The program offer five topics on five days, and
participants can enroll in the entire week-long program or elect to attend
any of the specific day topics:
Corporate Strategy: How firms build and maintain competitive advantage
and implement corporate strategy.
Developing Your Leadership for Competitiveness: How companies
build flexible and fast-moving leadership throughout the organization
in response to intensifying competition.
Information Strategy: How companies use information aggressively
to amplify the value of their existing strengths or establish new strengths
in fresh markets.
Strategic Use of Human Resources: How firms make human resources
serve the overall goals of the business and create distinctive forms of
Critical Thinking and Decision Making: How people actually think
and make decisions, and the critical thinking and creative strategies
required to manage unfamiliar and complex problems.
For additional information or to enroll, visit http://www.wharton.upenn.edu/execed/wmc/index.htm
or contact Ray Del Bianco at firstname.lastname@example.org.
person on the flight deck is an expert, doing one task (or a few tasks)
very well. The tasks are significant in the most extreme sense: if done
well, people live; if done poorly, people die. Every flight deck crew
member understands that complex, fast-moving, merciless environment, and
knows that everybody on the flight deck is an expert. When speaking as
an expert in a certain area, a crew member whether officer or seaman
is listened to, even deferred to... [Any] 'cog' acting as an expert
can shut down flight operations, and no officer (not even an admiral)
will contest the right, obligation, and authority to do so."
Source: Admiral J. Paul Reason, Sailing New Seas (Newport,
R.I.: Naval War College, 1998).