Warren Buffett: Why Social Media Is Making Everyone Stupid

Key Concepts

• Social Media Impact: The transformative effect of social media on marketing and customer engagement, drawing parallels to the internet's earlier influence.
• Direct-to-Consumer Model: Geico's historical success through direct mail and its evolution to digital channels.
• Customer Listening: The necessity for businesses to understand and respond to customer feedback across all platforms.
• Technophobia: A reluctance or aversion to adopting new technologies, as expressed by the speakers regarding social media.
• Business Moats: The competitive advantages that protect a company's profitability, with a comparison between IBM and Coca-Cola.
• Investment Conviction: The level of confidence in a company's long-term prospects, differentiating between IBM, BNSF, and other businesses.
• Pension Obligations: The financial liabilities associated with employee pension plans, particularly their impact on companies like IBM.
• Annuity Business Risks: The inherent uncertainties and potential for losses in the annuity sector, especially concerning interest rate fluctuations.
• Life Insurance Industry Challenges: The difficulties faced by life insurance companies due to unfavorable policy options and interest rate environments.
• Mortgage Business Dynamics: The asymmetrical benefits of long-term mortgages for borrowers versus lenders.
• Partnership Dynamics: The effective working relationship between the speakers, characterized by shared understanding and minimal reliance on constant communication.
• Omaha's Transformation: The significant changes observed in Omaha over recent years, reflecting broader societal and economic shifts.

Social Media's Impact on Business and the World

The discussion begins with the profound impact of social media on businesses, drawing a direct parallel to the transformative influence of the internet. Warren Buffett notes that for companies like Geico, social media is already making a difference and is expected to have a huge impact on marketing over time, much like the internet did. Geico, founded in 1936 with a direct-to-consumer model initially reliant on mail, has progressively adapted to new communication channels, including television, phone numbers, the internet, and now social media. The core principle emphasized is the necessity for businesses to "listen to our customers in all our businesses." While the impact of social media varies in dramatic effect across different companies, Buffett expresses amazement at the speed of change, recalling how he initially expected the internet to affect younger generations' buying habits more rapidly, but found it spread across all age ranges quickly. He acknowledges his own limitations in managing social media for Berkshire Hathaway, stating it would be a "terrible mistake" to put him in charge, and humorously suggests Charlie Munger would also be a poor choice.

Charlie Munger's Perspective on Social Media and Technology

Charlie Munger expresses a strong aversion to social media, stating he "avoid[s] it like the plague." His primary concerns are twofold: the idea of teenagers "immortalizing for all time the three dumbest things they said when they were 13," and the belief that excessive multitasking, common among young people, leads to none of the tasks being done well. He humorously suggests that if such a system had existed during their youth, both he and Buffett would have been in "big trouble." Munger advocates for the idea that "your ignorance and folly ought to be hidden" at certain times.

Investment Moats and Conviction: IBM vs. Coca-Cola

Buffett then shifts to discussing investment moats, comparing his understanding of IBM's moat to that of Coca-Cola. He admits he doesn't understand IBM's moat as well as Coca-Cola's, Wrigley's, or Heinz's. However, he feels "good enough about IBM" to have invested a "considerable amount of money" and believes that both Microsoft and IBM can be successful. He has "enough conviction about IBM's position" to have taken a "very large position," appreciating their financial policies and believing their position is likely to be maintained strongly over time.

Differentiating Investment Conviction: IBM vs. BNSF

Despite his conviction in IBM, Buffett states he doesn't feel the same degree of certainty as he does about the BNSF railroad. He finds it "very hard... to think of anything that could go wrong with BNSF." In contrast, he can identify potential issues with IBM, specifically mentioning their "very large pension obligation."

Pension Obligations and Annuity Business Risks

The conversation delves into the complexities of IBM's pension obligations. Buffett notes that while IBM has a large pension fund (around $75-80 billion in assets and liabilities), it functions like a "big annuity company on the side." He acknowledges that "balls can take funny bounces in the annuity field" and expresses a preference for companies without such obligations. He points out that while IBM reports assets and liabilities as roughly equal, the liabilities are "a lot more certain than the assets over time."

Challenges in the Life Insurance Industry

Charlie Munger elaborates on the risks within the annuity and life insurance sectors, highlighting the "tortures of hell" faced by life insurance companies globally. He cites the example of Japanese life insurers agreeing to pay 3% interest, which became impossible to earn once policies were in place for a long time. This has led to many previously "revered secure places" now looking "unsecure." He contrasts this with Berkshire's own life operations, which are focused on their own policies rather than reinsurance, and are relatively small. Munger dislikes "giving options" and notes that the life insurance industry, driven by sales forces, has often offered options that have resulted in "huge amounts of money" lost. He states, "You always want to accept an option, you never want to give an option."

The Perils of Long-Term Mortgages

The discussion extends to the mortgage business, referencing Buffett and Munger's past involvement in the savings and loan business. They criticize the concept of offering a 30-year mortgage where the borrower can "call it off tomorrow" if it's advantageous, while the lender is locked in. Buffett humorously recommends that everyone in the room get a 30-year mortgage immediately, as it's a good deal for the borrower who can refinance if rates drop or potentially buy back the mortgage at a discount if rates rise. He reiterates that life companies have engaged in this practice "big time" and are now "paying the price," with some not yet fully realizing the extent of their problems, likening them to a person in a switchblade fight who doesn't realize they've been hit until later.

Partnership Dynamics and Communication

When asked about moving to Omaha to be closer to corporate headquarters, Buffett firmly states "no." He explains that their partnership works "extremely well" despite their "technophobic" nature, having mastered the use of the phone. He humorously adds, "we don't push us beyond that. No, we've never learned anything beyond the phone." He emphasizes that they each know "exactly how the other guy thinks," rendering even the phone less necessary. He notes that they used to phone frequently when it was expensive, but now that it's free, they "don't talk to each other hardly."

Omaha's Transformation and Generational Change

Buffett expresses fondness for Omaha, but notes that it's changing so rapidly with rebuilding that he feels like "Rip Van Winkle." He observes that "a third of the lifetime of the country has passed during our lifetime," necessitating change. Munger agrees, remarking on how much Omaha has changed in the last five years.