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When Warren Buffett speaks at HBS, it's always standing room only in Burden Auditorium. The cavernous hall fills up early, reverberating with the mounting excitement of a revival meeting. When the 69-year-old investment sage finally takes the stage, thunderous applause is punctuated by whoops and whistles.
And, as was the case during a visit to the School last September, the "Oracle of Omaha" doesn't disappoint. From his opening gambit ("Testing, one million, two million," he intoned into the microphone), to his astute overview of American business, to his warnings about investment sins to avoid, Buffett had the audience in the palm of his hand.
With a nod to scripture, the Berkshire Hathaway CEO began his remarks by noting that the last 34 years on Wall Street could be divided into "17 lean years and 17 fat years." Declaring that "interest rates exert a gravitational pull on valuations," Buffett asserted that high interest rates were to blame for keeping the Dow Jones Industrial Average virtually unchanged between 1964 and 1981 despite a 370 percent increase in U.S. GDP during that period. From 1982 through 1999, however, an extended bull market has prevailed because interest rates have remained low and corporate profits high - a situation, he warned, that is not likely to go on indefinitely.
Underlining the transitory and cyclical nature of business, America's most successful investor advised his audience that amid the fever and hype surrounding the Internet, it is wise to remember that equally hot industries have cooled with time. Once there were some two thousand companies manufacturing trucks and cars in America, Buffett said, but today "only three have finished the race." Between 1979 and 1998, he continued, in what once was considered a "glamorous" industry, 120 airlines filed for bankruptcy. "You've got to think where the competitive dynamics of a business or industry are going to lead over time," Buffett said.
"What causes unusual profitability," he emphasized, "is not demand or a great idea, it's sustained competitive advantage." The challenge for investors, Buffett observed, is to find companies, preferably undervalued, that will maintain that edge over the long term. Successful investing, he concluded, is not "a game of IQ, it's a game of discipline."
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