Through our Tuesday TouchPoints series, we are sharing a diverse set of content we hope will be helpful to those managing through volatility, working from home, or just connecting.
By HPA Founder & Managing Director Sumeet Goel
As we’ve covered in this space every Tuesday over the past several weeks, things are upside down, which is forcing change and creativity overnight. One of my favorite annual events is the amazing multi-day gathering that Phil Terry and his team at Collaborative Gain put together every year, centered around the Berkshire Hathaway Annual Meeting.
Phil and his team got super creative and put together a bang-up few days this year – all remote of course – including a several hundred person strong group for the live stream of the BHAM itself. And leading up to it, Phil hosted several presentations and chats with leaders across industries, all in the context of this COVID world we’re living in right now.
We here at HPA were fortunate enough to be invited to these amazing talks. As a unique Tuesday TouchPoints for this week, we wanted to share our collective experiences from this past week, and perhaps give you a glimpse into the perspectives of each of these amazing individuals…
How does COVID-19 change consumer behavior?
with Dan Ariely
Dan Ariely is an Israeli-American professor and global authority on behavioral economics. He is the author of three New York Times best sellers: Predictably Irrational, The Upside of Irrationality, and The Honest Truth about Dishonesty; his TED talks have been viewed over 15 million times. He serves as a James B. Duke Professor of psychology and behavioral economics at Duke University and is the founder of the research institution Center for Advanced Hindsight. In 2018, Ariely was named one of the 50 most influential living psychologists in the world.
It was amazing to get Dan’s learned perspectives on the COVID crisis, the response here in the U.S., and how this might play out over time. He tackled many topics – these were our highlights:
(1) Why did it take the U.S. so long to react to the virus?
We have the wrong mental model here in the U.S. We think we understand viruses and aren’t scared of them – after all, we’ve all had viruses before. I think if the name was actually something other than (corona) virus, maybe we would have responded differently using a different mental model. The fact that it was (just) a virus may have slowed down our reaction time.
(2) But then, once we took action we have really come together, especially locally. Why is that?
If someone had come from out of space six months ago and asked how much we care as a society about those over 65 years old – the answer would have been “not much.” But since there is a single identifiable cause (COVID-19) and identifiable victim (the mental images of people gasping for air on a ventilator), it evokes tremendous emotion and support. We pour resources and time and effort in because we can identify the cause and the victim.
(3) How do you think things are going now?
Unfortunately right now we have a sense of fear and learned helplessness – we’re getting conflicting information, we don’t understand the virus and all the measures being taken against it, it feels out of our control so we’re in this weird place of “this is happening to us” without any sort of answers.
We are also not taking into account all the costs of shutting down the economy (loneliness, increase in domestic violence, economic devastation to millions). The quarantine also kills people via financial ruin, depression, and decrease in quality of life.
One key learning is how fragile our system is and how connected we all are. There is always a tension between efficiency and resiliency. In normal times no one would plan for 20% extra hospital beds – it’s a big cost drag. In normal times if 10% of people don’t pay taxes it’s a relatively small macro hit; but in current times if 10% of the people don’t quarantine (either because they can’t afford to or don’t know they have it) – they can become super-spreaders and ruin the impact of the other 90% doing the right thing. The level of connectivity we have is underscored by this virus and how it spreads.
(4) What are your thoughts/recommendations to us individually?
It will take time for people to feel comfortable going back into the office. Employers should help build trust – don’t demand attendance, full-time, back in office, right away. Let them be there for fewer hours at the beginning. Emphasize that sick employees should stay home. Understand anxiety will be high and try to help them through it – rebuild a culture of trust.
Right now while staying at home, this is also a good time to invest in yourself — you have chunks of time so invest in you – eat well/healthy, learn to cook, learn a new skill, etc.
(5) What will happen as we emerge from the crisis?
By the end of May we’ll have a much better idea of how many people are/were asymptomatic, which will greatly affect how/when we choose to re-open the country. Jumping to conclusions about re-opening now is premature.
As we emerge from the crisis, several things will/may happen:
- Investing: Behavior changes slowly and once changed it is sticky – people who can, will increase savings rates beyond what they had before; spending will go down in the medium term.
- Entertainment: TV watching is way up and Disneyland and other out-of-house entertainment options are non-existent. In-home entertainment will remain higher than pre-COVID levels; it will take quite some time for Disneyland/movie theater/etc. to pick back up as people have to learn to get comfortable with this again. These big group environments, including concerts and sporting events will take *much* longer to recover. That’s an all or nothing proposition in terms of people interaction, unlike the comfort level you need to go to your coffee shop.
- Restaurants: To get customers eventually comfortable with coming back in, they should focus on pick-up to get people the experience of going to the physical location – which makes eventually eating at the location a smaller mental leap to take.
- Retail: Big ones like Walmart should get transparent with customers about supply chains, so people don’t hoard toilet paper and other items (perhaps signs notifying customers when supplies are coming so people don’t panic when shelves are empty?). There are two types of retail situations – (1) Supermarket where you have to go – and have learned not to be scared; and (2) Stores like GAP where you don’t have to go and haven’t gone for two months. For this latter group, they will need to create a Trojan horse to get people to come (only through experience will people reduce fears). These retailers and malls must work together on tactics to get people back.
- Finance: The insurance sector will do well – people will look to protect themselves in more ways after this experience. The risk aversion after everyone has been affected in some way will drive the insurance sector.
2008 vs. 2020 – Financial Crisis vs. Pandemic?
with Cecilia Rouse
Professor Cecilia Rouse is the Dean of the Woodrow Wilson School of Public & International Affairs
at Princeton University; Dean Rouse is the Lawrence and Shirley Katzman and Lewis and Anna Ernst Professor in the Economics of Education and Professor of Economics and Public Affairs at Princeton University.
Dean Rouse was a member of President Obama’s Council of Economic Advisors from 2009 to 2011, and as such, helped to architect in real-time the response to the then-unfolding financial crisis. She also served in the National Economic Council under President Clinton.
She shared her thoughts on the similarities and differences between the Global Financial Crisis and our current Pandemic, the current U.S. response, and where we will likely end up. Some of our highlights:
(1) How do you compare/contrast the Financial Crisis to our 2020 situation?
This is more than just a typical downturn – this is a public health crisis. Leaders have said stay at home, and we have. What we are seeing is the result of attempting to freeze the country to protect public health, which has resulted in an economic crisis. The effects of this crisis have come in atypical ways. Recovery can only really begin when the public health crisis has passed and we can start gradually re-opening.
- Employment: In 2008 a problem occurred in the financial sector that slowly burned and rippled to other sectors and gradually threw people out of work. 2020 is a complete quick stop across all sectors. Unemployment claims are 8-10 times higher than the peak of the financial crisis. It’s not even close.
- Where this goes: It’s hard to make predictions and interpretations based on trends and statistics. The Bureau of Labor Statistics numbers may not accurately be capturing the impact of this crisis, as people are not just unemployed but also have reduced wages or hours, are expecting to go back to work when this is over, or are withdrawing from the labor force all together. The combination may be as high as 30% of more of the U.S. workforce. Again, not even close to 2008.
(2) What are your thoughts on the Federal response to the economy?
The Federal response has been large and quick. Two large packages totaling several *trillion* dollars is unprecedented. However, there are flaws in the response.
The CARES Act hit the necessary areas but due to the speed at which we needed to act, we didn’t have the systems in place to effectively and efficiently implement measures like cash transfers to the general population. Unemployment became swamped and small businesses couldn’t get the money they needed:
- Unemployment systems were getting 200k+ claims in a week pre-crisis. Now they’re getting 30 *times* that amount in a week – our systems can’t handle it
- LendingTree estimated that 60% of U.S. small businesses have applied for CARES Act related relief, but only FIVE percent have received funding
- In both instances, eligibility was broadened without a lot of guidance and with a lot of confusion – this has also severely impacted how effective these efforts have been – people don’t know if they’re eligible, the unemployment offices don’t know, and the changes are not in place to properly answer these questions
(3) How quickly will the recovery happen?
The overall recovery will likely be slower than we would like for many reasons:
- Execution: The headwinds mentioned above will continue to persist
- Approach: The U.S. approach relies more on separation between employees and employers and this will slow things down. By inducing separation, we will have greater turnover, businesses will close, entrepreneurs may not start new businesses
- Systems: We acted differently since we are not set up for this. Other countries have managed to support businesses by paying payroll of the firms or employees directly, which we aren’t set up to do in the U.S.
The worker side is what may really slow it down. The recovery won’t be as tied to unemployment as we would expect in a typical downturn. We will have a reckoning with how hard we have pushed to be efficient with the labor force. We will not be able to run as lean as we have and will need to provide more cushion for everyone through healthcare, benefits, sick pay, fairer wages.
(4) Where is this going to end up?
It’s early. That’s important to remember. We’ve only been in this for a short time – 6-7 weeks! We have made great strides in trying to make things work, developing testing and adapting overall. Who’s to say what we will come up with over the next 6-7 weeks? If we build off of the improvements we have made over the past few weeks, we can be smart and strategic in finding ways to reopen. Despite the concerns I’ve shared, I will always bet on the U.S.
Leading the NBA during Coronavirus
with Mark Tatum
Mark Tatum is the Deputy Commissioner and Chief Operating Officer of the NBA, a $5 billion multi-media, content-streaming global juggernaut with a 215-country footprint.
Forbes named Tatum one of the Top 25 Most Influential Minorities in Sports while SportsBusiness Journal named Tatum to its list of the 50 Most Influential People in Sports Business. For three straight years Tatum was also honored by the SportsBusiness Journal with a Forty Under 40 Award, making him an entrant into the publication’s Forty Under 40 Hall of Fame.
Tatum sits on the boards of USA Basketball, the International Basketball Federation (FIBA), the Naismith Memorial Basketball Hall of Fame, LA 2028 Summer Olympics, and the Harvard Business School Board of Dean’s Advisors.
Mark shared his thoughts on dealing with the crisis in a high-profile environment, and where the NBA sits today. Some of our takeaways:
(1) How has this hit the league?
This has been a year unlike any other – with Daryl Morey’s tweets in November and then being off of CCTV since then; losing David Stern in January, and Kobe’s death shortly thereafter – it was a trying time for the NBA before the coronavirus hit.
Yet we have seen the greatness of our people in times of crisis – unfortunately we’ve had a lot of practice this year and our team has stepped up each time. When this hit, we jumped on work-from-home and doing video calls every morning, seven days a week. Now down to five days/week.
We are hoping to restart the season if we can, but of course there are lots of health considerations and constituencies to make the decisions. Our focus is on data – we shut down offices / games in China in December-January, limited staff who could come into the All-Star game in February, and engaged experts to advise us. Two in particular – Dr. David Ho, a world-renown virologist, who volunteered as a close advisor, and Dr. Murphy (Immunologist under Obama) – have helped to make sure we’re educated on the coronavirus. So we’re not going to get back on the court until we ensure that it’s safe.
(2) How do you think about the fans? Are you going to open without fans to start?
We’ve spent a lot of time figuring out how to keep fans engaged – we feel that it’s important for the psyche of US and world to keep them engaged. So we did lots of things, including:
- Moved up the launch of The Last Dance documentary – was supposed to launch in June, found ourselves in a situation where we worked with ESPN to finish it; and the documentary has set records
- HORSE competition which was a technological feat to get different NBA/WNBA/former players to compete remotely on ESPN
- An NBA 2K Players tournament
- Virtual WNBA Draft
- Program NBA Instagram/Twitter accounts for fan engagement on a daily basis
Yet none of this is a substitute for games, so still in a constant evaluation state. I wish I had the plan to share, but we’re being guided by the data as we get it.
(3) What about the players? How are you working with them?
We’re working directly with the Players Association and won’t do anything unless the players collectively feel safe; they also understand the situation. There were reports today on agents putting pressure to not play, and then LeBron tweeted for the players, “We love this game, and we want to play.” He also rightly said no one at the league offices has said we’re not playing.
In this situation, lots of conversations with the Players Association; we had worked out something with them in the last Collective Bargaining Agreement that said force majeure (including epidemics) when we have to cancel games. They return a portion of their salary rather than cutting them off, so we have a 25% gradual phasing on compensation.
Labor is our largest cost, 50% of every dollar we make. In that force majeure agreement was a pre-existing formula which helped, so no disputes. No other professional sports league we know of had that provision including epidemics; so other leagues have had to come to different agreements with their players associations.
(4) You’re leading the NBA’s digital push. How has that gone?
We have the NBA 2K league – 23 teams there – 22 are owned and operated by NBA franchises. We’re going to launch the season next week with players playing from their homes.
The digital transformation is happening overnight with the crisis – two years of change in two months. We partnered with Microsoft on AI and cloud computing. We have a Direct to Consumer product right now – NBA League Pass – not tied to any cable distributor. It’s fairly expensive since we’re competing with the cable / distributors offering NBA games; with cord-cutting happening more and more, we understand that that is the future. A partner like Microsoft creating a robust product, using the product development know-how for that diehard NBA fan – we see innovation there, as we think about returning to these games…let’s say there are likely scenarios with many different viewing options for fans around the world.
(5) How has the NBA culture worked in the crisis?
Adam Silver and I have a great working relationship; he’s been commissioner for six years; he appointed me deputy commissioner before becoming commissioner – he has been with the league for 21 years and I’ve worked for him 12 of those – so a great working relationship; I complete his sentences and know his thought processes.
In the COVID environment we have divided things up – we engage with every single owner, every single week; split them up 15/15 each week and switch every week.
Our mission statement is “Compete with Intensity, Lead with Integrity, and Inspire Play.” At the same time we’re a sports organization and need to have fun – we’ve had an employee dance challenge and other things to keep our team engaged in these trying times.
Perspectives on Warren Buffett and Berkshire Hathaway
Phil is a recognized expert on Berkshire Hathaway – particularly the cultural and leadership lessons to be learned from Buffett and Munger. He teaches CEOs and other leaders about a number of key concepts and values including what Buffett calls Noah’s principle: “Predicting rain doesn’t count; building arks does.”
Phil’s written a chapter in the book, The Warren Buffett Shareholder: Stories from inside the Berkshire Hathaway Annual Meeting, leads a year-long Zoom class about Berkshire Hathaway for up-and-coming high school and college students, and cited Buffett and Munger’s influence in his acclaimed book, Customer Included, which he co-authored.
Don Graham is the longtime CEO and Chairman of the Washington Post Company (now known as Graham Holdings, a publicly-traded multi-billion dollar business for which he is the Chairman).
Graham and Buffett have been close friends for almost 50 years and joined the board of the Washington Post Company at the same time in the early 1970s.
First in an informative session about Berkshire Hathaway, and then in a 90-minute fireside chat, Phil and Don took us through their knowledge of the company, of Warren and his team, and how Warren approached 2008 and approaches our current situation. We enjoyed hearing from both Phil and Don – here were our takeaways from these sessions:
Both on Berkshire Hathaway…
First from Phil and then with reinforcement from Don, we heard about the key leadership lessons and principles that have guided Warren over the decades, including:
- Margin of Safety: Words to live by from Warren – “The three most important words in investing and in life…Margin of Safety.” He is super conservative and has said time and time again over the years that he focuses on reduction of risk, maximizing liquidity, keeping debt low, etc. The Big One will come and no one knows from where, and he wants to be resistant to that.
- Culture: He would say this is the number one reason why his company is successful. He doesn’t focus on company budgets. He buys the company with the team. He only has a corporate staff of 26, and avoids meetings with his CEOs. He’s there if they want him, but he doesn’t drop himself in.
- Long-Term: His goal is to be “a little bit better than average over a long period of time.” With that and time arbitrage, he doesn’t need to do anything else.
- Ask for Help: This manifests itself in his focus on heroes and mentors; as he put it, “Tell me who your heroes are and I’ll tell you how you’ll turn out to be.” And the concept of Asking for Help and having a peer council is important to him. Don is one of Warren’s council members. Again – “It is important to associate with people that are better than yourself.”
- Circle of Competence: Unlike most wealthy individuals, Buffet does not publicly discuss things he thinks he knows something about when he really doesn’t. He focuses solely on what he knows he does best – how to value a company, how to buy a company, and how to judge someone’s character.
Don on Warren…
(1) How well do they know each other?
Don and Warren have been close for almost 50 years, dating back to Warren’s initial investment in the Washington Post, when Don’s mother was the CEO. Both were on the Board of the Post and remain close to this day – both have referred to each other as among the smartest people that each has ever met.
(2) From your unique vantage point, what would you share about the Oracle of Omaha?
- Approach: Warren has never done anything just because everyone else did it. He doesn’t have quarterly earnings calls with Wall Street – he feels an obligation to tell shareholders – the people who own the stock. He also generally doesn’t think anything important happens in a given quarter – he’s a long-term thinker not a short-timer – he thinks decade to decade versus quarter to quarter.
- Investing: Warren views himself as great at investing versus managing – he looks to acquire a business that can endure, along with a CEO who can run it for an extended period of time.
- CEOs: He is always available to speak to anyone who runs one of his companies – doesn’t just call them up about details (ready to help on the big things). Key leaders run the firms as owners. No CEO has ever left a BH company to work for a competitor.
- Focus: Warren is brilliant and also *focused* – there are very few people in this group – Bill Gates by high school only thinking about personal computers; Michael Jordan at basketball; Warren read every book in Omaha library on investing by the age of 11.
- BRK: Buffet is not focused on making the stock price as high as possible as quickly as possible– he wants to dissuade short term investors and attract long term ones who think like he does. BRK traditionally has among the lowest stock turnover in the market.
(3) Bezos bought The Washington Post in 2013 – you know both him and Warren well – how would you compare them?
They are dissimilar in how they run their companies, but they have one key thing in common – they are both long-term minded.
Feel very good about how Bezos has handled The Washington Post since the sale – under the Grahams they were not good at producing the product in digital form – and thus not the best owners – hoped that Jeff would infuse the firm with tech talent, and he did.
(4) We’ll hear from Warren on Saturday. But given how well you know Warren, put yourself in his shoes – how would he compare and contrast 2008 vs. 2020?
He would say that 2008 was very different in nature on several levels – mortgage backed securities – complex and banks didn’t really know what they owned or what they were worth. Created incredible amounts of debt – Warren is a big critic of debt. Then their value collapsed and the market turned. But that Fall, Buffett wrote a NYT op-ed piece, essentially saying “I am buying stocks and think you should too.” Essentially he said that while the country is facing a crisis – things will resume growing and these companies will be fantastic growth engines.
Now in 2020, Buffett is not buying shares – we’re all still trying to figure out what the pandemic means, what it is going to mean for the country. We have never seen anything like this. We don’t know what it means for us as Americans and investors. If Warren is pausing then the rest of us should pause as well. So many people think they know what market is going to do – nobody does. Warren doesn’t know what is going to happen and he’ll be first to tell you that.
Thanks again to Phil and his team at Collaborative Gain for putting on a wonderful week of content. The summaries above don’t do the actual sessions full justice. Definitely connect with Phil directly to get access to the full sessions and learn more about Collaborative Gain.
Later this week, I’ll be publishing my own thoughts on the surreal 2020 BHAM – Warren by himself on a stage, presenting the most simple of slide decks, and without tens of thousands of people in attendance.
In advance of that, I’d humbly point you to articles that we’ve written over the past several years on the annual Woodstock of Capitalism, including our first visit, an extensive white paper outlining how the Berkshire Hathaway machine works, and a brief follow up last year providing some perspectives from afar.