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Founder, chairman, and chief executive officer of Morningstar, a leading provider of independent investment research.

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Berkshire Hathaway 2016 Annual Meeting Highlights

Despite streaming the Berkshire Hathaway annual meeting live on the internet for the first time, Warren Buffett still managed to fill the CenturyLink Arena in Omaha, Nebraska with more than 40,000 people. I’ve been trekking to Omaha most years since 1998 to attend the annual meeting. It’s always insightful and uplifting to hear Buffett and his business partner, Charlie Munger, discuss a wide range of issues over five hours. I can’t think of a better continuing education course for investors. Attendees come away with a good idea of how Buffett and Munger think about investments and life in general. It’s a celebration of capitalism and a reminder of the power of business done the right way.

Here are a few highlights from the meeting that I jotted down in my notebook. I assume readers have some knowledge of Berkshire’s businesses. Even if you don’t, I think you’ll find Warren and Charlie’s observations worthwhile.

Ideal business “An ideal business uses no capital and every year grows its earnings. You have double-barreled growth since the earnings are growing, and you get to keep those earnings.” —Warren Buffett

Burlington Northern “BNSF has lower but decent returns—in the 10 to 12 percent area.”—Warren Buffett

“While we prefer businesses that don’t require capital, our large amounts of capital forces us into more capital intensive businesses. When something is forced on you, you might as well prefer it! But it’s plan B.” —Warren Buffett

“Decline in coal volume is secular. It’s about 20 percent of the volume at Burlington Northern.” —Warren Buffett

Precision Castparts “Precision Castparts’ CEO, Mark Donegan, is one of a kind. One of the best CEOs we’ve come across, and we’ve seen a lot of managers over the years.” —Warren Buffett

“Being part of Berkshire could be an advantage for Precision Castparts over time. Now Mark can spend 100 percent of his time thinking about making engine parts. He doesn’t have to waste time on things that aren’t productive.” —Warren Buffett

“We’ve almost gotten as good at picking superior managers as in picking no-brainer businesses.” —Charlie Munger

Life and regrets “I’m doing exactly what I want, I eat what I want, and I work with people I love.” —Warren Buffett

“I don’t regret that I didn’t make more money or that I’m not better known. I do regret that I didn’t wise up sooner. But there’s a blessing in that, too. Now that I’m 92, I still have plenty of ignorance left to work on.” —Charlie Munger

Reinsurance business and Berkshire selling its 3 percent of Swiss Re and 10 percent of Munich Re over past year “The reinsurance business won’t be as good over the next 10 years as it was over last 10 years. That’s in part because of low interest rates. They can’t earn as much on the float.” —Warren Buffett

“Float is worth more to Berkshire than other insurance companies when interest rates are low because Berkshire has a broader range of options for what to do with it.” —Warren Buffett

“There’s a lot of new capacity in reinsurance. That’s totally different than Precision Castparts where a customer would be crazy to switch suppliers.” —Charlie Munger

GEICO and competition “There was an uptick in auto fatalities last year for the first time in a long time. Distracted driving may be the cause.” —Warren Buffett

“GEICO has quintupled market share over time—I wouldn’t worry about a competitor having a good quarter or two.” —Charlie Munger

Retailing “We failed in retail so miserably that we reduced our troubles.” —Charlie Munger

Studies on harmful effects of soft drinks “If you’re happy every day, I think you’re going to live longer.” —Warren Buffett

“One ghastly error people make is that they look at the disadvantages without looking at the advantages. It’s immature and stupid.” —Charlie Munger

Derivatives and banks “Derivatives are a problem when there is a discontinuity. Even in good times, they can be problematic. Gen Re unwound its small derivatives holdings and lost $400 million. And we weren’t under any pressure or in a hurry.” —Warren Buffett

“And the accountants blessed those values.” —Charlie Munger

“If you take the 50 largest banks in the world, we wouldn’t be interested in 45 of those.” —Warren Buffett

Investing in stocks “When you buy a stock you get in the mental state of mind as if you’re buying a business.” —Warren Buffett

“The average client of a stockbroker won’t do well.” —Charlie Munger

NV Energy and renewable energy “Berkshire is required to buy power at $0.10/kilowatt hour when it could buy it in the marketplace at $0.035/kilowatt hour. The concern is having to buy electricity at higher prices that only benefits 17,000 people (people who purchased solar panels). The question is who should pay the subsidies?” —Warren Buffett

“Mid-American could not have done what’s it’s done in renewables without being part of Berkshire.” —Warren Buffett (Berkshire can use the tax credits for its overall business)

Higher education “If you expect a lot of financial efficiency in higher education, you are howling at the wind.” —Charlie Munger

“Monopolies have pernicious effects everywhere, and universities aren’t immune.” —Charlie Munger

“If we have a problem in our school system, it’s not because we’re cheap.” —Warren Buffett

“I was involved with an endowment that went from $8 million to over a $1 billion. But I didn’t see tuition go down.” —Warren Buffett (endowment was Grinnell College)

“I have all the enemies I can afford at the moment.” —Charlie Munger

“I tell students to go work for an organization you admire or an individual you admire, which usually means that most MBAs I meet become self-employed.” —Warren Buffett

GDP growth “Returns on tangible equity have not fallen. GDP per capita has gone up six times in my lifetime. No presidential candidate will interrupt that.” —Warren Buffett

“GDP underweights achievements. Real achievements are way higher.” —Charlie Munger

“No one thinks they’d rather live 50 years ago yet they think today is bad.” —Warren Buffett

"Microeconomics is what we do, and macroeconomics is what we put up with."  —Charlie Munger

Leasing business “The math of the leasing business is not attractive. We have to bring something to it. Pure money-type leasing is not attractive since others have a lower cost of funds.” —Warren Buffett

“Aircraft leasing does not interest us at all. You don’t want to try to fix something that is not fixable.” —Warren Buffett

Valeant “Valeant’s business model is enormously flawed.” —Warren Buffett

“Peter Kiewit’s description of what to look for in a manager: you want someone who is smart, energetic, and has integrity. If they don’t have the last one, you better hope they don’t have the first two.” —Warren Buffett

“I watched the House testimony by Valeant executives. It wasn’t pretty.” —Warren Buffett

(I watched it after Warren mentioned it and it’s well worth a look: http://www.c-span.org/video/?408805-1/valeant-pharmaceuticals-business-model-repercussions-patients-health-care-system)

“Sequoia as reconstituted is reputable. They’ve fixed it.” —Warren Buffett

“Valeant is a sewer. Those involved got all the opprobrium they deserve.” —Charlie Munger

Hedge Funds “Hedge funds are a compensation scheme. It’s unbelievable to me.” —Warren Buffett

"No consultant in the world is going to tell you to buy an S&P index fund and sit for the next 50 years. You don't get to be a consultant that way. And you certainly don't get an annual fee that way." —Warren Buffett

Berkshire governance “Three criteria for Berkshire directors: (1) business savvy (2) shareholder oriented (3) special interest in Berkshire.” —Warren Buffett

“We have no committees at Berkshire. We may have one, but I don’t know about it.” —Warren Buffett

Share buybacks “A full wallet is like a full bladder—there’s an urge to pee it away.” —Warren Buffett

“Can you imagine buying a business without knowing its price? It’s like that with share buybacks at any price.” —Warren Buffett

“Buyback press releases never mention valuation.” —Warren Buffett

Nebraska Furniture Mart “Dallas Furniture Mart will be a $1 billion annual volume store. It’s our largest.” —Warren Buffett

Lubrizol “Lubrizol has performed as expected. One large acquisition it did was a big mistake. It was in in the oil industry—made just before oil declined.” —Warren Buffett

Anchoring effect “We try to avoid the worst anchoring effect—anchoring on your previous conclusion. We try to destroy our previous conclusions.” —Charlie Munger

Acquisitions and due diligence “We want to add every year something to the normalized earning power of Berkshire.” —Warren Buffett

“Important to recognize what you can’t do. Try to only swing at things in your strike zone. You don’t need a high IQ. But you do need emotional control.” —Warren Buffett

“After making money, people risk what they need for what they don’t need.” —Warren Buffett

“We’re really trying to become well. Win fairly, use wisely.” —Charlie Munger

“Mistakes in acquisitions are in bad assessments of economic future.  It’s not due to a lack of due diligence—a bad lease, etc. The key thing is whether you have a fix on the economics. Is Amazon going to kill it? No diligence list has a fix on this.” —Warren Buffett

“If I owned a bunch of department stores and shopping malls, I would be thinking very hard about what they will look like 10 years from now.” —Warren Buffett

3G and company’s employee size “Unable people you can’t fix.” —Charlie Munger

“American companies are loaded with people who aren’t doing anything or doing the wrong things.” —Warren Buffett

“I’ve never seen anyone run things more superbly than 3G when it comes to firms that aren’t run well.” —Warren Buffett

“Generally speaking, companies that are lean do better than companies that are overstaffed. Overstaffed companies are like a human beings weighing 400 pounds.” —Charlie Munger

Van Tuyl (auto dealerships) “Van Tuyl’s economics have been almost exactly as expected.” —Warren Buffett

Negative interest rates “I don’t think anyone knows much about negative interest rates because we’ve never had them before.” —Charlie Munger

Bad businesses “Cattle—one of the worst businesses I can imagine.” —Charlie Munger

Incentive plans “You get what you reward for. GEICO has two variables in its bonus plan that applies to 20,000 employees—growth in number of policies in force and profitability of seasoned business. There’s a multiplier effect on the bonus as you move higher in the organization. You don’t want to reward profits because you can just stop advertising. You want to reward profits of seasoned business.” —Warren Buffett

Managing working capital “It’s hard when you’re rich and our supplier is not. It’s better to bend over backwards to have a win-win relationship with your supplier.” —Charlie Munger

Adjusted earnings “Things are good enough at Berkshire where we don’t have to inflate the figures.” —Warren Buffett

“If you see the world accurately, it’s bound to be humorous because it is ridiculous.” —Charlie Munger

Those are a few of the highlights of this year’s Berkshire annual meeting. There was much more, not to mention all the activities going on in Omaha before and after the meeting. It’s a terrific weekend for Buffett fans. If you’re free the first weekend of May, I’d recommend a trip. Hope to see you there next year!

Photo: Bloomberg via Getty Images

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The Future of Robo-Advice

Many people often ask me what I think of robo-advisors—the many automated investment management sites that have emerged over the past few years. On the investment side, robo-advisors aren’t breaking new ground. What impresses me, though, is what they have done with user engagement. They’ve created compelling user interfaces that are written in a friendly, casual voice with clear explanations. They make investing more accessible and less intimidating. I’m a design fan, and many of these offerings have done an excellent job with it. They’ve made investing more enjoyable and easier to fit into your digital life.

Is this another instance of technological disruption that will render a profession (financial advisors) obsolete?

I don’t think so. Robo-solutions work well for those early in their careers when their financial affairs are often simpler. As people age, their financial lives inevitably become more complex—there may be a divorce, a special needs child, care of elderly parents, insurance needs, annuities, housing assets, social security, estate planning, and other factors to consider. At that point, people highly value working with a financial advisor who can put together an appropriate financial plan. It’s hard for a computer algorithm to take into account the multitude of possible individual situations and create a plan in a way that engenders trust. By Morningstar estimates, the value of financial planning is significant—it can provide an additional 1.6% of return per year.

There’s also the emotional and behavioral aspect to investing. If the market plunges, investors often want to speak to someone. Logging on to a website and interacting with an online tool may not suffice. The future of the financial advisor is secure and arguably more important than ever.

That said, robo-advisors are good for the investment industry and here to stay. They’ve put people into sensible portfolios that are low-cost and diversified with regular rebalancing. They should produce reasonable, index-like returns over time. It’s not revolutionary, but does fill a market need. Many investors who use these services have few alternatives. They have low account balances that are too small for financial advisors. Robo-advisors can step up to fill the advice gap and get people investing earlier in their careers.

Over time, robo-advisors may add financial planning capabilities with artificial intelligence features to enhance their appeal. We’ll see them evolve to hybrid solutions that incorporate licensed advisors into their solution via phone and video. One example of a robo-advisor doing this today is Personal Capital.

We’ll also see financial advisors use robo-tools to manage their smaller accounts. Instead of being harmed by technology, financial advisors can turn the tables and leverage it to expand their practices. We’ll increasingly see robo-technology built into advisor platforms and asset management firms offering robo-solutions to their distribution partners.

Over time robo-advisors will add financial planning capabilities to move up to larger accounts, and financial advisors will add robo-tools to move down to smaller accounts. The sweet spot may well be the hybrid solution that integrates robo-tools with licensed financial advisors.

I don’t think pure robo-advisors will replace financial advisors any time soon. It reminds me of the introduction of no-load (no sales commission) mutual funds in the 1980s. Common wisdom was that their cost advantage would enable them to take over the fund industry. But investors voted with their feet and sought to work with financial advisors. Funds sold through advisors became dominant while no-load funds sold direct to individuals languished. Robo-advice is also reminiscent of online banking in the 1990s. Many start-ups emerged. But who dominates online banking today? The big firms—Chase, Wells Fargo, Bank of America. Scale is a large advantage.

You can see that pattern starting to form from the fourth-quarter 2015 asset levels of robo-advisors:

Robo-advised assets

Vanguard $31.0 billion Schwab      5.3 billion Betterment  3.3 billion Wealthfront  2.8 billion Personal Capital 1.8 billion Source: InvestmentNews

Even though Vanguard and Schwab entered the market after the other three firms on the list, they quickly sprinted to the top of the charts. That gap will only widen in coming years.

Stand-alone robo-advisor firms face a challenging future. Morningstar equity analyst Michael Wong wrote an insightful research piece about robo-advisors last year and concluded that stand-alone firms will need $16 billion to $40 billion of net assets to break even. That’s far from today’s asset levels for these firms. Moreover, Michael estimates that it will take tens, if not hundreds, of millions of marketing dollars to raise sufficient assets. He estimates a $1,000 cost to add a new account, after factoring in attrition, and up to a decade to recoup marketing costs. It will be hard for robo-firms to self-finance their growth.

Firms that already have large customer bases have an overwhelming advantage. Charles Schwab has $2.5 trillion in net assets, and TD Ameritrade has $700 billion. Converting a small fraction of these dollars to a fee-based account is far easier than the challenge of a stand-alone robo-firm spending millions to attract new clients.

So the long-term viability of most pure-play robo-advisors is in doubt—especially as Schwab and Vanguard enter the fray. Pure-play robo-advisors will need a large amount of assets under management to turn a profit with low fees. The marketing spend to get there may not make economic sense, though. I believe many hope to exit by selling to a strategic firm. We’ve seen Blackrock purchase FutureAdvisor, Invesco purchase Jemstep, and Interactive Brokers buying Covestor.

I am a big believer in automated advice—Morningstar’s been a “robo-advisor” for more than a decade, though one selling investment services through an employer’s retirement plan. Today, we manage more than one million retirement accounts with assets of more than $40 billion. So automated advice works, it scales well, and is a terrific way to service many smaller accounts. Our advantages are a trusted brand and lower distribution costs because we sell through retirement plan providers and plan sponsors.  

Morningstar has also invested in Sallie Krawcheck’s Ellevest, a start-up that focuses on meeting the investing needs of women through an automated investing offering. Sallie is an investment industry star with a large following among her women’s network, more than one million LinkedIn Influencer followers, and regular media appearances. The combination of Ellevest’s unique focus on women with Sallie’s stellar reputation should prove a winner.

I’d love to see several of the start-up robo-advisors thrive in the coming years. But most face serious economic headwinds. They’ll need to evolve their offering to incorporate more financial-planning capabilities (either licensed advisors or automated financial planning) and find creative ways to lower client acquisition costs.

They’ll also need to find ways to develop an economic moat—or sustainable competitive advantage—to thrive in the long run. They must develop scale to drive cost advantages and create meaningful brands as intangible assets.

If they can do these things, they’ll have a shot at success. While robo-advice may have a good future, the incumbent brokerage, advisory, and banking firms are much better positioned to reap its benefits.

[joemansueto]

Biking Across Iowa

Photo credit: The Des Moines Register

Unless you’re a biking enthusiast or from Iowa, you’ve probably never heard of RAGBRAI.  I hadn’t either until a friend mentioned it a year ago. RAGBRAI is an acronym for the Register’s (as in the Des Moines Register newspaper) Annual Great Bicycle Ride Across Iowa.

My 12-year-old son and I rode the 43rd annual RAGBRAI this July. We started in Sioux City on Iowa’s western border and over seven days biked 482 miles to Davenport on Iowa’s eastern border. We dipped our tires in the Missouri River at the start and dipped our tires in the Mississippi River at the finish. It’s a great way to see Iowa up close.

We rode about 70 miles daily over country roads, visiting roughly eight small towns per day. Each town comes out to greet the riders—people waving from their front lawns, bands, banners, people offering water. It’s a festive atmosphere with many food stands (often at local churches, schools, and fire stations), crowds of people, large tractors on display, Slip ‘N Slides on the church lawn, and music. Several times we finished the day with a swim in the local pool, which was open for riders.

RAGBRAI is one of the most popular bike rides in the country. Some 8,500 riders enter the seven-day ride, though those who opt for one-day passes can add another 1,500. People come from all walks of life with a common goal: to bike across Iowa. That shared mission creates a strong spirit and camaraderie among riders. Riders are always willing to help each other out, answer questions, or compare notes.

RAGBRAI has been described as a rolling festival, and that it is. There’s a band each night in the exposition area (Huey Lewis and the News, Cheap Trick, etc.). During the daily ride you’ll see riders in costumes, unicycles, fat tire bikes, recumbent bikes, experimental bikes, bikes towing dogs, and more.  

Western Iowa is hilly. The eastern side is too, to a lesser degree, but fortunately the middle is very flat. Coming from Chicago, my son and I had to get used to hills and became very good at them over the course of the ride. The total climb for the ride was 16,000 feet, with 4,000 feet coming on the first day.

The second town where we stayed overnight was Fort Dodge. I couldn’t help but notice the many gypsum plants around the town. I looked it up after I returned and found out Iowa is the second-largest gypsum producer in the United States. Gypsum is the chalk-like material that makes up drywall and plaster. U.S. Gypsum, National Gypsum, and Georgia-Pacific all have large plants in the Fort Dodge area, which produces nearly all of Iowa’s gypsum. Gypsum originates from evaporated sea water, which at one time covered the region.

Iowa leads the country in corn production, and it’s number two in soybeans and number one in hogs. There are endless cornfields (30 million to be exact) as you bike across Iowa, and they look beautiful with the sun rising above them early in the morning. The first settlers found topsoil that was 14 to 16 inches deep, though now it’s down to just four to six inches. That’s still incredibly rich soil, and with flat topography, it’s ideal for corn and soybeans.

Food is a big part of RAGBRAI. In addition to local purveyors, there are food vendors that follow the route. The food is excellent, though you need to get used to standing in line. My son said he had the best ice cream ever at Beekman’s (a required daily stop) and the best pie ever at the Amish pie stand. We regularly stopped by Farm Boys for scrambled eggs for breakfast but also enjoyed Chris’ Cakes and Dad’s Waffles. Local churches typically had spaghetti dinners that we frequented. We consumed lots of Iowa corn, pies, smoothies, pork chops (OK, my vegan diet slipped), and watermelon.

A satisfying part of RAGBRAI is setting a goal and working to accomplish it. We decided to enter RAGBRAI last fall. We spent the winter planning what we’d need to complete the ride. I decided to upgrade to a real road bike and had fun researching them with my son. My son built a road bike the previous year that he would use. But we had a long list of things to get—sleeping bags, biking gear, sunscreen, and so on. We were frequent visitors to our local REI store.

Then there’s the training. As soon as it was warm enough, I switched my daily morning run to a morning bike ride. I really enjoyed the quiet, peaceful early morning bike rides along Lake Michigan with the sun rising. I trained about 875 miles prior to the ride. My son is athletic (lots of soccer and basketball) and only trained about 200 miles. Older age and training equaled youth and athleticism.

There were many armed services cycling teams. The U.S. Air Force cycling team, though, stood out. Riding in groups of four or five, they always called out, “Do you need help?” from their bikes if someone had a problem roadside. If you saw someone changing a flat tire, odds were high USAF members were helping out. They also had sharp black cycling outfits (“U.S. Air Force – No One Comes Close”).

We had an Iwo Jima moment as we crossed the large Coralville dam, which restrains the Iowa River before Iowa City. Although it was late afternoon, it was dark with heavy rain and high winds. There were large American flags lining the road over the dam every 10 feet or so. With strong winds, several flags had blown off and were carried over the sidewalk far down below on the ragged rocks toward the water. Given the high winds, you felt your bike was about to blow away and you focused on getting over the dam as quickly as possible. Yet I saw a USAF rider who had jumped the sidewalk railing and was scrambling far down on the ragged rocks to retrieve one flag while another one was struggling with the winds to raise a retrieved flag back on its mount atop the dam. It made you proud.

Our campsite in Eldora was next to a group called “Dream Team.” At first I thought it was one of the many cycling clubs at RAGBRAI. But I learned that it was a non-profit group from Des Moines that helps at-risk youth. This group gives low-income kids a bike to train and enter RAGBRAI. If they complete it, they get to keep the bike. Each team member is assigned a mentor who works with them. It gets kids off the streets and engaged in activity where they work to accomplish a goal and have fun doing it. Just before bedtime, we listened to their team meeting where the Dream Team leader asked each teenager about their day. There were individual stories, laughter, encouragement, and good team spirit. I made a note to add Dream Team to my list of groups to support.

The best part of the ride, though, was simply spending a week with my 12-year-old son. We had many conversations as we biked, over meals, and as we walked around the overnight town with the sun setting. I was proud of him—he completed the ride in good shape, never complained, and had a good attitude throughout. He’s ready to do it again next year.

Iowa is a crown jewel of the United States. It’s blessed with ideal conditions for agriculture, and its people are warm, friendly, family-oriented, and hard-working. It was a delight to spend a week there to see it up close on a bike.

[joemansueto]

Berkshire Hathaway 2015 Annual Meeting Highlights

This year marks the 50th anniversary of Warren Buffett running Berkshire Hathaway. So the mood at the annual shareholders’ meeting on May 2 was even more celebratory than usual. Warren and his partner, Charlie Munger, were as sharp as ever and put on another excellent meeting. For five hours, the two answered questions before 40,000 people that ran the gamut from business specifics to philosophical life questions.  

I’ve been attending these meetings since 1998 and never tire of listening to Warren and Charlie. Typically I don’t come away with a major revelation, but it’s always valuable to hear their clear and common sense approach to business. There’s also plenty of timeless advice about how to conduct your life that’s inspiring and resonates with the audience.

At a time when the media is rife with stories of corporate greed and corruption, the Berkshire meeting is a refreshing reminder that business done the right way is noble and can be fun. It’s a powerful celebration and affirmation of business.

Here are my meeting notes, roughly in the order of the questions asked:

On 3G (the private equity firm Berkshire partnered with to buy Heinz and Kraft) and its practice of significantly reducing headcount after an acquisition

“There’s no policy to have more people than we need.” —Warren Buffett 

Charlie also isn’t a fan of employing too many people and compared it to working in Russia: “They pretend to pay us, and we pretend to work.”

 “Railroads went from 1.6 million workers to 200,000 while delivering more freight and better safety. Efficiency is required. I tip my hat to 3G,” —Warren Buffett

 “We don’t believe in hiring extra people. Most of our managers don’t operate that way. Where I see it, I may tolerate it, but I don’t like it.”—Warren Buffett

IBM

Is IBM similar to textile mills in the 1960s? Charlie said no. “We own many companies that were mightier in the past than they are now. But IBM has managed through many tech changes.”

Warren added, “It helps that they repurchase shares.”

Business success

“The whole thing in business is to be open to ideas as they come along. Be open to having good accidents happen. Like when Lew Davidson, the head of GEICO, spent four hours with me at a young age, or when Jack Ringwalt wanted to sell National Idemnity or Ajit Jain walked into our offices.”—Warren Buffett

“If people weren’t so often wrong, we wouldn’t be so rich.”—Charlie Munger

Berkshire culture and growth rate

“Berkshire culture runs as deep as any large company’s could.  Mrs. Louis in Germany [owner of a motorcycle apparel and accessories retailer] wanted to sell to Berkshire because its culture is institutionalized and will last for decades.” —Warren Buffett

“There are worse tragedies in life than having our growth rate slow,” said Charlie. “Name one!” Warren shot back.

 “It’s wonderful to work with people who care about doing a great job rather than what’s in it for them.”—Warren Buffett

Coca-Cola

“There are 1.9 billion Coca-Cola products consumed per day. That was true decades ago, and I’m confident it will be true far in the future.”—Warren Buffett

On the trend of eating less sugar, Warren said,  “Consumer food companies will adjust.”

“Twenty years from now there will be more Coke consumption than today. I’ve had one-quarter of all my calories for the past 30 years come from Coke products. I am 25% sugar!”—Warren Buffett

“Sugar is enormously helpful. It prevents premature softening of the arteries.”—Charlie Munger

“When I compare having a Coke product to something I get at Whole Foods, there’s no comparison. I don’t see smiles with the products there.”—Warren Buffett

Auto dealership business

“Auto dealers have no scale advantage—it’s a local business. The finance part is not attractive because banks are a cheaper source of money. Margins won’t widen as they grow this business.”—Warren Buffett  

“Van Tuyl [recent auto dealership acquisition] is run like a meritocracy. The right people are there.”—Charlie Munger

Employee behavior

“340,000 people work for Berkshire. I’m pretty sure 5, 10, 25 are doing something I wouldn’t like.” —Warren Buffett

 “Behave in all situations as if the situations were reversed.”—Charlie Munger

Law firms

“It’s how modern law firms work. They’re like a pie-eating contest where if you win, the prize is you get to eat more pie.”—Charlie Munger

Market valuation

“Today’s valuations are affected by the low interest-rate environment. Prices are higher when rates are lower. The question is how long will interest rates stay low?”—Warren Buffett

 “Stocks were cheaper in 1973-74 than 2008-09.”—Warren Buffett

 “Invest when things get cheap—no matter what people are saying on TV; sell when they get very enthused. It’s not a difficult intellectual exercise.”—Warren Buffett

 “I don’t think value investing will ever go out of style. Who the hell doesn’t want value when they buy something?”—Charlie Munger  

 “Owning a farm where you don’t get a quote on it every day, month, or year is probably a better way to look at stocks.”—Warren Buffett

Renewable energy

“Twenty percent of Berkshire Hathaway Energy in Iowa comes from wind. That will be 58 percent by the end of 2016.”—Warren Buffett

 “We have $18 billion committed to renewable energy (wind and solar). It’s dependent on tax credits. We’re able to invest far more money because of our consolidated tax return—more than any other utility. Most utilities don’t pay that much income tax.”—Warren Buffett

Worst failure

“My most memorable failure: We invested $400 million in Dexter Shoe, and it went to zero. And we paid for it in stock that’s now worth $6-7 billion! It makes me feel better when the stock declines.”—Warren Buffett

 “Most anytime we issued shares it was a mistake.”—Charlie Munger

Leverage

“We could have used leverage and been much bigger. But we would be sweating at night. We don’t like sweating at night,” said Charlie. Added Warren, “Over financial matters!”

Interest rates and inflation

“I’ve been very wrong on rates and inflation. We’ve had five to six years of zero rates. The Fed balance sheet has gone from $1 trillion to $4 trillion. It’s still hard for me to see if you toss money from helicopters how you don’t get inflation. We are operating in world we don’t fully understand. We have to be prepared for anything.”—Warren Buffett

 “There are no 30-year mortgages at Clayton [Berkshire’s manufactured housing business].”—Warren Buffett

 “I am nervous about printing money, especially when we spend it like a helicopter spreading it around rather prudently, financing infrastructure projects, and so on.”—Charlie Munger

“You make little progress in life trying to make macro predictions.  We have abdicated. It’s better to say ‘we’re ignorant.’” —Charlie Munger

Deferred taxes

“The $37 billion in deferred taxes Berkshire has is due to (1) unrealized appreciation and (2) bonus depreciation. I wouldn’t look at it as a form of equity.”—Warren Buffett

Management incentives

“Henry Singleton [of Teledyne] had clever incentives for executives. But Teledyne got into trouble after Singleton left with government contract fraud. Charlie and I believe in incentives. But we have seen decent people get into trouble with incentives. The CEO promises a certain number, and his executives don’t want to make the CEO look bad. Egos get involved. You have to be careful in the messages you send as CEO. If you don’t want to disappoint Wall Street, your managers will react.”—Warren Buffett

Risk

“There’s still a lot of risk in high finance. The idea that Dodd-Frank removed all the risk is nonsense.”—Charlie Munger

“Berkshire is miles away from being a SIFI [systemically important financial institution].”—Warren Buffett  

Brand power

“Brands have to stand for the promise of them in people’s heads.  You’ve got to protect a brand. It’s a fabulous asset.”—Warren Buffett

Global investing

“Investment principles do not stop at borders. I would apply the principles of the Intelligent Investor—stocks as prices of a business—in evaluating businesses overseas.” —Warren Buffett

United States and China

“The luckiest person ever born on a probabilistic basis is the baby born in the United States today.”—Warren Buffett

“But we can’t get too smug. It’s important the United States and China have a good relationship and work together. There’s nothing more important for our respective safety and the benefit of the world than close cooperation with China.” —Charlie Munger

Berkshire CEO qualifications

“You need significant operating experience to be the Berkshire CEO. I wouldn’t vote to have someone whose sole experience was investments run an operation like Berkshire. But the CEO should have some investing skills. A dual background is helpful.”—Warren Buffett

“Trustworthiness is more important than brains.”—Charlie Munger

Tax policy

“Don’t shed tears for corporate America on tax rates. They are not onerous. We still earn 15% on tangible equity. Charlie and I remember rates as high as 50%.”—Warren Buffett

“California has a really stupid tax policy. The Federal policy is OK.  The California tax policy drives rich people out. Florida is much smarter.”—Charlie Munger

Reinsurance

“The reinsurance business not as good as it once was and is unlikely to get better. Money has come in—not because they want to be in reinsurance—but because it’s an uncorrelated asset class.  We’re in it for the long haul.”—Charlie Munger

How to get people to like you

“Get very rich and very generous.”—Charlie Munger

“Be a person you would like. Have a good sense of humor, and don’t take credit for things you didn’t do.” —Warren Buffett

“That really works in a marriage. Change yourself, not your marriage partner.” —Charlie Munger

NetJets and its pilot’s strike

“NetJets was not a mistake. We have a decent business. NetJets pilots make $145,000 per year, with seven days on and seven days off. I’m not sure unions are accurately representing pilots.”—Charlie Munger

Philanthropy

“Philanthropy is a very individual thing. I promised to give more than 99% of my wealth away. If I had a child who was very talented, helped build the business, smart—I’d leave it to the child.”—Warren Buffett

“Bonds in a safety deposit box are of little utility to me and great utility to people on the other side of the world. Where will it do the greatest good? Charlie and I both live very simple lives.”—Warren Buffett

“You can leave $5 million to your kids. That’s a very desirable change in the tax law. We can’t always assume politicians will do crazy, unreasonable things.”—Charlie Munger

“I don’t think it’s healthy for [young people] to lay around looking for pie in the sky or whatever. Speaking for many grandparents in the audience, I wish they would start to form households soon.”—Charlie Munger

“I believe in personal philanthropy, not corporate philanthropy.  I’m working for shareholders, and they should determine their own philanthropy. I have real reservations about corporate philanthropy.”—Warren Buffett

Euro

“They probably created something unwise. You can’t create a business partnership with your thriftless, drunken brother.”—Charlie Munger

Warren responded, “Praise by name, criticize by category. He loves to name names.”

Corporate activism

“The best defense against activism is performance. Money is flowing into activism. Activists are now reaching in terms of the kinds of companies they are targeting. This is not a constructive activity. Stocks traded below intrinsic value for many years. Now shares are above intrinsic value, and activists are urging companies to repurchase shares.”—Warren Buffett

“I don’t think it’s a great age, the age of activism. I don’t want an activist to marry into the family.”—Warren Buffett

“I failed in this activity with some of my relatives.”—Charlie Munger

Acquisition prices

“I don’t want to lower our standards on the asset side just because money is so cheap.”—Warren Buffett

“We’d rather pay 12x earnings in a bad year than 8x in a good year [referring to auto dealers]. Right now we are having a good year in selling autos.”—Warren Buffett

Internet

“The Internet was a huge change in my life. I love it. If I had to give up either my plane (which costs $1.5 million per year) or the internet ($100 per year), I’d give up the plane.”—Warren Buffett

“I hate multi-tasking.”—Charlie Munger

Income inequality

“Income inequality is extreme in the United States. On a GDP per capita basis it has gone up six to one in my lifetime.”—Warren Buffett

“Everybody who is willing to work should have a decent livelihood. Raising the minimum wage would cost a lot of jobs. It’s a form of price fixing. The Earned Income Tax Credit makes a lot of sense. It can be improved. There’s fraud. But the answer lies more in the EITC than the minimum wage.”—Warren Buffett (Warren later wrote a terrific editorial piece on this topic for The Wall Street Journal)

College education

“There are the silliest statistics on the value of a college education. They compare the income of those who go to college and those who don’t. Attributing all of the gain to college is crazy. Maybe college students do better because they were better people before they attended.”—Warren Buffett

Dow Jones

“Dow Jones totally missed it. They had such an advantage. But they let the world pass them by. They could have been Bloomberg.”—Warren Buffett

“The family did end up with $6-7 billion so they didn’t destroy their fortune.” —Charlie Munger

China

“Lee Kuan Yew stopped corruption in Singapore. China is doing the same thing. Smartest thing I’ve seen a country do in a long time. They are copying Lee Kuan Yew. They’ve actually shot a few people. That scares people off.” —Charlie Munger

“Charlie just ordered a bust of Lee Kuan Yew. That’s what Berkshire does—copy smart people.”—Warren Buffett

“We have a system that unleashes human potential. We found it several hundred years ago. China found it 40-50 years ago.”—Warren Buffett

Buffett and Munger families

“You can’t accomplish much in one generation. We both owe a lot to the families that raised us.”—Charlie Munger

“We had admirable people in our families and that helped us identify other admirable people.”—Charlie Munger

“At an early age, I got the idea that my main duty was to become as rational as you could be. I got that from my grandfather.”—Charlie Munger

“It’s dishonorable to stay stupider than you have to. You have a duty to remove it.”—Charlie Munger

A good life

“If you wrest a fortune by buying stocks, trading pieces of paper, it’s not much of a life. If you’re good at managing your own money, I hope you do more with your life.”—Charlie Munger

Those were some of the highlights for me. If you’re interested in business or investing, I’d highly recommend attending next year’s Berkshire meeting. It’s one of a kind.

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The Genius of Paul Rand

The opening of the exhibition, “Everything is Design: The Work of Paul Rand,” at the Museum of the City of New York led me to reflect on Paul’s life and work. Paul Rand was one of the leading designers of the 20th century. He brought a fine arts perspective to graphic design and helped to significantly elevate the quality of the profession. There is a powerful mix of simplicity, restraint, and at times, whimsy in his work that makes it especially memorable. He also taught design at Yale and authored many books, including A Designer’s Art, which is how I came across Paul when I read it in the 1980s.  

Paul is well known for his many corporate logos—ABC, UPS, Westinghouse, NeXT Computer, and our own logo at Morningstar. I was fortunate to convince Paul to take on our logo assignment in 1991 when Morningstar was just a small company.

I was impressed with Paul’s work and design philosophy after I read A Designer’s Art. In 1990, as a six-year-old company, we started to get serious about design. We wanted to create products for investors that were beautifully designed and helped investors distill massive amounts of data into reports that were clear and easy to understand. I knew a revamp of our design program had to begin with our logo. So who better to call on than Paul Rand?

I called a few designers in New York to track him down. The first response I received was “Paul Rand? Isn’t he dead?” (He was 77 at the time.) But I persevered. I eventually found him at his home in Weston, Connecticut. He answered the phone in a gruff voice: “I’m busy now. Call me back in a month.” An odd approach to customer service, but I wanted Paul, so I dutifully waited a month.  

I called again and got the same response. I could see where this was going. So I said, “How about if I fly out to meet with you?” Instantly, his whole manner changed. He was pleasant and agreed to meet me. He later told me he received many calls for logo assignments, but no one ever followed up or came to see him. So that made the difference.

I flew to Connecticut and spent a wonderful morning with Paul in his home. He had a beautiful, art-filled home with floor-to-ceiling windows on a wooded lot. It was snowy outside, and we sat at his dining room table as his wife Marion came in occasionally to refill our coffee.

Our conversation focused on art and design. He recommended I read John Dewey’s Art as Experience. He was critical of IBM for its approach to design. He showed me various works of his that were never implemented, like a new Ford logo. He wasn’t a fan of decisions by committee. It was a lively, wide-ranging conversation. But I found it curious he never asked me about Morningstar.

When we were wrapping up, he said, “Morningstar….you’ve got a ‘g’, an ‘s’...I’ll get back to you when I’m done.” I then told him I had two requirements. First, I wanted the logo and the word Morningstar to be one thing—like Coca-Cola’s logo—and not a mark plus the word Morningstar. He groused about that but finally agreed. Second, I told him I knew he designed many great logos, but Morningstar was really important to me—my life’s work—and I wanted him to promise he’d give me his best work. He groused about that, too, but finally said he’d do his best.

As we were walking out, I thought I should ask about his fee. “What are your revenues?” he responded without hesitation. I told him our sales were between $1 million and $2 million. “That’ll be $50,000. Half upfront.” He was a shrewd businessman, too. I immediately agreed, knowing it’d be a worthwhile investment because a great logo is hugely valuable and the cost should really be spread over many years.

I went back to Chicago and waited. And waited. Our head of marketing asked me when the logo was going to be ready because a new Morningstar catalogue was in production. I knew from reading Paul’s book—there’s a part about good clients—that clients shouldn’t bother the artist. Let him or her work.

But after several months, I broke down and gave him a call. He was in a good mood and said he was glad I called—he had just finished the logo the day before. He spent months—and filled several books—with logos with stars in them, playing off the word Morningstar. But then he remembered where the name Morningstar came from. It’s from the last line of Thoreau’s Walden, “The sun is but a morning star.” After recalling the origin of the name, he said he got the logo instantly—a rising sun in place of the “o” in Morningstar.

Paul didn’t present his finished work to clients. Instead, he created a booklet that illustrated his design journey with the logo. At the end is a gatefold that unfolds the new logo. He said he’d overnight the booklet.

It was a beautiful, handcrafted booklet that began with the old logo and illustrated the evolution in his thinking until he arrived at the final logo. On the cover of the booklet, Paul attached a note: “Joe, here is my best work ever—with 11 letters. —Paul Rand.”

Paul was very concerned that after he designed our logo “some hack” would make a mess of its use. I knew from reading his books that a logo becomes great when people see it many times in many different formats. But it must be used in a consistent manner and in the right way.

So I asked his advice on getting design help. He said I was in luck. His teaching colleague from Yale, Philip Burton, had just taken an assignment at the University of Illinois at Chicago. So I called Philip, and he agreed to help. That conversation began a long and important relationship with Philip.  

Philip led us to David Williams, who at the time was heading design at the Museum of Contemporary Art in Chicago. David and Philip have led design at Morningstar ever since and helped establish design as one of our core competencies. It’s something we consider in every aspect of our business, from our workspace design to how we present information and how people interact with our products. So Paul was responsible not only for our logo, but for our design leadership. He cared passionately about creating great work and ensuring we used it properly. Sadly, Paul died in 1996. He was a giant in the world of design, and we at Morningstar owe him much.

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Mellody Hobson: Advice from an Inspiring Leader

If you’ve ever met Mellody Hobson, I’m sure she made an indelible impression. Mellody is the long-time presidentof Ariel Investments LLC in Chicago. Mellody and John Rogers, the founder of Ariel, have built Ariel into one of the country’s most respected asset management firms. Mellody is a dynamic personality—bursting with energy and one of the most productive and accomplished people I know.

Her role at Ariel alone makes Mellody noteworthy. But Mellody also has a full life outside Ariel. She’s on the boards of Starbucks, DreamWorks, and Estee Lauder. She’s also active in non-profit ventures, especially those centered on education and financial literacy. She’s married to filmmaker George Lucas and is the mother of an 18-month-old daughter. She’s a commentator on finance for CBS. She’s also incredibly fit and regularly runs and swims long distances. She exudes energy, enthusiasm, and a positive outlook on life.  

Mellody recently spoke to Morningstar’s WIN (Women’s Initiative) group and offered great advice to those building their careers, particularly women and minorities. Mellody is a talented public speaker who speaks articulately, candidly, and is chock-full of entertaining anecdotes.

A few highlights from her talk:

“To be really excellent, you need to find a perspective beyond what you do every day.” Mellody told the story of how she volunteered for two years for Bill Bradley’s presidential campaign in the late 1990s. She essentially held down two full-time jobs. While the campaign was not successful, it paid off when Bill later called Mellody and said he was joining the Starbucks board and wanted to take her with him. Bill had seen Mellody in action and told CEO Howard Shultz he had never seen anyone work as a hard as her.

Mellody views her board experiences as opportunities to learn from world-class leaders. She likened sitting on Starbucks’ board to witnessing Ray Kroc build McDonalds. She gets to see how a global company is built from the inside. She takes these learnings back to Ariel—how would Howard attack this problem? Am I thinking too small? This type of thinking has stretched Mellody and made Ariel a better company.

“There are pluses and minuses to having quotas for women and minorities on corporate boards. But if pushed to answer whether we should have them, I’d say yes.” Mellody is deeply concerned by the lack of representation of women and minorities on corporate boards. She believes what’s great about America is hope. If you don’t have hope the situation will improve, that’s a bad thing.

“Women and minorities should embrace their differences and use them to their advantage.” Being different also makes you memorable. Mellody doesn’t want to be like everyone else—because she isn’t. She embraces the ways she’s different. When she first started going to conferences, everyone knew her name because she was the only black person in the room. She joked that she doesn’t need a last name—like Cher or Beyoncé. She recommends embracing that advantage rather than viewing it as something that hurts you.

“Teach children about financial literacy.” One of Mellody’s passions is promoting financial literacy. She notes that it’s something many of us weren’t taught in school or at home. While there is desire among adults to learn, there is fear and embarrassment about asking for help. Mellody says we should start earlier and teach investing in school. It’s why Ariel created Ariel Community Academy (a public school where financial literacy is part of the curriculum).

Mellody finds shifting the mentality helpful—tell people you are teaching their children, and they’ll listen and learn. “It gives them permission to learn and not know. If you are teaching a 45-year-old, they are a little too cool for that.”

“Money tends to be a taboo subject in many homes. When parents were surveyed on the idea of teaching their kids about money, they reported being more comfortable talking to them about sex or drugs.”

“We need to get more women interested in investing—we’ve admired the problem long enough.” At Ariel there is a saying, “we’ve admired the problem long enough.” Now it’s time to act. Every individual can do something about the problem. Go into high schools and teach an investing class, for example. It’s why she works in television—not for fame or glory—but because people who know nothing about investing will listen to her.

“During a storm, don’t look up—look at your feet.” The years preceding and during the financial crisis were tough for Ariel. The firm underperformed and clients withdrew assets. Mellody took this really hard. Her sense of self-worth was wrapped up in Ariel. If Ariel didn’t do well, it reflected poorly on her. But she realized she had a job to do, and she was going to do it. It wasn’t about validating Ariel. She came out a survivor and stronger for it. Her sense of worth is no longer tied to a company but to how she acts.

Her husband, George Lucas, gave her this advice: “During a storm, don’t look up at it or you’ll fall. Watch your feet.” She went to work at Ariel during the financial crisis and told everyone, “we are watching our feet, and we are going to get through this.” And they did.

“A liberal arts education is an asset.” Mellody believes a liberal arts education helps you come at problems in different, more well-rounded ways than someone who simply builds financial models. Those who are successful in life have ideas, and the best analysts have a point of view. The liberal arts support that.

“Who is more industrious than a mother?” Mellody doesn’t buy that being a mother should deter someone from being a CEO or serving on a board. “Who is more industrious than a mother?” she asks. Mothers excel at multitasking and time management.  

“Whatever is important to you, you will do. A lot of people say they want things, but I’m amazed that people still pull back.”

“Be brave.” Mellody shared the story of a woman who told her daughter every day to be brave. She would not end with “I love you” but “be brave.” Mellody believes if you are courageous, you’ll push for things you never knew you’d fight for. The path to success is perseverance and courage.

“Embrace a mode of wonderment.” To grow and develop as a leader, Mellody tries to be in a constant mode of wonderment about what the universe is trying to teach her. What is the lesson in this experience? Why did it trigger a response or make her mad? It could be as simple as meeting a person she didn’t like. At least she learned what she doesn’t want to be. Instead of becoming upset, see what you can learn. Be self-aware.

“I don’t have work-life balance!” Mellody rejects the idea of work-life balance. It implies that if you’re working, you’re not living, and if you’re living, you’re not working. She rejects the nomenclature. She says no one asked Martin Luther King, Jr. or Gandhi about work-life balance. She is juggling many things and getting it done. Like many working parents, she has guilt about things. But she doesn’t have guilt about working.

She wants her daughter to have a working mother. Mellody wants her to know that work can be great and wants her to be proud of her mother. As a result, Mellody goes at things hard and doesn’t want to be a bystander in life. She admits she hasn’t figured out balancing. She has some zen people in her life who are helping her, though, she said with a smile.

Those were a few of the highlights of Mellody’s talk. She is inspiring and full of practical, sound advice. You can see why she made a lasting impression on Morningstar employees, including me.  

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Career Advice from Three Leaders

We recently hosted an event at Morningstar’s Chicago office with several women’s groups in our industry. It was an inspiring afternoon and provided valuable advice about building your career. The event featured a panel of accomplished women—Ellen Costello (Corporate Director and former U.S. Country Head for BMO Financial Group), Cheryl Francis (Co-Chairman of the Corporate Leadership Center and AON, Morningstar, and HNI Corporation Board Member) and Catherine A. Rein (Independent Director and Chair of the Audit Committee for BNY Mellon). They shared their career stories and answered questions from the audience in a refreshingly candid, personal, and open style. It was one of the most memorable events I’ve attended this year.

A few highlights:

You don’t need a career master plan. All three women said they didn’t plan out their careers. I thought this was a liberating view that takes pressure off people who are early in their careers and think they need a fully mapped out plan. Cheryl Francis likened it to crossing a stream. You know you want to get to the other side, but you cross the stream one rock at a time, only seeing the next few rocks. Careers are the same way. Find a place you can contribute, maximize those contributions, and then try to create more options for yourself when you make your next career move.

Develop leadership skills in a safe environment. You don’t have to wait for a promotion to develop your leadership skills. Look for opportunities outside work—a non-profit board, your church, recreational groups, and so on. These groups are hungry for people to step up and take on leadership roles. Take advantage of these opportunities to develop leadership skills where there is no downside.

Know yourself. All three women emphasized how important it is to know your strengths and weaknesses, because once you do, you can build a team around you to complement your skill set.

Take a risk. Don’t be afraid to try something outside your comfort zone. Ellen Costello told the story of taking an assignment on the bond desk of her bank. It was a different environment than she was used to, but she was glad she stuck with it. Don’t be afraid to take a lateral move or even a step down in the organization for the right developmental opportunity, especially running a profit and loss center.

Mentorships should be reciprocal relationships. Catherine Rein said whenever she mentored someone, she asked for something in return. She told the story of mentoring a woman in Albany who held a lower position in the organization. Catherine told the woman she was happy to mentor her, but in return, she wanted the woman to tell her what was going on in the field, how the average employee perceived actions by the corporate group. Mentorships where both parties receive something are more likely to be enduring and substantive.

The panel of women also discussed balancing their careers with having families, who inspires them, and their habits. It was refreshing to be at a meeting without an agenda other than to learn from each other. The women shared personal, candid stories and set a tone of openness. The audience connected. Even though this was a women’s group event, the advice shared benefited both men and women in attendance.

A quick aside about our women’s group, which we call the Morningstar Women’s Initiative, or WIN for short (men are welcome to join, too). We started WIN less than a year ago and already have 220 members out of a population of 1,600 employees in the United States. That’s the fastest-growing group I can recall at Morningstar. This was the first event that we held in coordination with the women’s groups at other companies (BMO Harris Bank, Deutsche Bank, UBS, and BNY Mellon). The event was very well received, and we look forward to expanding WIN and connecting with other firms. 

Photo: Rawpixel

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1871 CEO Howard Tullman nominated me for the ALS Ice Bucket Challenge! I accepted, and nominated Morningstar’s Scott Burns, Fast Company’s Robert Safian, and Ariel Funds’ John Rogers to take the challenge. 

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Beyond Dollars

There’s no question a business needs to turn a profit.  That’s how capitalism works—consumers vote with their dollars on the value of a company’s products. If the sum of what consumers will pay is greater than the cost to produce the goods, the company earns a profit. Society has given a “thumbs up” to the business.

Truly great businesses, though, exist to do more than simply earn a profit. They are rooted in a mission and are as much a cause as a for-profit enterprise. At Morningstar, our cause is to help people achieve better investing outcomes. We think we have a noble mission—our work helps people save for retirement, buy their first home, and put their kids through school. While many of our competitors see themselves as software or data vendors, we have an overarching purpose that differentiates us and defines us.

There are many other examples of mission-driven companies. Patagonia strives to create great outdoor clothing while minimizing environmental impact. Facebook’s mission is to make the world more connected. Nike’s is to inspire athletes. These firms make decisions in the context of their mission, not only from a profit and loss perspective. 

If a mission is genuine, it creates a strong bond with a company’s customers. They trust the company will do the right thing in creating its products, that it won’t take shortcuts that lessen quality in order to maximize profits. Customers who believe in a company’s mission are more likely to become loyal and enthusiastic supporters. The company-customer relationship becomes larger than an exchange of dollars for product.

The mission is also something company employees rally around. People want to work for more than a paycheck. Yes, they want the opportunity to grow, develop, and be fairly paid. But they also want to contribute to a meaningful cause. As a result, employee engagement and job satisfaction rise.

But the mission needs to be authentic—a company’s actions must be in keeping with the mission. That’s the really hard part. Customers or employees will quickly surface any missteps. When they do, the company loses credibility and is actually worse off by having a mission and not following it. 

Every day, managers make many decisions—and it’s not always a black-and-white call about what’s on mission and what’s not. Managers must be open to listening to dissenting views about whether their decisions are in line with the company’s mission. That’s not easy for some managers who prefer to forge ahead with their pet projects.

A company’s mission is at the core of a company’s brand and identity. It’s the single most important thing to get right in growing a business. It provides a compass for making decisions and clarity to your customers and employees about why you exist. If you can articulate it in simple terms and have the discipline to follow it, you’ll be well on your way to growing your business.

Photo: Fanatic Studio / Getty images

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To Finish Well, Start Early

When I was in my early 20s, I made my first investment in a mutual fund. I was working part time and took one paycheck and invested it in 20th Century Growth Fund (now called American Century Growth). The fund had a solid track record, and importantly to me, no minimum investment. I added to my investment over time, and the fund performed very well.

But the point is it got me started with mutual fund investing. Like many things in life, it’s important to get started. Not next year, not next month, not next week, not tomorrow, but now. Investing is governed by the laws of compounding, and the sooner you start, the sooner the high part of the exponential curve can kick in.

In the early 1980s, I made $2,000 annual contributions to my IRA. I contributed $8,000 in total (and then I stopped so I could use funds to start Morningstar). Today, more than 30 years later, that $8,000 account is worth a considerable sum—bolstered by rising equity markets and tax-free compounding. One great way to get started with investing is through a 401(k) or IRA account. Not only will you reap important tax advantages that will significantly add to your investment return, but you’ll also be less tempted to take the money out.

Since the financial downturn of 2008-2009, many people—especially young people in their 20s and 30s—have avoided equities and kept their funds in cash or fixed-income securities. This isn’t a great way to build wealth. The markets were up 16% in 2012 and 32% in 2013, and those on the sidelines missed the run-up.

Equity mutual funds had net outflows over the past five years. Then, last July, the tide turned and assets started coming back to equities. For 2013, equity funds had net inflows of $218 billion, a trend that has continued so far this year.

The longer you wait to build your investment portfolio, the harder the task of meeting your goal. Most wealth—be it in an investment portfolio or in building a business—is created over long time frames by stringing together many years of positive returns.

By waiting too long to save and invest, many people fall into a trap of overreaching for returns to make up for lost time. They fall prey to get-rich-quick schemes, the latest investment fads, or drifting into high-risk areas without sufficient knowledge. They end up with capital losses that are difficult to overcome. As one smart money manager I know likes to say, “You don’t have to worry too much about making money as long as you don’t lose money.” Starting early with appropriate expectations will help your odds of avoiding permanent capital losses.

Here are 10 funds I like that have a minimum investment below $2,500. I’ve also noted the Morningstar Analyst Rating for each, which is our analysts’ assessment of the likelihood that these funds will perform well over the long run:

Ariel Investor (Bronze) Artisan Mid Cap Value (Silver) Baron Growth (Bronze) Dodge & Cox Stock (Gold) Fidelity Small Cap Discovery (Gold) Mairs & Power Growth (Silver) Matthews Pacific Tiger Investor (Gold) Primecap Odyssey Stock (Gold) Royce Special Equity (Gold) T. Rowe Price Mid-Cap Value (Gold)

You can also get started by investing directly into stocks. Right now the aggregate price-to-fair value for the 1,600 stocks we cover at Morningstar is 1.06. That means the market is fairly valued—not undervalued, not overvalued. If you have a long time horizon, you should be fine with investing in equities now. Ten companies I like that our stock analysts also rate highly are:

Baxter International ($76.11) Berkshire Hathaway ($128.58) Coca-Cola FEMSA ($116.00) Clorox ($90.91) Coach ($34.32) ConocoPhillips ($84.53) CSX ($31.14) Deere ($87.64) McCormick ($70.27) POSCO ($74.03)

(Stock prices as of market close on July 21, 2014.)

Our lives are shaped by our habits. Developing the habit of investing will shape your life in a positive way. You’ll be a step closer to financial independence and the security and pride that come with it. For me, it was always important to be independent. It gives you freedom to do whatever you want—no matter what anyone else says. So take a paycheck—or part of a paycheck—and get started.

Photo: denphumi / Getty images