Here’s Buffett’s Lecture To MBA Students 27 Years Ago – “Don’t Borrow Money Like Donald Trump”

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Apr 14 2018
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They’re both billionaires, but their similarities end there. President Donald Trump and investor Warren Buffett are not friends, and chances are they won’t become friends. They’re simply too incompatible. Both Trump and Buffett have very different business philosophy, let alone political belief. Trump is a conservative and nationalist while Buffett is a liberal and globalist.


Even though both billionaires eat regularly at McDonald’s, their menu choices mirror their vastly different approaches to business. When Trump decides to go for the fast food, his campaign staffs revealed Trump routinely ordered a McDonald’s dinner of “two Big Macs, two Filet-O-Fish, and a chocolate malted.” In New York, that would cost US$23.91.


The “Oracle of Omaha”, on the other hand, would order his menu according to the market performance. If the stock market is down, Buffett opts for the US$2.95 sausage McMuffin instead of the US$3.17 bacon egg and cheese biscuit. Yes, apparently the difference of US$0.22 is a big deal to the world’s third richest man.

Donald Trump Eats McDonalds Hamburger

Buffett is worth a staggering US$85.2 billion while Trump’s fortune is about US$3.1 billion. Their eating habits perhaps explain why Trump possesses less than 5% of Buffett’s wealth. Buffett methodically analyses companies to find under-valued stocks before investing. Trump’s choice of menu reflects his impulsive behaviour and an appetite for risk.


Perhaps that also explains why both billionaires do not see eye to eye. As far back as 1991 – 27 years ago – Warren Buffett already regarded Donald Trump as a failure, and used him as a negative case study to show students why they should not emulate Trump. According to a transcript published by former hedge fund manager Whitney Tilson, Buffett revealed why Trump was a bad role model.


In 1991, Buffett delivered three lectures to MBA and undergraduate students at the Notre Dame Faculty. The billionaire was asked by a student about Trump’s business troubles during a question-and-answer session. Donald Trump’s Atlantic City Taj Mahal casino filed for Chapter 11 bankruptcy in that year.

Warren Buffett Eats McDonalds

Warren Buffett answered – “Where did Donald Trump go wrong? The big problem with Donald Trump was he never went right. He basically overpaid for properties, but he got people to lend him the money. He was terrific at borrowing money. If you look at his assets, and what he paid for them, and what he borrowed to get them, there was never any real equity there.”


The Oracle of Omaha continued his lecture – “He owes, perhaps, US$3.5 billion now, and, if you had to pick a figure as to the value of the assets, it might be more like US$2.5 billion. He’s a billion in the hole, which is a lot better than being US$100 in the hole because if you’re US$100 in the hole, they come and take the TV set. If you’re a billion in the hole, they say ‘hang in there Donald’.”


The billionaire also told the students back in 1991 why life tends to snap at their weakest link – “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. Donald Trump failed because of leverage. He simply got infatuated with how much money he could borrow, and he did not give enough thought to how much money he could pay back.”

Donald Trump Atlantic City Taj Mahal Casino 2

Buffett also told the students to learn how to succeed without using too much debt. He said – “In this world, you really do not need so much leverage. As long as you are smart enough, you can earn a lot of money without borrowing money. In my lifetime, I never borrowed huge amounts of money. I never did, and I never would. I am not interested in borrowing money.”


In his 2017 annual letter to Berkshire Hathaway shareholders, Buffett repeated his warning and told investors not to use debt to buy stocks. He wrote – “For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips.”


In comparison, Trump’s businesses have filed for bankruptcy a half dozen times. After his US$1.2 billion Taj Mahal Casino Resort – then described as the eighth wonder of the world and the largest casino in the world – defaulted on interest payments to bondholders and eventually went belly up in July 1991, Trump was forced to sell off his yacht and his airline.

Donald Trump Atlantic City Taj Mahal Casino - Bankruptcy Liquidation Sale

A year later, Trump Castle Hotel & Casino which was opened in 1985 entered bankruptcy in March 1992. At the same time, another of his casinos – Trump Plaza Casino – entered bankruptcy. In the same year, Trump’s Plaza Hotel entered Chapter 11 bankruptcy in 1992 after accumulated more than US$550 million in debt. Altogether 3 of his businesses went “kaput” in 1992 alone.


Trump Hotels & Casino Resorts, a holding company for Trump’s three casinos, entered Chapter 11 in November 2004 as part of a deal with bondholders to restructure US$1.8 billion of debt. Thanks to the 2008 subprime financial crisis, Trump Entertainment Resorts, the casino holding company, entered Chapter 11 in February 2009.


So, altogether, Donald Trump has filed Chapter 11 bankruptcy for his companies 6 times. But how could he become the U.S. president after all those screws-up? In actuality, Chapter 11 bankruptcy isn’t a big deal. It allows companies to restructure or wipe away much of their debt to other companies, creditors, and shareholders while remaining in business but under the supervision of a bankruptcy court.

US Chapter 11 bankruptcy

Chapter 11 is also called “reorganization” because it allows the business to emerge from the process more efficient and on good terms with its creditors. Don’t go bonkers when Trump said – “I have never gone bankrupt”. It’s true that he has never filed personal bankruptcy. He only filed corporate bankruptcy. That’s why Trump tells all and sundry that he is smart.


Both billionaires also love Coca-Cola. While Trump washes his McDonald’s meals down with Diet Coke, Buffett often says he gulps down several Cokes daily. But the only billionaire who benefits from the Coke’s consumption is none other than Warren Buffett’s Berkshire Hathaway which owns nearly 10% stake in Coca-Cola. Who’s the smarter billionaire here?

Warren Buffett Youthful Secret - Coke Coca-Cola


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