“Two Lessons from Buffett,” by David Gardner and Tom Gardner
February 20, 2004
David and Tom Gardner recently interviewed Overstock.com (Nasdaq: OSTK) CEO Patrick Byrne on The Motley Fool Radio Show on NPR. The company purchases excess inventory from manufacturers and distributors and resells it on its website.
TMF: Patrick, any opinions about a coming Google IPO?
Byrne: I think Google is, of course, a great company. I have been using it for years. They are smart guys who basically captured the value of the Internet for the mathematicians out there. I hope that they use the auction model to IPO. We used the auction model, the Hambrecht Dutch auction model, and if there is anyone else who should use it, it is Google because they are an auction model. There would really be some charm in them using Hambrecht.
TMF: Can you just lay out the Hambrecht? You are talking about how to sell their shares to the public, right? Pricing them in sort of a different way, different from traditional Wall Street pricing. Could you just explain what you mean by it?
Byrne: Sure. A lot of the nefarious behavior that came to light from Wall Street in the last three or four years, was really, really driven by a pathological IPO process. What you have is a bunch of white shoe Wall Street bankers, and you know I don’t like these guys, so I will talk about them that way. These bad men who are taking companies public at artificially low prices. Now anytime you take a company public at an artificially low price, there is guaranteed profit. Anytime there is guaranteed profit to be assigned by somebody, there are kickbacks. It doesn’t matter if you are talking about some Paraguay customs official or if you are talking about some white shoe banker on Wall Street. So what they were doing is giving guaranteed profits to their friends and pension funds and other things and getting kickbacks.
TMF: So in effect, they’re saying, “We are going to sell you these shares at $10 a share… pay us a bunch of money for it. And by the way, they are going to go public next week at $12 or $13, so there is your profit, buddy.”
Byrne: Could be that or it could be…
TMF: “And give me back a little of it too.”
Byrne: Give me back 50% of it. This guy Frank Quattrone, who is making 50% of it back in kickbacks. This isn’t the exception. This is how Wall Street operates. So Hambrecht comes along, and I mean at the heart of Wall Street, this is how it is done. It is so crooked you can’t believe these guys aren’t in jail.
Hambrecht comes along and says, “You know, we are not going to do back-room allocations of stock and IPOs. We are going to put it out there and let people bid and then the right people buy the stock the first time. So people come in on the IPO not so they can flip out of the stock the next day and make 50%, because it is not going to go up 50%. It is going to come out at the right price to begin with. So the people who buy the stock in the IPO are the people who actually believe in the company. It is much fairer; it is just a better mousetrap.
TMF: Are you recommending that I, as an investor looking at initial public offerings, the market of IPOs… I should be looking for Hambrecht’s IPOs versus anybody else’s? If Google does not select Hambrecht, should I think less of Google?
Byrne: Well, I will answer the first question this way. This smart investor in Omaha, that I keep referring to, he once said, “If you ever sit down at a poker table and in 15 minutes you haven’t figured out who the pigeon is, you are the pigeon.” Well, when you are Joe Q. Public and you are coming to an IPO, trust me, you are the pigeon. I know how it works and how it works behind the scenes. You are the pigeon and the sharks are the bankers and their headstrong managers that they are allocating shares to. You are the pigeon. So absolutely Joe Q. Public should stay away from that game as it is normally practiced on Wall Street.
Google, I am not going to judge Google. Their decision is theirs to make. But I know probably better than anyone the kinds of pressures that got brought to bear by Wall Street when we decided to go with Hambrecht. People said, “I had white shoe Wall Street bankers tell me if you go with them, we will never pick up coverage.” Just threatening me. I don’t negotiate with terrorists. So they made my decision for me. I hope Google has a lot more clout than we did and I hope they stand up to the pressures that I am sure are going to be brought to them.
TMF: Patrick, as we draw to a close here, you did grow up in a pretty unique environment. Your father was a successful businessman. You have referred to a “businessman from Omaha” a few times. Of course the sage of Omaha, Warren Buffett. You met him quite young and if I recall correctly, Buffett gave you some advice for investing and some advice for life, including, I think, don’t save sex for old age. Never buy a stock that you aren’t willing to hold long term. What are one or two other lessons Buffett has taught you?
Byrne: Well, I hate to be on here sounding like I am dropping his name because I know he hates that. But half of my worldview was formed by this guy. He is just an incredible fellow. Two things. One, is act like what you are going to do is going to end up on the front page of The Washington Post because by the time a man is 60, he has the reputation he deserves. That is one of them, it sounds sort of corny and midwestern, but it is a good way to live.
Secondly, think of yourself as you go through life as standing at the plate and people throwing you pitches. It is a very special baseball game. There is no one calling the balls and strikes and you can stand there forever. You have got all these people in the bleachers saying, “Hey, swing you bum!” on every second pitch. You just have to learn to ignore them and when a pitch comes along and it is straight but it is a little high inside, you let it pass. Another one comes along and it is a little low outside. Every once in a while a pitch comes along that looks like the sweetest, juiciest, fattest pitch you are ever going to see. And when it does, you swing from your heels on it. You come out of your shoes on it. That is how you go through life. And you are only going to get about ten swings like that, maybe five swings. That is what you wait for. Too many people go through life batting at every other pitch. So just wait for your opportunities and when they come you swing from your heels.
TMF: Patrick Byrne, thanks for joining us once again on The Motley Fool Radio Show.
Byrne: It is my honor, thanks.