On Ham Sandwiches

Are you annoyed by investors who go on and on quoting Warren Buffett? Then you are probably not going to like this essay! Especially because it has not one, but two (!) Buffett stories about ham sandwiches. But I hope these are “deep cut” enough that you are not bored to tears.

An Exceptional Ham and Cheese

There is a story from Carol Loomis’ “Tap Dancing to Work” biography of Buffett. He has dinner with his friend Marshall Weinberg on a visit to New York in the 80s. Buffett orders a ham and cheese sandwich and is quite satisfied. A few days later, they meet again for dinner. Weinberg proposes various restaurants, but Buffett insists they return to the first restaurant. “That was a great ham and cheese,” he says.

I first read this anecdote 15 years ago and it always struck me. It hints at something very unique about Buffett.

I remember imagining myself in his shoes: I am visiting the greatest city in the world and, compared with Omaha, the quality of restaurants is off the charts. These were the days of Le Cirque and Dorsia (jk). Choosing among the many great options would be the hardest part. Meanwhile, choosing to go back to the first restaurant for a pedestrian ham and cheese struck me as pathological. 

As someone who used to revel in new experiences, I couldn’t fathom Buffett’s mentality. 15 years later, I am starting to understand. A desire for novelty makes sense when you are young and building an understanding of the world, but becomes less important as your number of data points increases.

For example, assume you have only been to 2 restaurants in New York out of 20,000. At one of them you enjoyed a great meal. Let’s call it Tony’s Pizza. Should you go back to Tony’s the next day or risk trying someplace new? Your sample size is so small that you would be well-advised to keep trying new places. If, on the other hand, you have already been to 1,000 restaurants and judged Tony’s Pizza to be among the best, the probability that a new place would exceed your experience at Tony’s is quite low.

We can support this mathematically with t-stats etc., but I will skip the brain damage for now. People with an excessive bias towards novelty or similarly a gambling instinct, may continue trying out new restaurants even after they already have a large sample size. The result is likely to be repeated disappointment as the meals consistently fall short of prior great experiences.

Bringing this back to investing, I propose that Buffett has an extraordinarily, perhaps superhumanly, low propensity toward both novelty and gambling.

He has a deep reservoir of experience to draw upon across nine decades of investing (a huge sample size). When he encounters a company akin to a first-class ham & cheese sandwich - maybe it is a little boring and pedestrian - but he knows investing in this company will be highly satisfactory and almost certainly better than investing in something novel that may look more attractive on the surface.

This mindset is extremely helpful in investing, and I am still in the process of cultivating it myself. I recognize that I have a very low gambling bias, but a relatively high inclination toward novelty. But as I have built up my own reservoir of experience over the last two decades, my novelty bias is shrinking due to hard-won experience.

Investing in IPOs or the current hot sector is akin to what Samuel Johnson called “the triumph of hope over experience.” I am now mostly happy to avoid these and stick with the areas that I know best. But I still need some work to get to Buffett’s ham and cheese state of zen.

Run by a Ham Sandwich

In “The Snowball,” Alice Schroeder quoted Buffett as saying that Coca Cola could be run by a ham sandwich (although he later implied the quote was actually from Bill Gates.)

Coca Cola is indeed a very solid business that appears capable of printing money regardless of who sits at the helm. However, if we examine the background of Buffett’s investment, I think we can conclude that he invested because there was the exact opposite of a ham sandwich leading the company.

In 1981, Roberto Goizueta took over as CEO of Coca Cola, and Buffett’s former neighbor Don Keough became COO. Goizueta made significant structural changes to streamline the business, including selling off non-core lines such as a winery. Most importantly, he fixed Coke’s relationship with its bottlers. That move would eventually result in Coca Cola getting out of the capital-intensive bottling business, thereby transforming the business model and turning Coke into a cash flow gusher.

That said, there were a number of missteps under Goizueta, including the disastrous launch of New Coke in 1985 and the purchase of Columbia Pictures in 1982.

On a side note, Columbia was the wrong business for Coke to be in, but it did produce my favorite movie of all time, The Karate Kid. Ghostbusters is also in my top 10. The sale of Columbia to Sony at the peak of the Japanese bubble was a lucky exit.

By 1988, when Buffett started buying, the shares had advanced 4x in the 7 years since Goizueta and Keough had taken over. But the stock was not done. As an asset-lite syrup producer generating prodigious cash flows, Coke was able to invest heavily in brand building, allowing it to reclaim share from Pepsi and expand internationally.

In the decade (1971-1981) before Goizueta took the helm, Coke’s stock had a negative return, excluding dividends. From 1981 until his passing in 1997, the shares rose 37x to $26. Thirteen years after his death in 2010, the stock was still at $26. The shares now trade at about $88.  

My conclusion is that even at a very large company such as Coca Cola, leadership can have a major impact and a “ham sandwich” is not going to cut it. Resolving Coke’s painful relationship with its bottlers, who had legal control over input costs, and its decisions on concentration vs. diversification had enormous impact on the value created. Those strategic decisions were directly attributable to the Goizueta / Keough duo.  

I think people who conclude that Buffett is merely looking for "moats" and strong business models miss that he is actually deliberately investing alongside best-in-class operators.

The Hosomichi strategy is built on the same premise: people matter and culture matters. We are looking for exceptional people and cultures, while also recognizing that an underperforming company may simply need a change at the top to become a success story.

We don’t want ham sandwiches, unless we can enjoy them over lunch with Buffett.