tony soprano

7 lessons Tony Soprano could learn from Warren Buffett

January 24th, 2013

There might not seem to be much connection between Warren Buffett and Tony Soprano – one, a wise and legendary investor, the other a violent and impetuous mob boss from HBO’s The Sopranos. Still, “business is business” – a sentiment Warren and Tony might both agree upon – and, after recently re-watching the series, we couldn’t help but feel that Tony Soprano could have benefited from some advice from the Sage of Omaha.

Here are seven lessons we feel that the New Jersey mob boss could have learned from the master.

Lesson 1: Don’t throw away the moat

Warren Buffett likes a business to have a “moat” around it: a competitive advantage that makes it difficult for others to compete and that allows it to have some control over its pricing. As an example, the Coca Cola “moat” is its primacy in soda drinks, its customer loyalty, and that any general retailer of soda drinks needs to stock Coke. With Gillette, the moat is that it is a market leader with a product that needs constant replacing.

At the start of the series, the Soprano family had its moat; it was the predominant organised crime outfit in North Jersey, its products were reasonably cheap in unit prices, and there was a constant need for replacement or repetition – weekly garbage pick ups, gambling, stolen credit cards, protection, loan sharking.

Then, what does Tony do? In Season 2, he becomes involved in a joint enterprise with the Lupertazzi family in large construction projects. These bring him a host of problems – infighting with the other partners, building approvals and delays, and reduced liquidity. The problems continue through following seasons, and a by-product of the venture is growing bad blood between Tony and Phil Leotardo, under-boss of the Lupertazzi family and eventual boss.

LESSON: If Tony had heeded the investment principles of Warren Buffett, he would have stuck with his original product line, probably avoiding the eventual gang war with Phil, the decimation of the Family and his own possible whacking.

Lesson 2: Stick to good managers

It is essential, says Buffett, to have good managers running businesses that you invest in.

Tony Soprano made some poor choices with his managers. In Season 2, he gave the management of one of his crews to Richie Aprile, the brother of Tony’s former Don, even though he neither liked Richie nor trusted him. Richie’s plans to oust Tony from leadership came to an end when he was whacked by Tony’s sister in a lover’s tiff.

Tony then gave the management of that crew, after a short hiatus, to Ralph Cifaretto, even though he knew Ralphie to be gambling excessively, snorting too much coke and beating strippers to death. This too ended when Tony killed Ralph, because Ralph destroyed in an arson hit the racehorse, beloved by Tony, that they co-owned.

LESSON: had Tony listened to Warren and employed good and competent managers, two hoods and a horse might still be alive. Sad about the horse.

Lesson 3: Know the business

Warren Buffett believes that you need to understand any business in which you invest.

In various episodes of The Sopranos, Tony’s cousin Christopher, who fancies himself as a film script writer, tries unsuccessfully to get into the movie business, a business that he does not understand. In Episode 7 Season 2, he believes that he is negotiating with a Hollywood director to sell him a script, but does not realise that the director is only playing him for Christopher’s anecdotes about criminals so that he can put them in his own script. In Episode 7, Season 6, Christopher has another unsuccessful attempt to break into the film industry before resorting to type and robbing a famous film star of her goodies.

Christopher is outside his area of expertise in trying to woo Ben Kingsley (some bad language)

LESSON: Christopher’s only film success comes late in Season 6 when he scripts a film for Carmine Lupertazzi Jr, a criminal with a good understanding of the film industry through his experience in making pornographic movies.

Lesson 4: Avoid debt that you can’t pay back out of earnings

A primary factor in Buffett’s decision whether to invest in a company or not is the ability of the business to pay back debt out of earnings. Buffett sensibly believes that the longer it would take to pay back a debt from profits, the riskier the business is. Benjamin Graham had a similar view (the current ratio).

In Season 6 of The Sopranos, Tony gambles recklessly and racks up large gambling debts to his friend and loan shark Hesh at a time when business is bad, earnings are down and relations between the Sopranos and the Lupertazzi Family are quickly deteriorating. Tony’s inability to repay the debt not only causes mental anguish and loss of concentration on the problems of the Family but threatens his long time friendship with Hesh to the extent that he contemplates killing Hech.

LESSON: Had Tony not lost the plot by getting into debt that he could not repay from profits, he may have focussed more on his core business and avoided the debilitating gang war that concludes the series.

Tony’s gambling problem demonstrated a poor attitude to debt - something Buffett counsels against (warning: some swearing and nudity)

Lesson 5: Only retain earnings when they can be used productively

Buffett believes that earnings should be distributed to shareholders unless they can be used productively by, for example, buying back the company shares if they are selling below intrinsic value, or increasing shareholder earnings by more than they could do themselves if they had the money.

In various episodes of The Sopranos, we see Tony hiding his excess cash in closets, his mother’s hatboxes, or giving them to the Russian Mafia to be hidden in a secret bank account. Unless the Russian bank deposits are paying really good rates of interest, or the funds are being laundered so that Tony can get them repatriated and invested in legitimate businesses, the value of the money will be eaten away by holding charges and depreciation. And the money in the closet and Mom’s hatbox are doing no good.

LESSON: if Tony had done something productive with his excess earnings as Buffett suggests, he would not have lost the money he stored in the duck feed bin by the swimming pool which wife Carmela stole when she was angry at Tony in Episode 8 Season 4.

Lesson 6: Stick with the brand that the customers know

Warren Buffett believes in the value of a good brand and his big investments show it – Amex, Coke, See’s Candies.

In Episode 5 of Season 3 of The Sopranos, Tony and his friend and restaurateur Artie Bucco discuss going into business together, making a range of sauces based on Artie’s own well-loved family recipes. Artie wants to distribute the sauces under the brand name Vesuvio, the upmarket and well-known restaurant that he owns. Tony, ever the controller, wants to name it after Satriales, the pork store that he owns in Kearney, New Jersey.

LESSON: The venture does not go ahead but Tony should have had the business sense to know that a sauce bearing the name of a famous restaurant would be more likely to appeal to a discerning public than one named after a shabby meat market.

Lesson 7: Know when to keep and when to sell

The Sage of Omaha’s preferred position is to keep his interest in a business forever but that does not mean that he will not sell when the time is right – when his original investment thesis is no longer valid.

In Episode 8 Season 6, Tony owns some real estate in his old neighbourhood. He receives an offer to sell but refuses the offer for sentimental reasons. After looking around, he realises that the neighbourhood has changed – ethnic gangs and yuppies are moving in - and it no longer has the meaning for him that it once had.

LESSON: Tony must have actually listened to Warren Buffett this time around because, when the buyer ups the price, Tony, realising the basis for his ownership is no longer there, takes the offer without a second thought. Of course, the sexual favors offered by the estate agent may have been a factor.

When the neighborhood changed and the price was right, it was time for Tony to sell. Again, some bad language.

Posted by Julian Livy on January 24th, 2013 | Posted in Warren Buffett |