“the Sage of Omaha”
Bought first stock at age 11
Invested savings into farmland
Had pinball machine business and sold for a profit
Attended Columbia University where Ben Graham was a professor at the time
Worked for Ben Graham for $12,000 a year
Opened his own partnership in Omaha
By 1961, he had 5 partnerships
In 1962, he merged partnerships to make
Buffett Partnerships, Ltd.
Bought stock for Berkshire Hathaway at $8
Bought Amex stock after fraud scandal
Took control of Berkshire in 1965
Closed partnership in 1969 and worth millions personally
In 1974 lost over 50% of wealth
In 1981 Buffett and Munger create Berkshire Charitable
Crash of ‘87 lost $342 million personally
Buffett worth $44 billion today
Berkshire has $248 billion in assets
Charles Munger, vice-chairman
Met in 1959
Goal to increase 15% a year
85% of wealth given to philanthropy
Bill and Melinda Gates Foundation
Health and learning
$1.5 billion annually
The rest to foundations run by his children and founded by late wife
Buffett’s three management tenets concern the evaluation of management quality
Is management rational?
Is management candid?
Does management resist the institutional imperative?
If a company generates high returns on equity, the duty of management is to reinvest those earnings back into the company, for the benefit of shareholders
If the earnings cannot be reinvested at high rates, management has three options:
ignore the problem and continue to reinvest at below-average rates
return the money to the shareholders, who then might have a chance to reinvest the money elsewhere at higher rates
In Buffett’s mind, only one choice is rational, that is option 3
Buffett believes that a manager who confesses mistakes publicly is more likely to correct them
Managers who discusses the failures of the company with shareholders are admirable
Resisting the Institutional
What is the institutional imperative?
the lemming-like tendency of corporate management to imitate the behavior of other managers, no matter how irrational it may be
Buffett points out that thinking independently and charting a course based on rationality and logic are more likely to maximize the profits of the company than a strategy that can best be described as “follow the leader”
He will not interfere with the running of the company.
He will be responsible for hiring and setting the compensation of the top executive.
Capital allocated to the business will have a price tag (a hurdle rate) attached.
Review annual reports from a few years back, paying special attention to what management said then about strategies for the future.
Compare those plans to today’s results: How fully were they realized?
Compare the strategies of a few years ago to this year’s strategies and ideas: How has the thinking changed?
Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights
What is a value investor, and what makes Warren
“the best” ?
So you say I can make great returns here?
Do what is the best for you, not what people think you should be doing.
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
“The stock market is designed to transfer money from the active to the patient.”
“The most important quality for an investor is temperament, not intellect.”
"Risk comes from not knowing what you're doing."
Class A shares vs. S&P 500
Class A & B shares vs. S&P 500
Has the company consistently performed well?
ROE for 5-10 years
Has the company avoided access debt?
Small amount of debt indicating that earnings growth is being generated from equity as opposed to borrowed money
Are profit margins high? Are they increasing?
Look back at least 5 years
How long has the company been public?
At least 10 years
Recent IPO is not a target
Do the company’s product rely on commodity?
Characteristics must be hard to replicate – competitive advantage, or “economic moat”
Product must be distinguishable
Must not rely solely on commodity
W. Buffett’s most important skill!!!
Is the stock selling at 25% discount or at its real value?
Determine intrinsic value by analyzing business fundamentals:
Include analysis of earnings, revenues and assets
Usually higher than its liquidation value
Compare company’s intrinsic value to its current market capitalization
If intrinsic value is at least 25% higher – company has value
Complete understanding of the industry
(based on fundamental analysis)
(in established businesses, for long-term)
Great Buffet Quotes:
"Someone's sitting in the shade today because someone planted a tree a long time ago."
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."