“the Sage of Omaha”
Ping Hu
Matt Neeve
Olena Olenchuk
Rachel Caldie

 Bio
 Management style
 Investment approach
 Methodology

 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
Contribution plan
 Crash of ‘87 lost $342 million personally

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Buffett worth $44 billion today
Berkshire has $248 billion in assets
CEO
Charles Munger, vice-chairman
 Met in 1959
Goal to increase 15% a year

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85% of wealth given to philanthropy
Bill and Melinda Gates Foundation
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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
 buy growth
 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
Imperative
 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

Value Investor
 What is a value investor, and what makes Warren
“the best” ?
 Amex

So you say I can make great returns here?
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“Economic moat”
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Intrinsic value
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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."

Berkshire Hathaway’s
Class A shares vs. S&P 500
Berkshire Hathaway’s
Class A & B shares vs. S&P 500

1.
2.
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
3.
Are profit margins high? Are they increasing?
 Look back at least 5 years

4.
How long has the company been public?
 At least 10 years
 Recent IPO is not a target
5.
Do the company’s product rely on commodity?
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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!!!
6.
Is the stock selling at 25% discount or at its real value?
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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
 Value investing
(based on fundamental analysis)
 Longevity
(in established businesses, for long-term)

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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."

Sources: http://www.investopedia.com/university/greatest/warrenbuffett.asp
http://www.investopedia.com/articles/01/071801.asp
http://www.investopedia.com/articles/06/threewisemen.asp
http://en.wikipedia.org/wiki/Warren_Buffett http://finance.yahoo.com/