Biography/History 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
Biography/History 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
Biography/History 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
Biography/History 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
philanthropy 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
Management TenetsBuffett‟s three management tenets concern the evaluation of management quality Is management rational? Is management candid? Does management resist the institutional imperative?
Rationality 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
Candor 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”
Management Style 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.
Some Management Tips 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 type of investor is Buffett?Value Investor What is a value investor, and what makes Warren “the best” ? Amex
Buffet’s famous statements 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 youre doing."
performance Berkshire Hathaway’s Class A shares vs. S&P 500Berkshire Hathaway’sClass A & B shares vs. S&P 500
Methodology1. Has the company consistently performed well? ROE for 5-10 years2. Has the company avoided access debt? Small amount of debt indicating that earnings growth is being generated from equity as opposed to borrowed money3. Are profit margins high? Are they increasing? Look back at least 5 years
Methodology4. How long has the company been public? At least 10 years Recent IPO is not a target5. 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
Methodology W. Buffett’s most important skill!!!6. 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
conclusion Complete understanding of the industry Value investing (based on fundamental analysis) Longevity (in established businesses, for long-term)
Great Buffet Quotes: "Someones 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."