Thank everyone for coming by today. I’m Matthew Blair and I’m here on behalf of the Investment Club. Looking around the room, I see a lot of people here who I don’t believe are a part of the Investment Club, and since everyone here is going to meet Warren Buffett, presumably you all have at least a minor interest in investment management. So let me give a quick plug for the Investment Club. We do a lot of things—currently most of our efforts are focused on getting a student fund up and running, and so to prepare for this, every two weeks or so we do a stock pitch roundtable, where people present their research on a stock and defend why this would be a good investment. If you’re interested in working for a hedge fund or a mutual fund, they will ask you to give a couple of stock pitches, and so we think it this will be pretty good interview practice. Also, our club isn’t that big, so if you’re feeling lost in some of the larger clubs on campus, I think you’ll find that you’ll be able to make more of an impact with a smaller club.
Background Information Session Sponsored By: Berkeley Investment Club http://groups.haas.berkeley.edu/hsbic/ Warren Buffett Trip
Buffett: “I didn’t feel that I was learning that much. Nebraska called, Wharton repelled.”
Much more active: took course loads of 5-6 classes, took a job as a paperboy supervisor, and revived his golf ball business.
He even started to date more: “The latest girl I have been dating casually mentioned to me that she played tennis, so thinking I would impress the little gal with a show of my cave-man masculinity, I offered to give her the opportunity to see me work out from across the net.
Buffett’s partner and “right-hand man” in Berkshire.
Brilliant: graduated from Harvard Law School without a Bachelor's Degree.
Chairman of Wesco Financial Corporation, an 80.1%-owned subsidiary of Berkshire. Wesco is similar to Berkshire in that it controls several companies (Precision Steel, CORT Furniture Leasing) and also has equity investments in Coke, American Express, Wells Fargo, and P&G.
Big believer in the benefits of a concentrated portfolio.
In 2006 Buffett gave away the bulk of his holdings—10 million shares, roughly $30 billion—to the Bill and Melinda Gates foundation.
Including gifts made to family foundations, the total amount given away was close to $40 billion in 2006 dollars. However, since Buffett has committed to give a set number of shares each year, if the price of Berkshire rises, the actual dollar amount given away will rise as well.
Ethics are paramount: “It takes 20 years to build a reputation and five minutes to ruin it.”
Not a fan of hedge funds and the high fees they charge.
Heavily favors the inheritance tax.
Favors expensing stock options.
Has stated that the U.S. dollar will weaken and lose value over the long-run due to the U.S.’s expanding trade deficits.
2007 Warren Buffet Trip
You Could Be The Next Warren Buffett! 2007 Warren Buffet Trip
In 2007 Buffett announced he was looking for the next CIO of Berkshire. Jokingly stated: “We're going to run this like 'American Idol' in the end”.
Looking for “independent thinking, emotional stability, and a keen understanding of both human and institutional behavior.”
The applications have been flowing in. A lawyer in Oregon recommended his four-year-old son, characterizing the toddler as a "great negotiator" on issues such as “bedtime, chores, allowance, baths, etc.”
Graham believed that investors could reduce risk by investing in companies that are trading at a discount to their net asset value (total assets minus total liabilities). This discount (or “margin of safety”) protects the investor against unforeseeable risks.
Whereas Graham was most concerned with a quantitative measure of value, Fisher focused on qualitative metrics.
Scuttlebutt: interview company officers, employees, suppliers, customers, and competitors to find companies with significant competitive advantages and management teams that could effectively exploit these advantages.
Also like Fisher, Buffett is willing to invest in a small number of good companies, rather than diversify across a large number of companies he doesn't understand as well.
Buffett: “ Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now.”
“ Put together a portfolio of companies whose aggregate earnings will march upwards over the years, and so also will the portfolio's market value.”
Focus on companies with a clear, sustainable comparative advantage, or “moat”. A moat will help protect the company against competitors.
Look for high return on equity, a consistently strong free cash flow, and limited debt.
Act as if you “own a lifetime decision card with only 20 punches on it.” Each time you invest, you have one few investment available for next time. This will help you look for only the best opportunities.
Buffett: “We have no insights into which participants in the tech field possess a truly durable competitive advantage.”
Buffett in 1999: “I think it’s much easier to predict the relative strength that Coke will have in the soft drink world than Microsoft will in the software world. That’s not to knock Microsoft. If I had to be on anyone, I’d bet on Microsoft. But I don’t have to bet.”
“ Most institutional investors in the early 1970s...were under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient. We are enormously indebted to those academics: what could be more advantageous in an intellectual contest--whether it be bridge chess, or stock selection--than to have opponents who have been taught that thinking is a waste of energy.“
“ Observing correctly that the market is frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between those propositions is night and day.”
Buffett: “We define risk, using dictionary terms, as the possibility of loss or injury.
Academics, however, life to define investment "risk" differently, averring that it is the relative volatility of a stock or portfolio (compared to the market).
For example, under beta-based theory, a stock that has dropped very sharply compared to the market…becomes riskier at the lower price that it was at the higher price. Would that description have then made sense to someone who was offered the entire company at a vastly-reduced price?”
Buffett: “We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.”
“ Charlie and I decided long ago that in an investment lifetime it’s too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart—and not too smart at that—only a very few times. Indeed, we’ll settle for one good idea a year. (Charlie says it’s my turn.)”
Buffett: “Consciously paying more for a stock than its calculated value—in the hope that it can be sold for a still-higher price—should be labeled speculation (which is neither illegal, immoral, nor—in our view—financially fattening).”
Buffett: “If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible.”
“ Unless you are a liquidator, this kind of approach to buying a business is foolish.”