Background Information Session Sponsored By: Berkeley Investment Club http://groups.haas.berkeley.edu/hsbic/ Warren Buffet...
Goals and Purpose <ul><ul><li>We’re here today to give you an overview of Warren Buffett in preparation for our visit Nove...
Agenda <ul><li>Biographical </li></ul><ul><ul><li>Childhood stories </li></ul></ul><ul><ul><li>College and graduate school...
General Info <ul><ul><li>Born in Omaha in 1930. </li></ul></ul><ul><ul><li>Father, Howard Buffett, was a stockbroker and R...
Paper Route <ul><ul><li>One of Buffett’s first jobs was as a delivery boy for the Washington Post.  </li></ul></ul><ul><ul...
Pinball Machine Business <ul><ul><li>As a high school senior, Buffett and a friend began buying used pinball machines and ...
Wharton <ul><ul><li>Attended Wharton for a short time, but found it's curriculum lacking and too concerned with “fancy the...
University of Nebraska at Lincoln <ul><ul><li>Buffett: “I didn’t feel that I was learning that much. Nebraska called, Whar...
Columbia Business School <ul><ul><li>After graduating from Nebraska at age 19, Buffett applied to Harvard Business School ...
Buffett Associates Ltd <ul><ul><li>In 1956 Buffett started an investment partnership.  </li></ul></ul><ul><ul><li>Raised $...
Charlie Munger <ul><ul><li>Buffett’s partner and “right-hand man” in Berkshire.  </li></ul></ul><ul><ul><li>Brilliant: gra...
Berkshire Hathaway <ul><ul><li>Originally was a textile manufacturer.  </li></ul></ul><ul><ul><li>Made the first investmen...
Why Insurance?  <ul><ul><li>In 1967, Buffett began diversifying Berkshire's business interests by purchasing two insurance...
Buffett’s Stocks (6/30/07) 2007 Warren Buffet Trip
Salomon Crisis <ul><ul><li>In 1987 Berkshire had invested $700 million in preferred stock at Salomon, which allowed Salomo...
Philanthropy <ul><ul><li>In 2006 Buffett gave away the bulk of his holdings—10 million shares, roughly $30 billion—to the ...
General Views <ul><ul><li>Ethics are paramount: “It takes 20 years to build a reputation and five minutes to ruin it.” </l...
You Could Be The Next Warren Buffett! 2007 Warren Buffet Trip <ul><ul><li>In 2007 Buffett announced he was looking for the...
Early Influencers – Ben Graham <ul><ul><li>Early in his career, Buffett said, “I’m 85% Ben Graham.” </li></ul></ul><ul><ul...
Early Influencers – Ben Graham <ul><ul><li>2 nd  big contribution: Margin of Safety </li></ul></ul><ul><ul><ul><li>Graham ...
Early Influencers – Phillip Fisher <ul><ul><li>Whereas Graham was most concerned with a quantitative measure of value, Fis...
Goal as an Investor <ul><ul><li>Buffett: “ Your goal as an investor should simply be to purchase, at a rational price, a p...
Equity Investing Strategy <ul><ul><li>Buffett: “ We want the business to be one  </li></ul></ul><ul><ul><ul><li>That we ca...
Tenet #1: Understandable Businesses <ul><ul><li>Stick with stocks in your &quot;circle of competence.&quot; If you don't u...
Tenet #2: Favorable Long-term Prospects <ul><ul><li>Focus on companies with a clear, sustainable comparative advantage, or...
Tenet #3: Good Management  <ul><ul><li>Look for managers who treat the shareholders' capital with owner-like care and thou...
Tenet #4: Buy at an Attractive Price <ul><ul><li>Look at raw data, not analyst summaries. Focus on understanding the pictu...
Time Horizon <ul><ul><li>Buffett: “If you aren't willing to own a stock for ten years, don't even think about owning it fo...
Why Not Tech Stocks? <ul><ul><li>Buffett: “We have no insights into which participants in the tech field possess a truly d...
Thoughts on Efficient Markets <ul><ul><li>“ Most institutional investors in the early 1970s...were under the spell of acad...
Risk <ul><ul><li>Buffett: “We define risk, using dictionary terms, as the possibility of loss or injury. </li></ul></ul><u...
Portfolio Concentration <ul><ul><li>Buffett: “We believe that a policy of portfolio concentration may well  decrease  risk...
Speculation <ul><ul><li>Buffett: “Consciously paying more for a stock than its calculated value—in the hope that it can be...
Cigar Butt Approach to Investing <ul><ul><li>Buffett: “If you buy a stock at a sufficiently low price, there will usually ...
Portfolio Insurance <ul><ul><li>Buffett: “The less these companies are being valued at, the more vigorously they should be...
Recommended Reading <ul><ul><li>The Essays of Warren Buffett : Lessons for Corporate America  by Lawrence Cunningham </li>...
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  • 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.
  • Warren Buffett Presentation

    1. 1. Background Information Session Sponsored By: Berkeley Investment Club http://groups.haas.berkeley.edu/hsbic/ Warren Buffett Trip
    2. 2. Goals and Purpose <ul><ul><li>We’re here today to give you an overview of Warren Buffett in preparation for our visit November 18-19 and to explain this record: </li></ul></ul>2007 Warren Buffet Trip
    3. 3. Agenda <ul><li>Biographical </li></ul><ul><ul><li>Childhood stories </li></ul></ul><ul><ul><li>College and graduate school </li></ul></ul><ul><ul><li>Buffett Associates </li></ul></ul><ul><ul><li>Berkshire-Hathaway </li></ul></ul><ul><li>Investment Philosophy </li></ul><ul><ul><li>Early influencers </li></ul></ul><ul><ul><li>Equity investing strategy </li></ul></ul><ul><ul><li>Investment tenets </li></ul></ul><ul><ul><li>Thoughts on risk </li></ul></ul><ul><ul><li>Thoughts on efficient markets </li></ul></ul>2007 Warren Buffet Trip
    4. 4. General Info <ul><ul><li>Born in Omaha in 1930. </li></ul></ul><ul><ul><li>Father, Howard Buffett, was a stockbroker and Republican congressman. </li></ul></ul><ul><ul><li>Buffett ran away once. </li></ul></ul><ul><ul><li>He bought his first stock, Cities Service Preferred, at $38 a share. It dropped to $27 a share, but then rose back to $40, at which point Buffett sold. Cities subsequently rose to $200 a share. </li></ul></ul>2007 Warren Buffet Trip
    5. 5. Paper Route <ul><ul><li>One of Buffett’s first jobs was as a delivery boy for the Washington Post. </li></ul></ul><ul><ul><li>Even with 500 papers to deliver, the process was so efficient that it only took a little more than an hour. </li></ul></ul><ul><ul><li>Buffett expanded into magazines, and eventually was earning $175 a month. </li></ul></ul><ul><ul><li>Buffett refused to let his dad pay the taxes. Instead, Buffett tracked his earnings and filed his own return. </li></ul></ul>2007 Warren Buffet Trip
    6. 6. Pinball Machine Business <ul><ul><li>As a high school senior, Buffett and a friend began buying used pinball machines and putting them in barbershops. </li></ul></ul><ul><ul><li>Buffett: “Eventually we were making $50 a week. I hadn't dreamed life could be so good.“ </li></ul></ul><ul><ul><li>But the pinball machines were constantly breaking, and the barbershop owners kept pushing them to put in new machines. </li></ul></ul><ul><ul><li>“ We'd always tell them we'd take it up with the boss. We pretended like we were these hired hands that were carrying machines around and counting money.” </li></ul></ul>2007 Warren Buffet Trip
    7. 7. Wharton <ul><ul><li>Attended Wharton for a short time, but found it's curriculum lacking and too concerned with “fancy theories” and “ignorant of the practical details of making a profit.” </li></ul></ul><ul><ul><li>While there, Buffett did manage to make the cover a student magazine dressed as the model football fan—derby hat, raccoon coat, cigar in mouth, holding a banner and offering a flask to his date. </li></ul></ul><ul><ul><li>At his fraternity parties, he would entertain the crowd with dissertations on the gold standard. And the crowd loved it! </li></ul></ul>2007 Warren Buffet Trip
    8. 8. University of Nebraska at Lincoln <ul><ul><li>Buffett: “I didn’t feel that I was learning that much. Nebraska called, Wharton repelled.” </li></ul></ul><ul><ul><li>Much more active: took course loads of 5-6 classes, took a job as a paperboy supervisor, and revived his golf ball business. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>She trounced me.” </li></ul></ul>2007 Warren Buffet Trip
    9. 9. Columbia Business School <ul><ul><li>After graduating from Nebraska at age 19, Buffett applied to Harvard Business School and was rejected. </li></ul></ul><ul><ul><li>“ To tell you the truth, I was kind of snowed when I got rejected from Harvard.” </li></ul></ul><ul><ul><li>Instead, Buffett went to Columbia, where Benjamin Graham and David Dodd taught. </li></ul></ul><ul><ul><li>Graham was already the dean of the securities profession. Together with Dodd, he published Security Analysis, which was the seminal textbook in the field. </li></ul></ul>2007 Warren Buffet Trip
    10. 10. Buffett Associates Ltd <ul><ul><li>In 1956 Buffett started an investment partnership. </li></ul></ul><ul><ul><li>Raised $105,000 from family and friends. </li></ul></ul><ul><ul><li>Results: earned more than 30% annually from 1956 to 1969, when the general market earned only about 8% annually. </li></ul></ul><ul><ul><li>Began to consult with Charlie Munger. </li></ul></ul><ul><ul><li>In May 1969, he dissolved the partnership, as he was &quot;unable to find any bargains in the current market&quot;. </li></ul></ul>2007 Warren Buffet Trip
    11. 11. Charlie Munger <ul><ul><li>Buffett’s partner and “right-hand man” in Berkshire. </li></ul></ul><ul><ul><li>Brilliant: graduated from Harvard Law School without a Bachelor's Degree. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Big believer in the benefits of a concentrated portfolio. </li></ul></ul>2007 Warren Buffet Trip
    12. 12. Berkshire Hathaway <ul><ul><li>Originally was a textile manufacturer. </li></ul></ul><ul><ul><li>Made the first investment in 1965, and eventually bought the whole company in 1967. </li></ul></ul><ul><ul><li>Early investments included National Indemnity Insurance, See’s Candy, Washington Post, Capital Cities-ABC, and GEICO. </li></ul></ul><ul><ul><li>Salary as Chairman: $100,000 </li></ul></ul><ul><ul><li>Currently has about $38 billion in cash, and $77 billion in equity investments. Stock market cap: $210 billion </li></ul></ul>2007 Warren Buffet Trip
    13. 13. Why Insurance? <ul><ul><li>In 1967, Buffett began diversifying Berkshire's business interests by purchasing two insurance companies: National Indemnity and National Fire and Marine. Soon added more insurance companies. </li></ul></ul><ul><ul><li>Buffett liked insurance companies because he received the policyholder premiums upfront, but wouldn’t have to pay out the claims until a much later time. </li></ul></ul><ul><ul><li>Essentially, Buffett became the investment manager for the insurance companies' premium-based capital (or &quot;float&quot;). </li></ul></ul>2007 Warren Buffet Trip
    14. 14. Buffett’s Stocks (6/30/07) 2007 Warren Buffet Trip
    15. 15. Salomon Crisis <ul><ul><li>In 1987 Berkshire had invested $700 million in preferred stock at Salomon, which allowed Salomon to ward off Ronald Perelman, who was looking to take over the company. </li></ul></ul><ul><ul><li>Top management had stepped down over a trading violation—CEO John Gutfreund had kept the Board in the dark over both the violation and the subsequent investigation by the Treasury Department. </li></ul></ul><ul><ul><li>Buffett managed to convince the Treasury to reverse its ban on Salomon participating in the auctions (thus saving the company from certain bankruptcy). </li></ul></ul>2007 Warren Buffet Trip
    16. 16. Philanthropy <ul><ul><li>In 2006 Buffett gave away the bulk of his holdings—10 million shares, roughly $30 billion—to the Bill and Melinda Gates foundation. </li></ul></ul><ul><ul><li>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. </li></ul></ul>2007 Warren Buffet Trip
    17. 17. General Views <ul><ul><li>Ethics are paramount: “It takes 20 years to build a reputation and five minutes to ruin it.” </li></ul></ul><ul><ul><li>Not a fan of hedge funds and the high fees they charge. </li></ul></ul><ul><ul><li>Heavily favors the inheritance tax. </li></ul></ul><ul><ul><li>Favors expensing stock options. </li></ul></ul><ul><ul><li>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. </li></ul></ul>2007 Warren Buffet Trip
    18. 18. You Could Be The Next Warren Buffett! 2007 Warren Buffet Trip <ul><ul><li>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”. </li></ul></ul><ul><ul><li>Looking for “independent thinking, emotional stability, and a keen understanding of both human and institutional behavior.” </li></ul></ul><ul><ul><li>The applications have been flowing in. A lawyer in Oregon recommended his four-year-old son, characterizing the toddler as a &quot;great negotiator&quot; on issues such as “bedtime, chores, allowance, baths, etc.” </li></ul></ul>
    19. 19. Early Influencers – Ben Graham <ul><ul><li>Early in his career, Buffett said, “I’m 85% Ben Graham.” </li></ul></ul><ul><ul><li>1 st big contribution: Mr. Market </li></ul></ul><ul><ul><ul><li>Irrational fellow who appears daily and names a price at which he will either sell you his interest or buy yours </li></ul></ul></ul><ul><ul><ul><li>Doesn't mind being ignored </li></ul></ul></ul><ul><ul><ul><li>Very emotional: at times he will be euphoric, and quote you high prices, and at times he will be depressed, and quote you low prices </li></ul></ul></ul><ul><ul><ul><li>Buffett: “It is his pocketbook, not his wisdom, that you will find useful” </li></ul></ul></ul>2007 Warren Buffet Trip
    20. 20. Early Influencers – Ben Graham <ul><ul><li>2 nd big contribution: Margin of Safety </li></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul>2007 Warren Buffet Trip
    21. 21. Early Influencers – Phillip Fisher <ul><ul><li>Whereas Graham was most concerned with a quantitative measure of value, Fisher focused on qualitative metrics. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>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. </li></ul></ul>2007 Warren Buffet Trip
    22. 22. Goal as an Investor <ul><ul><li>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.” </li></ul></ul><ul><ul><li>“ Put together a portfolio of companies whose aggregate earnings will march upwards over the years, and so also will the portfolio's market value.” </li></ul></ul>2007 Warren Buffet Trip
    23. 23. Equity Investing Strategy <ul><ul><li>Buffett: “ We want the business to be one </li></ul></ul><ul><ul><ul><li>That we can understand; </li></ul></ul></ul><ul><ul><ul><li>With favorable long-term prospects; </li></ul></ul></ul><ul><ul><ul><li>Operated by honest and competent people; and </li></ul></ul></ul><ul><ul><ul><li>Available at a very attractive price.” </li></ul></ul></ul><ul><ul><li>&quot;We try to buy into businesses with favorable long-term economics. Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price.&quot; </li></ul></ul><ul><ul><li>“ In our opinion, the two are joined at the hip: Growth is always a component of value.” </li></ul></ul>2007 Warren Buffet Trip
    24. 24. Tenet #1: Understandable Businesses <ul><ul><li>Stick with stocks in your &quot;circle of competence.&quot; If you don't understand the business, you can't value the stock. </li></ul></ul><ul><ul><li>Thinks of investment success as being not how much you know but how realistically you define what you don’t know. </li></ul></ul><ul><ul><li>Will improve your ability to ascertain whether the business has favorable long-term prospects. </li></ul></ul>2007 Warren Buffet Trip
    25. 25. Tenet #2: Favorable Long-term Prospects <ul><ul><li>Focus on companies with a clear, sustainable comparative advantage, or “moat”. A moat will help protect the company against competitors. </li></ul></ul><ul><ul><li>Look for high return on equity, a consistently strong free cash flow, and limited debt. </li></ul></ul><ul><ul><li>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. </li></ul></ul>2007 Warren Buffet Trip
    26. 26. Tenet #3: Good Management <ul><ul><li>Look for managers who treat the shareholders' capital with owner-like care and thoughtfulness. </li></ul></ul><ul><ul><li>When Buffett buys a business, he buys its management as well—Buffett does not get involved with day-to-day activities nor helps with major strategic decisions. </li></ul></ul><ul><ul><li>Buffett asks, “Is management rational?”, “Is the management candid,” and “does the management resist the institutional imperative?” </li></ul></ul>2007 Warren Buffet Trip
    27. 27. Tenet #4: Buy at an Attractive Price <ul><ul><li>Look at raw data, not analyst summaries. Focus on understanding the picture, not precise points. &quot;It is better to be approximately right than precisely wrong.“ </li></ul></ul><ul><ul><li>Understand that majority of stocks are not compelling so ignore them. But when you find stock you like, show conviction, and buy a ton of it. </li></ul></ul><ul><ul><li>Don't worry about macro trends. Focus on long-term business value--the size of the coupons down the road. </li></ul></ul>2007 Warren Buffet Trip
    28. 28. Time Horizon <ul><ul><li>Buffett: “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.“ </li></ul></ul><ul><ul><li>“ When we own portions of outstanding business with outstanding managements, our favorite holding period is forever.” </li></ul></ul>2007 Warren Buffet Trip
    29. 29. Why Not Tech Stocks? <ul><ul><li>Buffett: “We have no insights into which participants in the tech field possess a truly durable competitive advantage.” </li></ul></ul><ul><ul><li>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.” </li></ul></ul>2007 Warren Buffet Trip
    30. 30. Thoughts on Efficient Markets <ul><ul><li>“ 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.“ </li></ul></ul><ul><ul><li>“ 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.” </li></ul></ul>2007 Warren Buffet Trip
    31. 31. Risk <ul><ul><li>Buffett: “We define risk, using dictionary terms, as the possibility of loss or injury. </li></ul></ul><ul><ul><li>Academics, however, life to define investment &quot;risk&quot; differently, averring that it is the relative volatility of a stock or portfolio (compared to the market). </li></ul></ul><ul><ul><li>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?” </li></ul></ul>2007 Warren Buffet Trip
    32. 32. Portfolio Concentration <ul><ul><li>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.” </li></ul></ul><ul><ul><li>“ 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.)” </li></ul></ul>2007 Warren Buffet Trip
    33. 33. Speculation <ul><ul><li>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).” </li></ul></ul>2007 Warren Buffet Trip
    34. 34. Cigar Butt Approach to Investing <ul><ul><li>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.” </li></ul></ul><ul><ul><li>“ Unless you are a liquidator, this kind of approach to buying a business is foolish.” </li></ul></ul>2007 Warren Buffet Trip
    35. 35. Portfolio Insurance <ul><ul><li>Buffett: “The less these companies are being valued at, the more vigorously they should be sold. “ </li></ul></ul><ul><ul><li>“ After buying a farm, would a rational owner next order his real estate agent to start selling off pieces of it whenever a neighboring property was sold at a lower price?&quot; </li></ul></ul><ul><ul><li>“ Volatility caused by money managers who speculate irrationally with huge sums will offer the true investor more chances to make intelligent investment moves.” </li></ul></ul>2007 Warren Buffet Trip
    36. 36. Recommended Reading <ul><ul><li>The Essays of Warren Buffett : Lessons for Corporate America by Lawrence Cunningham </li></ul></ul><ul><ul><li>Annual Berkshire Letters by Warren Buffett </li></ul></ul><ul><ul><li>Buffett: The Making of an American Capitalist by Roger Lowenstein </li></ul></ul><ul><ul><li>The Warren Buffett Way by Robert G. Hagstrom </li></ul></ul><ul><ul><li>The Intelligent Investor by Ben Graham </li></ul></ul><ul><ul><li>Common Stocks, Uncommon Profits by Phillip Fisher </li></ul></ul>2007 Warren Buffet Trip

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