-by
shatheeshl@[Link]
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
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
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
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
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?
“Economic moat”
Intrinsic value
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. Has the company consistently performed well?
ROE for 5-10 years
2. 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?
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?
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)
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."
Thank You
