An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news.
Youre qualified for residence, said St. Peter, but, as you can see, the compound reserved for oil men is packed. Theres no way to squeeze you in. After thinking for a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hand and yelled, Oil discovered in hell. Immediately the gates to the compound opened and all the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. No., he said, I think Ill go along with the rest of the boys. There might be some truth to that rumour after all.
Warren Buffett
The Greatest Investor of All Time?
Outline of Presentation
w Introduction w Buffet's Investment Style w Buffets Success w Value Investing for the Lay Investor w Conclusion
Introduction
w Warren Edward Buffett w Born August 30, 1930, Omaha. w Son of Howard and Leila Buffett
Background
w Born during the Great Depression w Father was a stockbroker w Emerged with strong drive to get very rich
Money-Making Schemes
M M M M M Age 6 - Peddled Coke Age 9 - Carrying golf clubs for $3 per day Age 11- Bought his first stock Age 11-13 - Sold used golf balls. Age 13 - Carrier for Washington Post and 4 other newspapers. M Age 14 - Bought 40 acres of farmland and leased it out. M Age 16 - Rented out used pinball machines making up to $50 a week.
Employment
M Worked for Buffett-Falk & Co., as an investment salesman after graduating with a Masters in Economics. (1951-1954) M Worked for Graham-Newman Corp, as a securities analyst (1954-1956) M Formed Buffett Partnership, Ltd and appointed himself General Partner. (1956-1969) M Bought over Berkshire Hathaway Inc in 1962 and became Chairman and CEO in 1970
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Buffett Partnership, Ltd
M $25,000 each from a group of investors M 1st year - 5 small partnerships, totalling range of $500,000 M 2nd year - Partnerships soared 41% (Dow 39%) M 3rd year - Original partnership money doubled M 1969 - Investment ballooned at compound rate of 29.5% (Dow 7.4%)
Berkshire Hathaway
M A textile mill purchased in 1962. Suffering a $2.2m loss at time of purchase. Priced at $8/share though it had $16.50/share of working capital. M Buffett currently holds 38% of shares, valued at total of $36bn M Has stakes in Coca-Cola (2nd largest shareholder), Gillette, American Express, Disney, McDonalds, Dairy Queen M Currently valued at $57.8bn book value. Intrinsic value unknown. Class A stock priced between $61,900 and $81,100 in 1999
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Holdings of Berkshire Hathaway, Inc.
w Capital deployed into other fields
underwriting of property and casualty insurance, newspaper publishing, retailing of home furnishings, retail jewellery, manufacture, import and distribution of footwear
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Business Activities
M All operating decisions for the different Berkshire businesses are made by the respective managers of those business units M All investment decisions and other capital allocation decisions are made for Berkshire and its subsidiaries, by Warren Buffett, in consultation with Charles E Munger M Main business of Berkshire Hathaway is involved in property and casualty insurance.
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Warren Buffetts Lifestyle
w Salary of $100000 a year. w Lived in the same house for 40 years. w Eats burgers and drinks Coke w Only extravagance: A Gulfstream IV-SP jet called The Indefensible.
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Buffets Investment Style
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Buffetts Investment Style
w Strong business fundamentals w Buy low, sell high w Traits of a good investor w Intrinsic value vs stock price w Invest for the long term w Circle of Competence w Minimize risks
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Strong Business Fundamentals
w stable company w strong management team w certainty of future cash flows
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Buy Low, Sell High
w Stocks
Investors get cold feet => sell
w Stocks
Herd instinct => buy
w In effect, buying high, selling low!
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Buy Low, Sell High
w Stocks
Buffett buys
w Stocks
Buffett sells
w Buy low, sell high w Short-term market volatility does not concern him w Day-to-day stock quotes are meaningless
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Traits of a Good Investor
w difference between investors and speculators attitudes toward stock pricing w master their emotions w not get caught up in the market momentum w discipline, patience, flexibility, courage, confidence, decisiveness
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Intrinsic Value vs Stock Price
Critical Investment Factor determining the intrinsic value of a business and paying a fair or bargain price for it Intrinsic Value w discounted value of cash that can be taken out of a business during its remaining life
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Intrinsic Value
Buffett values a company based on: w Return on beginning shareholders equity w Change in operating margins, debt levels, & capital expenditure needs w Companys cash generating ability
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Invest for the Long Term
w Market is for buying & selling w Fluctuations do not bother him w Investors overreact
Stock prices too high or low Do not reflect true value of company
w In long run, price true value
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Circle of Competence
w Draw a circle only around businesses that he understands w does not bother about those outside this circle w Never invests in businesses he cannot understand w Tech stocks do they possess a durable competitive advantage?
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Buffet on tech stocks
We're perfectly willing to trade away a big payoff for a certain payoff.
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Minimize Risks
w searches for investments in which risk is eliminated or minimized w only take risks where the chances of total loss are low and gains are substantial w reduced greatly by concentrating on only a few holdings (opp. of diversification) w invest over long term & in stable companies
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Rule-of-Thumb
M Think of owning stock as being an owner of the company, M Study that company and its competition thoroughly, M Invest in it for the long haul (> 5 years), M Do not use leverage, and M Do not be led by the market's moves or by what other investors do.
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Buffetts Success
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Buffetts Success
Stocks = Business Little Diversification
Long-term Oppose Herd Instinct Patience
Perception
+
Discipline
Folly / Wise
Rationality
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Views Stocks as Business
M Buffetts Point of View
When investing, we view ourselves as business analysts Holistic view of business.
M Investors Point of View
Mostly do not view buying shares as buying a business. Seldom looks into the management aspect of a business.
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Views Stocks as Business
M Thus, investors buy stocks because of superficial notions. M While, Buffett buys stocks based on business fundamentals. M Implication is that investors will pull out of the investment once they see signs of trouble, & this is where they will lose money.
I am a better investor because I am a businessman, and a better businessman because I am an investor.
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Views Stocks as Business
w Example:
Wells Fargo
Money-centre bank, financially strong Nationwide recession in 1990, set aside $1.3 billion for potential loan losses Stock price dropped from $86 to $41.30 Actual losses less than expected. Bank remained very solvent & even had profit of $21 million in 1991.
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Views Stocks as Long-term Investment
M Buffetts Point of View
If the business does well, the stock eventually follows. Short-term: investors sentiments Long-term: intrinsic value
M Investors Point of View
Tempted to buy shortterm for large quick profits. Stock market is the final arbiter.
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Views Stocks as Long-term Investment
w Example:
Buffet managed to own Borsheims, Sees Candy Shops, The Coca-Cola Company, The Washington Post, Capital Cities/ ABC all without looking at daily price quotes. He would not care if the stock market closed for 10 years.
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Good Business Judgement + Ignoring Market Sentiments
M Buffetts Point of View
As long as the stock is attractive & at reasonable prices, he will buy boldly, no matter how pessimistic the market sentiments are, or how high the market level is.
M Investors Point of View
Difficult to ignore market sentiments Require confidence and courage Easily influenced
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Good Business Judgement + Ignoring Market Sentiments
M Examples:
General Foods Company
In 1980s, perceived as stodgy food co. by investors In 1985, price went up 3-fold after Buffetts purchase.
The Coca-Cola Company
Safe co. but unappealing to investors. Buffett bought in 1988-1989, stock price has quadrupled.
The Washington Post Company
Buffett bought it even during height of 1973-1974 bear market.
GEICO Corporation
Buffett bought it when others thought GEICO was going bankrupt.
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Resists Inactivity + Holds Few Stocks
M Buffetts Point of View
Willing to say no. Willing to wait until a good stock comes by. To hold a few good stocks than many mediocre stocks.
M Investors Point of View
Hard to say no. Often felt the need to buy many stocks. Hard to stay inactive
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Resists Inactivity + Holds Few Stocks
w Examples:
In 1986
3 major stocks: Capital Cities/ ABC, GEICO & The Washington Post Co. made up 93% of Berkshires portfolio. (worth $1.7 billion) Could not find stocks that met his requirements.
In 1987
Market crashed, but Buffett didnt invest. 3 major stocks now worth more than $2 billion.
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Resists Conformity
M Buffetts Point of View
To wait for stock prices to go down To add stock more cheaply to portfolio
M Investors Point of View
To wait for stock prices to go up Tendency to follow herd instinct.
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Resists Conformity
w Example
GEICO Corporation
Made net loss of $126 million, on the brink of insolvency. Many investors pulled out. Buffett bought GEICO stocks instead.
American Express
Loss of $60 million. Stock prices fell. Buffett invested.
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Value Investing for the Lay Investor
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Value Investing for the Lay Investor
Analyse Buffetts strategy in terms of : w the period (old economy vs. new) and circumstances, w available resources (capital, company and market information), w general soundness of strategy (avoiding risk, maximising returns) w objectives and goals
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Starting Out
w Buffet started out early w more capital, experience w An ordinary investor would most probably start out in the early / late twenties onwards w Not much capital, limited funds
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Starting Out
w Buffets peak w market boom, fortunate times w Such circumstances no longer present w Emergence of new economy, volatile technology stocks
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Resources
Buffet has phenomenal resources a) capital b) information networks, friends in high places c) years of experience, streetwise The ordinary investor has a) limited capital b) have to rely on advice, fund managers c) low experience, tendency to follow market trends
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General Soundness of Strategy
a) Looking for bargain companies, with good management b) Invest for the long term c) Ignore stock market d) Holding on to a falling company e) Buying businesses with strong histories of profitability and with a dominant business franchise f) Focusing on only a few holdings
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Objectives
Objectives and Goals w Buffett
Build, develop and sustain a company/ empire
w Ordinary Investor
Increase and accumulate personal wealth, for comfortable retirement, upgrading status in life, affording luxuries etc.
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Commentary
M 1999 saw one of the worst absolute performances since Berkshire Hathaway was formed, and also one of the worst relative performance compared to the S& P 500. Reason? One of the insurance subsidiaries, General Re, suffered a huge underwriting loss. M Other factors: Less attractive prices of businesses now, larger capital base now, rising media rates, diminishing returns.
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Summary
w If you had put $10000 into Berkshire Hathaway in 1965, you would have more than $50 million today. w But what will happen when Warren Buffett dies? Is his personal worth tied to the balance sheet of Berkshire Hathaway, or will it continue to run smoothly even after he leaves?
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Q&A Session
Fools give you reasons, wise men never try. Warren Buffett
Proudly Presented By:
Chua Woon Leng Gerard Koh Rachel Chong Ee Ping Hashikin Maraican bin Mohd Latiff
Online resources available at: [Link]
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