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|Year||Return (%)||S&P500 (%)||Excess Gain (%)|
|3-Year Cumulative||41.4 (12.3%/year)||55 (15.7%/year)||-13.6 (-3.4%/year)|
|5-Year Cumulative||91.5 (13.9%/year)||125.5 (17.7%/year)||-34 (-3.8%/year)|
|10-Year Cumulative||167.5 (10.3%/year)||104.1 (7.4%/year)||63.4 (2.9%/year)|
|15-Year Cumulative||257.4 (8.9%/year)||98.3 (4.7%/year)||159.1 (4.2%/year)|
|20-Year Cumulative||1426.9 (14.6%/year)||483.2 (9.2%/year)||943.7 (5.4%/year)|
|25-Year Cumulative||4445.4 (16.5%/year)||1050.7 (10.3%/year)||3394.7 (6.2%/year)|
|30-Year Cumulative||13749.2 (17.9%/year)||2235.1 (11.1%/year)||11514.1 (6.8%/year)|
|TABLE 3 - Performances of Buffett Partnership, Ltd.|
|Year||Overall Results from Dow (%)||Partnership Results (%)||Limited Partners’ Results (%)|
Warren Edward Buffett is regarded as one of the most successful investors in the world and the primary shareholder, chairman and CEO of Berkshire Hathaway. He was ranked as the world's wealthiest person in 2008 but dropped to third soon afterwards and remained there. United States President Obama gave him the Presidential Medal for Freedom. Buffett plans to give away 85% of his holdings to five foundations with the majority to Bill and Melinda Gates Foundation. Under Buffett's leadership, Berkshire shares averaged a 19.8% compounded annual gain in per-share book value from 1965-2011.
Buffett once said, “I'm 15 percent Fisher and 85 percent Benjamin Graham. The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety.” The three most important concepts conveyed by Graham in “The Intelligent Investor” were the investor’s attitude toward the market, the “margin of safety”, and the practice of looking at companies as businesses, not stocks. The pursuit of high return businesses usually leads to companies with minimal book values. Buffett’s basic understanding of companies to invest in is simply to read everything out there on the business and understand the industry, so that is why Buffett only invests in businesses he understands. He believes the most important knowledge in learning how to invest could be summarized in two college courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility. Buffett simply puts that a quality business always has a great product at a fair price, and with honest reliable management, and a quality manager is honesty, smart, and a hard worker. He mentions that when you buy a stock, you need to imagine that the stock market will be closed for 20 years and you will not be able to look at its price, so you won’t be distracted by the short term ups and downs. A company will be successful if it offers good products and services at a fair price while being run by honest, capable managers. Over the long run, such companies tend to appreciate and go up in value. Buffett never invested based on a macro or demographic trend.
Buffett does not work with companies who are around for less than ten years such as technology companies. He only invests in a company that he completely understands, and he admits that he do not understands most of the technology companies. He observes the company’s overall potential only after years of progress. He has no concern with short term market and stock activities rather a company’s capability in the end to gain profits. Buffett’s main concern is the company’s potential to do business and continue to do it in the future. He mentions that when you buy a stock, you need to imagine that the stock market will be closed for 20 years and you will not be able to look at its price, so you will not be distracted by the short term ups and downs. A company will be successful if it offers good products and services at a fair price while being run by honest, capable managers. Over the long run, such companies tend to appreciate and go up in value. The ideal business is one that generates very high returns on capital as well as can invest that capital back into the business at equally high rates or at least maintain high earnings without continued reinvestment. Buffett assesses the intrinsic value of a company by comparing it with its present market capitalization to not less than 25%, which is higher than the market capitalization of company. It is important to look not for what is cheapest stock, but where the most value is delivered. Buffett also consider debt equity ratio carefully and avoids companies with excess of debt. He does not think price-to-earnings, price-to-book or price-to-sales ratios tell very much because all you need to evaluate a business is economic characteristics. One successful example is GEICO. Buffett wanted to invest and own GEICO ever since he learned from the future CEO of GEICO about its method of selling was direct marketing, which gave it an enormous cost advantage over competitors that sold through agents.
One of the first and most important question to ask before buying a business is, “Does the owner love the business or does he/she love the money?” Berkshire Hathaway is not big believers in contracts and constraints when buying a business. They want to buy businesses based on retaining the former owners’ passion for the business. When Buffett invests, he wants his managers to have full control over their company and shares rather than rely on brokerage firms, and Buffett is not fond of business meetings in general. He does not believe in fear as a manager style from his experience of working under Ben Graham, Don Keough, and his dad. Buffett’s described his management methods as “I don’t call managers of my businesses, they call me.” Buffett sends letter of motivation telling his managers to treat their jobs like it is the only business that their family can own for the next 100 years and they cannot sell it, and progress is not measure it by the earnings in the quarter but the moat around that business, what gives it competitive advantage over time has widened or narrowed.
Berkshire Hathaway Culture
At Berkshire Hathaway, they are not trying to appeal to people who care about next quarter or year, they want to appeal to people who view this as a lifetime investment. By not splitting shares, Berkshire Hathaway intends to attract the best shareholders.
The companies that Buffett like to invest in are $10-15 billion acquisitions, but it is hard to find one that's not being auctioned, which he does not do. Because Berkshire Hathaway has so much money now, they do not look for partners and sharing profits when they can obtain entire companies. Anything that is unpopular is always great to look at.
Buffett’s role on the board of directors is not to influence the company or its CEO much at all. If someone’s spent 20-30 years rising to become CEO, Buffett does not want a board telling them what to do. Overwhelmingly, the most important job of the board is to pick the right CEO.
Berkshire Hathaway has constantly thought about whether they could put all excess cash to work rather than to pay dividends, but so far it has always been better to put it to work. It would be a mistake for example for See’s Candy to retain money because they have no ability to use the cash they make to generate a high return internally so they pay out.
Short selling is not worth it to Berkshire Hathaway because they are too big, but even if it was it is too much risk. Berkshire doesn't hedge its currency exposure either. Also, Berkshire Hathaway would not go into the health insurance business because it is so ingrained into national policy that it is a tough business.
Berkshire Hathaway has the largest wind farm capacity in the country by being the net exporter of wind energy in Iowa and has been very receptive and progressive. Rates have not risen in Iowa for about 10 years. This is a way of looking into the future in energy.
Morale is good in Berkshire Hathaway subsidiaries, where managers hardly ever leave. In 38 years, it never had a CEO leave to work for a competitor. Buffett sees four people in the organization that can do his job in ways both better and worse than he can, but nevertheless they have been in the organization a long time Buffett wants his business culture keep on going.
Buffett’s Business Opinions
Buffett does not worry about the next big industry that will take over the economy because it is impossible to predict. The test of a good business is time and market share such as with Coke or Gilette and when knock offs just do not sell. Growth is good, but Buffett prefers strong economics. Also, Buffett would not put McDonald in the same class in terms of inevitability in dominating the market as Coke because of the various reasons people can chose alternative foods.
Buffet strongly believes that hedge funds are a huge fad. He said once that, you can pick any ten hedge funds and I'll bet that on average they will underperform the S&P over the next ten years. You can't create more money out of American business than the business itself creates; so most of these hedge funds will not be able to justify their outlandish fees over the long-term and they will disappear. In the money management industry Buffett mentions that that any 10 partnerships with over $500 million in assets and put them up against the S&P 500, they will trail the S&P, after fees, over time. If you know enough about the person and how they’ve done in the past, you can occasionally find someone. But if you’re running a big pension fund, with everyone calling on you, you will likely invest in the best salespeople.
To Buffett, the practices related to accounting charges, done to smooth out earnings and make future earnings look good is like we follow a policy of “criticize by practice, and praise by name” or you could say we hate the sin, but love the sinner. “Why should I penalize my shareholders for not doing something that others will do to help theirs?” Today, it is just the norm.
Buffett does not like to invest in gold because people will always need to drink and eat more, which is why he would rather invest in Coca-Cola and See’s Candies or even just land rather than just a metal. It gets very dangerous to assume high growth rates to infinity, and that is when people over commit.
Buffett cannot predict how the utilities industry is going to develop with deregulation and who is going to make the money in ten years. Although, he can see how it destroys a lot of value through the high cost producer once they are not protected by a monopoly territory. Overall, Buffett keeps away from the utilities industry as well as since the Public Utilities Holding Company Act limits Berkshire Hathaway's ability to acquire utilities.
When it comes to inflation the best thing to combat the threat of inflation is to have a lot of earnings power of your own such as owning a business that can price in inflationary terms and does not require big capital investments.
When it comes to investment banks being too complex and making complex contracts without the management being aware of the risks, Buffett thinks it is probably true in most places. Big investment banks and big commercial banks are almost too big to manage effectively in the way they have elected to run their business.
The current bankruptcy process attracts bankruptcies and over pay the lawyers. Anytime there’s some big and complicated like a bankruptcy, there might be some mispricing. And recently, the mispricing has been on the high side. Therefore, Buffett believes that over the next 10-15 years, we’re likely to do something big in the bankruptcy area.
IPOs are too small and less are up for negotiation, so Buffett believes that scanning an average group of 100 stocks is more likely to find anything interesting than by scanning 100 IPOs.
Buffett’s idea on “economies of intelligence” is about finding businesses where you have to be smart only once instead of being smart forever. For example retailing is a business where you have to be smart forever: your competitors will always copy your innovations, but buying a network TV station in the early days of television required you to be smart only once, which a terrible manager can still make a fortune. Given the choice between businesses where you have to be smart forever or one where you have to be smart once, Buffett advised being smart once.
Buffett is very careful to avoid asbestos liabilities; it is a cancer on the American corporate world and it is growing.
Buffett described that often stocks are overvalued because there is a promoter or a crook behind it, and there are way more stocks that are dramatically overvalued than dramatically undervalued.
Buffett feels OK with losing a lot of money in the insurance business, as long as being paid appropriately for the risk.
Buffett plans on buying more real estate brokerage companies over the next decade.
The important qualities a person need are intelligence, patience, and interest, but the biggest thing is to be rational.
Buffett wants his legacy to be running a unique and independent company in true pursuit of shareholder value and to improve the way people invest and run their companies.
For foreign investments, transparency matters; the accounting doesn’t matter so much to Buffett. Since Berkshire Hathaway only invests in the hundreds-of-million-dollar-size range that rules out a lot of market. As long as Berkshire Hathaway is able to value what’s underneath of it, they will invest. But because something like 53% of all the value of the public companies in the world is in the U.S., most are domestic. Right now investing in such industries as insurance in China and India which are growing is reasonable but both countries limit the amount that Berkshire Hathaway can own and how much. So Buffett put it in this way, why put my managerial talent to work on something where we only own 20% vs. 100%? But, Buffett likes and invested in PetroChina because they will pay out 45% of their earnings, is the 4th most profitable oil company in the world, and far cheaper than Exxon, BP, Shell etc. since it is 90% owned by the government of China.
Buffett investment took control of Berkshire Hathaway which was in textile manufacturing in 1962 when he first became a millionaire early that year. By 1965 Buffett was the owner but the textile business was falling apart so Buffett began investing in the insurance industry. In 1973 Berkshire bought stocks in the Washington Post Company. Next, in 1979, Berkshire acquired $3.5 billion of stocks in ABC Capital Cites. Then in 1998, he acquired General. In 2002, he signed an $11 billion of contracts to pass down US dollars versus other currencies, and he gained over $2 billion by April 2006. In November 2011, Warren Buffet has acquired in the last 8 months approximately 5.5% of International Business Machine stocks, which values approximately $11 billion. He became the richest man in 2008 with $62 billion, but Buffet could not sustain being number one due to loss of 25 billion in only 12 months in 2008- 2009.
Buffett was criticized during 2007 and 2008 for early distribution of capital that led to suboptimal business deals. Berkshire Hathaway resulted in a loss of 77% decline in earnings throughout 2008.
Buffett went door to door selling chewing gum, Coca-Cola, or weekly magazines as a child and worked in his grandfather's grocery store. Buffett showed interest in the stock market and investing growing up when he spent time in the customers' lounge of a regional stock brokerage near the office of his father's own brokerage company. At the age of 11, he bought three shares of Cities Service Preferred for himself, and three for his sister. In high school he delivered newspapers, selling golf balls and stamps, detailing cars, and he invested in a business owned by his father and bought a farm worked by a tenant farmer. He filed his first income tax return in 1944 at age 14. In 1945, Buffett and a friend spent $25 to purchase a used pinball machine to be placed in the local barber shop, and within months, they owned several machines in different barber shops. By the time he finished college, Buffett had accumulated more than $90,000 in savings measured in 2009 dollars.
Buffett attended college in 1947 at the Wharton Business School of the University of Pennsylvania for two years then transferred to the University of Nebraska–Lincoln where he graduated with a Bachelor of Science in business administration. After his undergraduate studies, Buffett enrolled at Columbia Business School. Buffett learned about Benjamin Graham (author of "The Intelligent Investor") and David Dodd, two well-known securities analysts taught there. He earned a Master of Science in economics from Columbia in 1951. Buffett also attended the New York Institute of Finance.
International Stocks that are Warren Buffett's Portfolio, as reported in Berkshire Hathaway 10-Ks:
|Symbol||Company||# of Shares on 12/31/2010||Costs ($mil)||Market Value ($Mil)||% of the Company||Profit (%)|
|BYDDY.PK*||BYD Company, Ltd.||225,000,000||232||1,182||9.9||409%|
Articles Written By Warren Buffett :
Buffett lives in this house in the Happy Hollow neighborhood that he bought in 1958 but built in 1921 for $31,500. It has 5 bedrooms, 2.5 bathrooms and is 6234 square feet. In 2005 it had a taxable value of $690,000. Down the same street about 1 mile away are the Berkshire Hathaway offices in Omaha, Nebraska.
LONG, VALUE INVESTING, FUNDAMENTAL ANALYSIS, MARGIN OF SAFETY
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