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Warren Buffett of Berkshire Hathaway Inc - UNC talk – Part 6 of 6

January 08, 2010 | About:

Part 6 of this series gives little mention to specific companies. It is more philosophic in tone. It is highly recommended that the reader start with part 1 of this series.

Part: 1, 2, 3, 4, 5, 6

Question 12: Mr Buffett freely speaks. The subject matter is the Berkshire annual report and financial reporting.

Answer: “If you understand an idea, you can express it to so other people understand it.” - Warren Buffett.

Mr. Buffett has trouble writing the annual reports each year. He gets writers block. It's not because he has run out of words in the dictionary. It's because he doesn't have his thoughts straight in his own mind yet.

There is nothing like writing to force you to think and get your thoughts straight.” - Warren Buffett

If you want to communicate something to others, it is quite possible to do it.

Regarding accounting footnotes, sometimes Buffett can not understand them. If it is written so you can't understand it, it is suspicious because it may be because they don't want you to understand it. It's not impossible to write an understandable footnote. Buffett recommends to stay clear of companies that write confusing footnotes.

Question 13: Discussing Berkshires slowing future due to it's growing size.

Answer: In this area of the video, Buffett talks about why Berkshire Hathaway's growth will slow as it gets bigger.

The greater the amount of capital that Berkshire has, everything else being equal, the worse it will do in terms of percentage returns on equity. He has been telling this to shareholders for years. The reason is simple. When he had $10,000 at the beginning of his career, any security he could find that seemed cheap could have a very significant impact on that capital. This is because a large portion of net worth could be invested in one thing and it's impact would be significant. In 1996 however, if Berkshire Hathaway put $100,000,000 into an investment and made $50 million ($33 million after taxes), that is just 0.003% of Berkshire Hathaway in terms of net worth. It takes very big ideas to make an impact now. Berkshire can not invest in small companies anymore. Big investments are needed. And the universe of possible investments has gotten very small and the returns can not be as good.

Alot of money is a drag” - Warren Buffett

It's easier to invest small amounts because the universe of options is greater. This does not mean that small investors can not invest in a large company like Exxon Mobil Corporation (ticker:XOM). The small investor can. The benefit that the small investor has is that he or she can invest in almost anything. But very big investors should not spend time looking at micro-caps, for example, because even if a bargain is found, it's impact on net worth may be negligible. Their universe has gotten smaller. The reasons is that if 0.1% of your money gets invested in a micro-cap that doubles in value, it doesn't really matter if your net worth will only increase by 0.1%. You need big ideas, but you need to make sizable investments in those ideas.

Question 14: Mr Buffett is asked to lend some words of wisdom on disciplining children when they are part of a wealthy family. This is in regards to inheritance.

Answer: “I got this idea/phrase from somebody else. You should leave your children enough money so they can do anything but not so much that they can do nothing. There is probably a certain social justice in that.” - Warren Buffett

He adds that he believes that society is significantly responsible for his wealth. If he was born on different soil, he would be struggling. He works in a market society that works very well for him. Society also pays a lot for someone that bats .350. It pays a lot if you can knock someone out in 10 seconds like Mike Tyson. If you are a marvelous teach or nurse, you are not rewarded for it as much. Society rewards people greatly for rather peculiar talents.

Society should have a big claim on the fees and services rewarded to these peculiar people. If you are the child of someone in one of these situations, the child should not be greatly rewarded. To some extent, society deserves to be rewarded.

Part: 1, 2, 3, 4, 5, 6

About the author:

Karl is currently a software engineer in Connecticut with a bachelors of science in electrical engineering from Clarkson University. He has been investing since 2001 and interested in value investing since 2005. Karl is continually striving to learn more about investment.

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