Professional Documents
Culture Documents
-stock market serves as a relocation center at which money is moved from the act
ive to the patient.
-"searching for superstars"; Berkshire searches for large businesses with unders
tandable and good economics, able and shareholder-oriented management, sensible
price; considering large sum of Berkshire, it's hard to get great results by adr
oitly buying and selling portions of far-from-great businesses
-? If at first you do succeed, quit trying.
-John Maynard Keynes: ...I get convinced that the right method in investment is t
o put fairly large sums into enterprises which one thinks one knows something ab
out and in the management of which one thoroughly believes. It is a mistake to t
hink that one limits one s risk by spreading too much between enterprises about wh
ich one knows little and has no reason for special confidence. One s knowledge and
experience are definitely limited and there are seldom more than two or three e
nterprises at any given time in which I personally feel myself entitled to put f
ull confidence.
-?portfolio insurance and 1987 crash
-Wrong: retail investors have no chance in a market dominated by erratic behavio
r of the big boys; such markets are ideal for any investor with Buffet's style;
volatility offers more bargain opportunities
d. "value" investing: a redundancy
-buying control of business = buying small holdings; look for favorable long-ter
m economics
-outstanding business and sensible price > mediocre business and bargain price
-controlled company offers two advantages: 1. buffet gets to allocate capital 2.
tax advantage when owning >80% of a company?
-Berkshire selects marketable equity securities in much the same way as it evalu
ates a business for acquisition: 1. can understand 2. favorable LT prospects 3.
honest and competent management 4. attractive price
-growth is always a component in the calculation of value
-investing: the act of seeking value at least sufficient to justify the amount p
aid; "value investing" is redundant
-growth is good only when each dollar used to finance the growth creates more th
an a dollar of long term market value. in the case of a low-return business requ
iring incremental funds, growth hurts the investor
-John Burr Williams <<The Theory of Investment Value>> the value of any stock/bo
nd/business today is determined by the cash inflows and outflows - discounted at
an appropriate interest rate - that can be expected to occur during the remaini
ng life of the asset
-The investment shown by the discounted-flows-of-cash calculation to be the chea
pest is the one that the investor should purchase irrespective of whether the bus
iness grows or doesn t, displays volatility or smoothness in its earnings, or carr
ies a high price or low [price ] in relation to its current earnings and book va
lue.
-for equities one must estimate future coupons; bond has defined future CF (coup
on and maturity date); management dramatically affect equity "coupons", not bond
-best business to own: employ large amounts of incremental capital at very high
rates of return
-worst business: consistently employ ever-greater amounts of capital at low rate
of return
-owner of business that are high-return but need relatively little capital will
usually benefit from dividends and/or stock repurchases
-stick to businesses you can understand: simple and stable in character; if it's
complex or subject to constant change, you are not smart enough to predict futu
re CF
-what counts for most people in investing is not how much they know, but rather
how realistically they define what they do not know
-margin of safety is cornerstone of investment success
-avoid new-issue; on secondary market constantly setting "clearing price"; for t
he latter, price is ruled by controlling stockholders and corporations
-cigar butt approach to buying business is foolish unless you are an liquidator
-1. bargain price may turn out to not be a steal; In a difficult business, no so
oner is one problem solved than another surfaces
-2. initial advantage will quickly be eroded by low return the business earns
-you buy a business for $ 8 million that can be sold or liquidated for $ 10 mill
ion and promptly take either course , you can realize a high return. But the inv
estment will disappoint if the business is sold for $ 10 million in ten years an
d in the interim has annually earned and distributed only a few percent on cost.
-time is the friend of the wonderful business, the enemy of the mediocre.
-when a management with a reputation for brilliance tackles a business with a re
putation for bad economics, it is the reputation of the business that remains in
tact.
-?institutional imperative - good management do not automatically make rational
business decisions; rationality frequently wilts when the institutional imperati
ve comes into play
(1) As if governed by Newton s First Law of Motion, an institution will resist any
change in its current direction
(2) Just as work expands to fill available time, corporate projects or acquisiti
ons will materialize to soak up available funds
(3) Any business craving of the leader, however foolish, will be quickly support
ed by detailed rate-of-return and strategic studies prepared by his troops
(4) The behavior of peer companies, whether they are expanding, acquiring , sett
ing executive compensation or whatever, will be mindlessly imitated.
-go into business only with people whom you like, trust, and admire; buffet wish
es not to join with managers who lack admirable qualities, no matter how attract
ive the prospects of their business
-1% chance of entering a bad situation when leveraged: We wouldn t have liked thos
e 99: 1 odds and never will. A small chance of distress or disgrace cannot , in o
ur view, be offset by a large chance of extra returns. If your actions are sensi
ble, you are certain to get good results; in most such cases, leverage just move
s things along faster. Charlie and I have never been in a big hurry: We enjoy th
e process far more than the proceeds though we have learned to live with those al
so.
g. life and debt
Except for token amounts , we shun debt, and use it for only three purposes:
1. part of certain short-term investing strategies that incorporate ownership of
U.S. government securities; purchases of this kind are highly opportunistic and
involve only the most liquid of securities
2. borrow money against portfolios of interest-bearing receivables whose risk ch
aracteristics we understand
3. [Subsidiaries , such as Mid-American, may incur debt that appears on Berkshir
e s consolidated balance sheet, but Berkshire does not guarantee the obligation.]
-From a risk standpoint , it is safer to have earnings from ten diverse and unco
rrelated utility operations that cover interest charges by, say, a 2: 1 ratio th
an it is to have far greater coverage provided by a single utility.
-Leverage can be lethal to businesses; companies with large debts often assume t
hat these obligations can be refinanced as they mature; assumption usually valid
except for when company-specific problems arise or there is a shortage of credi
t and maturities must be met by payment; for that, only cash will do the job;
-credit is like oxygen; when either is abundant, its presence goes unnoticed. Wh
en either is missing, that s all that is noticed .
-Even a short absence of credit can bring a company to its knees. In September 2
008, in fact, its overnight disappearance in many sectors of the economy came da
ngerously close to bringing our entire country to its knees.
-Berkshire holds at least $ 10 billion of cash, excluding that held at our regul
ated utility and railroad businesses; customarily keep at least $ 20 billion on
hand to 1. withstand unprecedented insurance losses ($3bn from Katrina) 2. quick
ly seize acquisition/investment opportunities even during times of financial tur
moil
-Berkshire keeps cash largely in treasury bills and avoids ST securities yieldin
g a few more basis points; a policy Berkshire has been adhering to long before t
he frailties of commercial paper and money market funds became apparent in Sept
2008
-Berkshire does not rely on bank lines, and does not enter into contracts that c
ould require postings of collateral except for amounts that are tiny in relation
to its liquid assets
-not a dime has left Berkshire for dividends or share repurchase; has retained a
ll earnings to strengthen its business
-extreme caution w.r.t. leverage penalizes return by a minor amount; having load
s of liquidity lets Buffet sleep well; during financial chaos, Berkshire is equi
pped financially and emotionally to play offense while others scramble for survi
val; Berkshire invested $ 15.6 billion in 25 days of panic following the Lehman
bankruptcy in 2008
IV. common stock
-timing, duration and degree of market aberrations are unpredictable; Berkshire
never try to anticipate arrival or departure of greed and fear
-Berkshire's goal: be fearful when others are greedy and greedy only when others
are fearful
-transaction and investment management costs -> stockholder over long term under
perform companies they own
a. the bane of trading: transaction costs
-the most that owners in aggregate can earn between now and Judgment dDay is wha
t their businesses in aggregate earn (exception: bankrupcies, some losses born b
y creditors)
-investor A, through clever buying and selling, may take more than his share of
the pie at expense of investor B. All investors feel richer when stocks soar, bu
t an owner can exit only by having someone take his place; for owners as a whole
, there is no magic - they will not extract wealth beyond that created by the co
mpanies themselves
-frictional cost of all sorts may well amount to 20% of earnings of American bus
iness; the burden of paying "helpers" may cause American equity investors to col
lectively earn only 80% of what they would earn if they just sat still and liste
ned to no one
-for investors as a whole, returns decrease as motion increases
-2 criteria for best market place for Berkshire stock
-1. consistently trade at a price rationally related to intrinsic value -> inves
tment result achieved by each shareholder approximate Berkshire's business resul
t
-swinging between undervaluation and overvaluation reward/penalize owners in a m
anner disconnected to how business has performed; Berkshire wants to avoid such
capricious results; Berkshire's goal is to have its shareholder-partners profit
from the achievements of the business rather than foolish behavior of co-owners
-in the long run, aggregate pre-tax reward to Berkshire's owners = business gain
s of company minus transaction cost imposed by marketplace (commissions by broke
rs + net realized spreads of market-makers)
b. attracting the right sort of investor
-Berkshire's goals:
-1. does not want to maximize share price; wish share price trades in a narrow r
ange centered at intrinsic value (which Berkshire hopes will increase at a reaso
nable rate)
-2. wish very little trading activity; analogy: private business with a few pass
ive partners who frequently want to leave partnership
-3. attract LT investor who have no timetable or price target for sale; hopes to
stay with BH indefinitely
comfort in seeing prices rise is analogous to commuter who rejoices after price
of gase increases, simply b/c his tank contains a day's supply
d. stock splits and trading activity
-Buffet disagrees with assumption that stock split is pro-shareholder action
-one goal of BH is to have stock trade at rational level -> need rational shareh
olders, both current and prospective
-irrationality -> silly stock prices -> helps BH in buying and selling stocks of
other companies, but not in best interest for long term holders
-high quality ownership can be attracted and maintained if we consistently commu
nicate our business and ownership philosophy along with no other conflicting mess
ages and then let self selection follow its course.
-BH tries to attract investors who understand its operations, attitudes, and exp
ectations
-want those who think of themselves as business owners and buy with intention of
staying for a long time; focused on business results, not market prices
-