These are the secrets to Warren Buffett’s success as stated by Alice Schroeder. Alice Schroeder is the author of The Snowball: Warren Buffett and the Business of Life. She spent five years with Mr. Buffett to write this book, and was the only one that he allowed exclusive access to his family and life to produce this great piece of work. In this video, she talks about the characteristics that Warren Buffett exhibited, skills he had and what he did that allowed him to be such a successful investor. Enjoy!!
Berkshire Hathaway recent buys as of 12/31/2010
- Secrets of Warren Buffett’s Success
- Buffett on Value Investing
- David Sokol on CNBC
- Bruce Greenwald on Value Investing
- Berkshire Hathaway Board wants to Split Class B sh...
- Warren Buffett Holdings as of September 2009
- Alice Schroeder on Warren Buffett's Purchase of Bu...
- Bruce Berkowitz of Fairholme Fund talks about Inve...
- Buffett and Gates at Columbia Town Hall Meeting
- Bruce Berkowitz Interview by PBS
- Warren Buffett continues to sell Moody’s
- ► August (2)
- GEICO: What Made Buffett Buy It?
- Warren Buffett Cartoon coming to AOL
- Warren Buffett Financial Rules to Live By
- Interview with Charlie Munger
- Microsoft’s Jeff Raikes Email to Warren Buffett in...
- Warren Buffett: Stimulus is Not a Panacea
- Warren Buffett On CNBC
- Warren Buffett on Becoming a Successful Investor
- Warren Buffett Advice to Girl Scouts at Dairy Quee...
- ► June (3)
- ► May (4)
- ► April (3)
- ► March (4)
- ▼ November (11)
Warren Buffett speaks about value investing at the Columbia University Town Hall Meeting.
One of Berkshire’s top managers named CEO of NetJets as an additional role.
A recent SEC filing states that the Board of Directors unanimously approved, has declared to be advisable and is recommending to the shareholders of the Corporation for approval a 50-for-1 stock split of the Corporation’s Class B stock. The Board wants recommends this split regardless of the Burlington Northern Santa Fe deal.
Shareholders will have the opportunity to vote at a meeting in January on the stock split. The expected price after the split should be in the range of $65 - $70.
Read more at Gurufocus.
Highlights from the portfolio of the greatest investor of our time.
- American Express Co. (NYSE: AXP) over 151.6 million shares, same as last quarter.
- Bank of America Corp. (NYSE: BAC) 5 million shares; same as last quarter.
- Becton Dickinson & Co. (NYSE: BDX) 1.2 million shares, same as last quarter.
- Burlington Northern Santa Fe (NYSE: BNI) was reported as 76.77 million shares but frankly it does not really matter as BNSF is becoming part of Berkshire.
- Carmax Inc. (NYSE: KMX) 9 million shares is same as last quarter.
- Coca Cola Co. (NYSE: KO) right at 200 million shares, still same as before.
- Comcast (NASDAQ: CMCSA) 12 million shares, same as before.
- Comdisco Holdings (NASDAQ: CDCO) roughly 1.5 million shares, same as before.
- ConocoPhillips (NYSE: COP) 57.43 million shares,
DOWN FROM62.485 million at the end of June.
- Costco Wholesale (NASDAQ: COST) 5.254 million shares, same as before.
- Exxon Mobil Corp. (NYSE: XOM) is a NEW HOLDING of 1.276 million shares.
- Gannett Co. (NYSE: GCI) 3.447 million shares, same as before.
- General Electric Corp. (NYSE: GE) 7.777 million shares is the same as before, but does not include the huge preferred investment from late 2008.
- GlaxoSmithKline (NYSE: GSK) 1.51 million shares, same as before.
- Home Depot Inc. (NYSE: HD) 2.757 million, same as last quarter.
- Ingersoll-Rand (NYSE: IR) 636,600 shares;
WAY DOWNfrom the 7.78 million listed last quarter.
- Iron Mountain (NYSE: IRM) 3.3722 million shares, same as before.
- Johnson & Johnson (NYSE: JNJ) was just over 36.91 million shares; Same as last quarter and still well under the 62 million shares at one point in 2008.
- Kraft Foods (NYSE: KFT) over 138 million; same as last quarter.
- Lowe’s Companies (NYSE: LOW) 6.5 million shares, same as last quarter.
- M&T Bank Corp. (NYSE: MTB) 6.71 million shares, same as before.
- Moody’s (NYSE: MCO) was listed as over 39.2 million shares, but that is
WAY DOWNfrom the 48 million last quarter. Be advised that he has noted sales and hinted at more sales here.
- Nalco Holding (NYSE: NLC) 9.0 million shares, same as last quarter.
- Nike Inc. (NYSE: NKE) 7.641 million shares, same as before.
- Norfolk Southern (NYSE: NSC) 1.933 million shares, same as before, but we already know Buffett has or is selling out of non-BNSF shares in rail companies.
- NRG Energy (NYSE: NRG) 7.2 million, same as before.
- Eaton Corp. (NYSE: ETN) was
NOT LISTED ANY LONGER, so sold from holdings.
- Procter & Gamble (NYSE: PG) 96.3 million, the same as before.
- Republic Services Inc. (NYSE: RSG) 3.625 million shares; NEW POSITION following Bill Gates.
- Sanofi Aventis (NYSE: SNY) more than 3.9 million shares, same as before.
- Sun Trust Bank (NYSE: STI) 3.079 million shares; DOWN FROM 3.2+ the quarter before.
- Torchmark Corp. (NYSE: TMK) roughly 2.82 million, same as before.
- Travelers Cos (NYSE: TRV) 27,336; NEW POSITION but small.
- US Bancorp (NYSE: USB) roughly 69 million; Same as quarter before.
- USG Corp. (NYSE: USG) 17.072 million shares, same as before.
- United Health Group (NYSE: UNH) 3.4 million shares; DOWN from 4.5 million last quarter and down from over 6 million in Q1.
- Union Pacific Corp. (NYSE: UNP) 9.55 million shares, same as quarter before but this does not matter as Buffett is dumping his non-BNSF rail holdings.
- United Parcel Service (NYSE: UPS) 1.429 million shares, same as before.
- Wal-Mart Stores Inc. (NYSE: WMT) 37.8 million; WAY UP from the 19.9+ million shares last quarter.
- Washington Post (NYSE: WPO) over 1.72 million shares, same as before.
- Wells Fargo & Co. (NYSE: WFC) 313.3 million shares; ABOVE THE PRIOR 302+ million last quarter and above the 290+ million in Q1.
- Wellpoint Inc. (NYSE: WLP) 3.394 million;
DOWN SLIGHTLYfrom the 3.5 million last quarter and from the 4.7773 million in Q1.
- Wesco Financial Corp. (NYSE: WSC) 5.7 million shares, same as before.
- WABCO Holdings (NYSE: WBC) IS GONE after being 2.7 million shares last quarter.
The Fairholme Fund is one of my favorite mutual fund because of Bruce Berkowitz and its performance. He has a Buffett-style philosophy and is very focused on being a steward of shareholders’ wealth. He runs Fairholme as a concentrated portfolio of stocks and holds about 17% cash. In this video, he talks about his investment philosophy, stocks, lessons from the economic downturn and some of Warren Buffett’s recent purchases.
Click here for full transcript courtesy of CNBC.
Bruce Berkowitz, founder of the Fairholme Fund, is interviewed by PBS. He is a well-known value investor that follows many of Warren Buffett’s investing philosophies. His top 5 holdings account for 40% of the fund and includes Pfizer, St. Joes, Americredit and Sears Holding company. Great 3 minute interview of Bruce.
For more information on the Fairholme Fund, go to http://www.fairholmefunds.com
Chairman of Berkshire Hathaway continues to sell his stake in Moody’s Corp raising $28.7 million in the transaction. Berkshire still holds 38.1 million shares of Moody’s. What does this move indicate? Let’s hear your comments.
Average price range during that selling period was $24.86 and $25.27.
- Warren talks about the propensity of humans to make stupid mistakes in the future.
- Warren talks about derivatives.
- Evans talks about investment opportunities in Goldman Sachs and others.
- Warren discusses liquidity.
- Evan asks Warren about his private jet.
- Warren talks about the value of money and being wealthy.
- Evan asks about taxes.
Warren Buffett talks a bit about his professor and mentor, Benjamin Graham. He attributes his success and entire investment philosophy to Graham and shares with us how great and intelligent a human being he thought Graham was. Graham, through his generosity, wrote two of the greatest investment books of all time; Security Analysis and The Intelligent Investor. These are considered must reads for anyone interested in investing.
Watch this short clip of Warren Buffett speaking to us about his mentor.
“The key to the future of Wells is continuing to get the money in at very low costs, selling all kinds of services to their customer and having spreads like nobody else has.”
Article Source: money.cnn.com
Warren Buffett: It's sort of hard to imagine a business that large being unique. You'd think they'd need to be like any other bank by the time they got to that size. Those guys have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it, and that's how banks get in trouble, when they say, "Everybody else is doing it, why shouldn't I?"
What about all the smart analysts who think no big bank can survive in its present form, including Wells Fargo?
Almost 20 years ago they were saying the same thing. In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things. But periodically banks do it, and they do it as a flock, like international loans in the 80s. You don't have to be a rocket scientist when your raw material cost is less than 1-1/2%. So I know that you can have a model that works fine and Wells has come closer to doing that right than any other big bank by some margin. They get their money cheaper than anybody else. We're the low-cost producer at Geico in auto insurance among big companies. And when you're the low-cost producer - whether it's copper, or in banking - it's huge.
Then on top of that, they're smart on the asset side. They stayed out of most of the big trouble areas. Now, even if you're getting 20% down payments on houses, if the other guy did enough dumb things, the house prices can fall to where you get hurt some. But they were not out there doing option ARMs and all these crazy things. They're going to have plenty of credit losses. But they will have, after a couple of quarters of getting Wachovia the way they want it, $40 billion of pre-provision income.
And they do not have all kinds of time bombs around. Wells will lose some money. There's no question about that. And they'll lose more than the normal amount of money. Now, if they were getting their money at a percentage point higher, that would be $10 billion of difference there. But they've got the secret to both growth, low-cost deposits and a lot of ancillary income coming in from their customer base.
Insurance revenues for example, which had double-digit revenue growth in 2008.
And I would say that most of the critics of Wells don't even know they've got that business. That business alone is worth many billions of dollars. And their mortgage business, as you can imagine in this period, I mean, the volume that is poring through there, is huge. The critics have been right on other big banks, so I think they're inclined to sweep Wells in as well to some extent. And if you've been right on Citi and you've been right on BofA, it gets easy to say, well, they're all going to go.
We own stock in four banks: USB, Wells, M&T, and SunTrust. SunTrust I don't know about because South Florida is going to be the last to come back, and they've got a concentration down there. The other three, they're going to have a lousy year, but they'll come out of it with far more earnings power. The deposits are flowing in. The spreads are wide. It's a helluva good business.
Dick Kovacevich specifically told me to ask you your views on tangible common equity.
What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do.
Incidentally, they won't lend Berkshire money. They're not interested in national credits or any of that stuff where the spreads are narrow. We did a big deal about six or seven years ago on Finova, which we did jointly with Leucadia. And what was then the old First National of Boston sort of headed the deal up, and people would come in for $500 million or $200 million. Wells wasn't interested. There wasn't enough money in it, basically. I got a big kick out of that because that was exactly how they should think. Everybody else wanted to be in it, and they were doing it for 20 basis points or something of the sort. And they'd make commitments for all kinds of credit for 6 or 8 basis points, and the ones that were in the underwriting business, they would do it just get the underwriting.
But back to tangible common equity...
You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently.
They'll have to work through a lot of this stuff that they inherited from Wachovia. Those option ARMs, they explained exactly how they break them down, and in the end they may lose 3 or 4 billion more. Nobody knows exactly. But I would say that California residential real estate is not deteriorating. It hasn't moved up. But it has flattened out with good volume recently. So my guess is that the option ARMs will work out about as they guessed.
What if the Treasury imposes new capital requirements? Will it hamper their earnings power?
I don't think it'll hamper their earnings. But if you make them sell a lot of common equity it would kill the common shareholder. It wouldn't increase the earning power in the future, and it would increase the shares outstanding. Wells, if they want another $10 billion in common equity or something like that in Wells, they'll have it in a very short period of time at this dividend rate. [In March, Wells cut its dividend by 85%.] Wells will be piling up the equity while they're paying nominal dividends. They could afford to pay the old dividend. But since they won't be paying the old dividend, that's $4 billion a year or something that they'll be adding to equity.
I would have been fine if they had just said, 'Look it, we'll quit paying any common dividend until our equity has gone up by whatever it might be, 10 or 15 billion.' And they'd get there in no time. Then they could pay the regular dividend. They elected to do it this other way because everybody seems to be kind of doing it. The idea of forgoing all or most of the dividend for a year to build the common equity ratio up, if that's what the government wants, that's fine. But that isn't really the key to the future of Wells, unless the regulators make it the key to the future of Wells. The key to the future of Wells is continuing to get the money in at very low costs, selling all kinds of services to their customer and having spreads like nobody else has.
How is Wells differentiated from the banks you own and the ones you don't?
Wells just has a whole different attitude. That's why Kovacevich calls them retail stores. He doesn't even like the word banking. I mean, he is looking to have a maximum enduring relationship with many, many millions of people. Tens of millions. And at the base of it involves getting money in very cheap. When you do that that's a helluva start in the business. The difference between getting your money at 1-1/2 % and 2-1/2% on a trillion-dollar asset base is $10 billion a year. It's hard to overemphasize that. He thinks more like Sam Walton than he thinks like J.P. Morgan. I'm talking about the individual there. He's a retailer. He's not trying to influence Washington or be the most important guy on the scene or anything like that. He's just trying to do business with millions of people every day and make a few bucks off of them.
Now that you mention it, Kovacevich has done a pretty good job of annoying Washington, wouldn't you say?
That's hard to tell. There's an advantage to being that way too. He's not going to cozy up or be sycophantic toward his regulator, and I would say most bankers probably are now. They need to be. But his strong point is retailing not diplomacy. I kind of like that. It's hard for a guy that knows his institution forward and backwards to have somebody come in that really may be working off a check list or something and is telling him what to do. And I'm sure that Dick gets antagonized by that sometimes. In the end, he's got the record. And he's got the business to back up what he's doing.
To the extent that his tangible common equity is low, a) nobody was even talking about that a year ago. And b) they should be talking about earning power. But it comes about in part because he saved the FDIC's bacon on Wachovia. I mean they had a deal on Citigroup (C, Fortune 500) that had big assistance involved in it, and the FDIC moved about what would have been about 5% of the deposits in the United States without a dime of expense to the taxpayer or the FDIC to Wells. And Wells took it over. And if they'd gone to Citigroup a) they would have looked like idiots, and within a very short period considering what happened to Citi. So to penalize them because they solved the FDIC's problem without cost to the FDIC would be a little crazy. And I imagine that's what gets Dick a little riled up.
So what is your metric for valuing a bank?
It's earnings on assets, as long as they're being achieved in a conservative way. But you can't say earnings on assets, because you'll get some guy who's taking all kinds of risks and will look terrific for a while. And you can have off-balance sheet stuff that contributes to earnings but doesn't show up in the assets denominator. So it has to be an intelligent view of the quality of the earnings on assets as well as the quantity of the earnings on assets. But if you're doing it in a sound way, that's what I look at.
How confident will you be in Wells when Kovacevich retires?
Well, John [Stumpf] is in charge. Dick is a terrific help to John. I play bridge with John on the Internet. He plays under the name of HTUR. His wife's name is Ruth. My bridge partner, who I probably play bridge with four times a week, developed online banking for Wells. A woman named Sharon Osberg. And she's worked with those people. And she told me about John Stumpf ten years ago. I've had some insight through her on these people. But the real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do. And what Wells didn't do is what defines their greatness.
How is John's bridge game?
John is a very good bridge player. But he doesn't play as much as I do. I play all the time. He's smart. He's a different personality than Dick. Dick is a real sales person. They both subscribe to the same principles of banking. They just don't think you have to do things that the other guy is doing.
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.
Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Thank you to GuruFocus for this great post.
In 1951, Warren Buffett wrote an article about the Government Employees Insurance Company (GEICO) in the local newspaper entitled, "The Security I Like Best". The article is instructive because it clearly shows the factors that Buffett used to analyze and value a stock. The story of how Buffett came to own it provides a model of how to find and research a stock.
Buffett was first attracted to GEICO in the 50’s when he learned that his idol, Ben Graham, was chairman of the board and an owner. He thoroughly researched the company and invested three-quarters of his portfolio in the stock. Although he eventually sold his original position, in the late 70’s, he again, through Berkshire Hathaway, made a major investment in GEICO, when its share price tumbled as a result of underpricing its insurance risk. Finally, in 1996, Berkshire Hathaway purchased the balance of the company, and GEICO became a wholly owned subsidiary of Berkshire Hathaway. Today, GEICO continues to thrive and take market share under its low-cost model.
The interview below shows a clip of the Warren Buffett cartoon that will be coming to AOL soon. These new webisodes will aim to teach young people about finance, investing, science and the environment.
I think this is a great idea and I am sure you can agree with me if you take a look at the clip below. Warren Buffett also talks about the inflationary environment that can be expected as a result of the high spending of the administration today. As always, a wealth of information from this 18 minute clip.
1. If it seems to good to be true, it usually is.
2. Always look at how much the other guy is making in the deal.
3. Stay away from leverage (borrowed money).
Monday Interview: Man on the money with Buffett
By Justin Baer in New York , Financial Times,
12 Jul 2009
Get Article here: http://www.scribd.com/doc/17317034/Munger
Wesco Financial's Pasadena headquarters are a blur of earth tones and cloudless sky. Bathed in southern California sun, the offices hold a glow befitting the gilded career of the company's chairman, Charlie Munger. Mr Munger, best known as business partner to Warren Buffett, head of Berkshire Hathaway, is settled deep into his chair. His lips stretched to a thin smile, the 85-year-old billionaire peers through thick glasses.
Over the years, generations of investors, chief executives and journalists have
wondered why Mr Munger has stayed happily in the background for almost half a
century as Mr Buffett forged a reputation as the world's greatest stock-picker.
"Warren is peculiar, and I'm peculiar," says Mr Munger, who is also Berkshire's vice chairman.
"We've got our own peculiar operating model. Nobody else operates the
same way or stays in the game in a major corporation as long as we have, so we've got a different model. And we like it that way."
Working 1,500 miles apart – Mr Buffett remains in his hometown of Omaha,
Nebraska – the two "intellectual pals" have built up a stellar record by sticking to the basic principles of value investing: they buy companies in industries they
understand, with managers they trust, at cut-rate prices. "We think all intelligent
investing is value investing," he says. "What the hell could it be if it wasn't value?"
While Mr Buffett's mentor, the economist Benjamin Graham, is considered the father of value investing, it is Mr Munger who is credited with helping Mr Buffett evolve beyond buying stocks for no other reason than that they were cheap.
"That worked fine in the period after the 1930s," Mr Munger says. "I don't think it
works nearly as well now. Too many people are doing it."
Many of Berkshire's holdings, from longtime investments such as Coca-Cola and
Wells Fargo to last year's purchase of General Electric's preferred shares, are bluechip companies considered the best at what they do.
The strategy sounds simple enough, but Mr Munger says few investors practise it.
"You can't believe the way that conventional wisdom invests money," he explains.
"They tend to rush into whatever fad has worked lately. In my opinion, a lot of them
are going to get creamed."
There are no regular meetings at Berkshire, no corporate-speak or standard
management memorandums that help define the cultures of so many companies.
"The legally required meetings for corporate governance, we do those," Mr Munger
says. "Everything else is ad hoc."
Mr Munger has been known to seize hold of a conversation and not let go until his
views on a given subject – and possibly the interviewer – are exhausted. But on this afternoon, he is practically beaming.
"When Warren talks about tap dancing to work, he's not kidding," he says. "His
spirits lift as he goes through the office door. And I'm the same way."
In keeping a stake in the hands of public shareholders and a portfolio of its own
investments, Wesco maintains an unusual place within the Berkshire empire. Mr
Buffett initially agreed to keep the company as a standalone entity to honour the
request by the Casper family, the previous owners who had sided with Berkshire in
a takeover battle for the former savings and loan company.
"Wesco is a historical accident," Mr Munger says of the holding company whose
assets include an insurer, a steel manufacturer and a furniture-rental business. "It
should've been folded into Berkshire long ago."
It is unlikely Berkshire, which owns 80 per cent of Wesco, will acquire the remaining stake unless the stock price falls relative to Berkshire's. "Warren's never going to issue stock that isn't fair to Berkshire shareholders, so we're hooked by reason of our popularity," Mr Munger explains. "But it is a ridiculous outcome and it costs $2m (€1.4m, £1.2m) a year in extra administration costs. We hate it, but we can't fix it."
Like Berkshire, Wesco's annual meetings, held each spring in Pasadena, have
inspired a devoted following among its investors. But while the carnival atmosphere
of Berkshire's event in Omaha has earned it the moniker "a Woodstock for
capitalists", Wesco's gathering is an intimate performance in a small club. And Mr
Munger's terse soundbites, his trademark at the Omaha meetings, give way in
Pasadena to extended monologues on the economy, government policy and his
favourite target this year, the financial services industry.
"The public is furious with Wall Street," he says. "Everyone who is in a position to
observe this says they've never seen this much fury to one particular industry."
Is it justified?
A voracious reader, Mr Munger's conversations and writings are peppered with
references to philosophers, psychologists and inventors whose works and life stories he has studied. He speaks directly, in a tone that can, at times, both alienate and educate.
Like Mr Buffett, Mr Munger was raised in Omaha. He attended the University of
Michigan, enlisted in the Army Air Corps and, after the second world war, earned a
degree from his father's alma mater, Harvard Law School. He considered joining his
father's practice in Omaha before setting his sights on southern California, where he had studied meteorology during the war.
Mr Munger was back in Omaha in 1959 when a family friend arranged a lunch with
Mr Buffett, then a young local investment manager. The pair hit it off immediately
and thus began a lifelong friendship.
By the early 1960s, Mr Munger had opened a law practice with four others and found success as a part-time investor in both businesses and commercial real estate. As his relationship with Mr Buffett flourished, he eventually stopped practising law to focus on deals.
While they no longer speak daily, rarely will more than a week pass between
conversations. They still frequently send one another documents and books to read. And while they often disagree, Mr Buffett once told the Financial Times that they had "never had an argument".
"We are having a huge amount of fun understanding how the world works," Mr
Mr Munger has amassed a great fortune in part because of his association with Mr
Buffett, but as his annual meetings attest, he has also built a loyal following of his
"He's got a real fan club, but for good reason," Mr Buffett has said. "I'm a member,
too." Mr Munger is in turn quick to praise Mr Buffett, who is looking to rebound from Berkshire's worst year. As an investor, Mr Munger insists, his partner has continued to improve.
"He never would have bought into BYD [the Chinese electric car battery maker]," Mr Munger said. "He's changed. He learns."
Longtime Berkshire disciples and friends alike might say Mr Munger has had
something to do with that.
"There's no successor to Charlie," Mr Buffett says. "You're not going to find anyone
To: Warren Buffett, Berkshire
Subject: Go Huskers!
Date: Sunday, August 17, 1997 9:37 PM
Warren, I apologize in advance for this being a long note. I do hope you find it interesting, and be certain I don’t expect a long reply (or any reply at all for that matter). Perhaps sometime we’ll get a few minutes where I can get your reaction to the thoughts on the business below.
Warren Buffett talks about how the U.S. economy needs a second, less watered down stimulus.
Click Link below for video from CNBC.
DOES THE U.S. ECONOMY NEED A SECOND STIMULUS? WHAT DO YOU THINK and WHY? Leave a comment…
Warren Buffett talks about current state of the economy. No green shoots.
“I think you should read everything you can. In my case, by the age of 10, I'd read every book in the Omaha public library about investing--some twice. You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water--take a small amount of money and do it yourself. Investing on paper is like reading a romance novel versus doing something else. [Laughter] You'll soon find out whether you like it. The earlier you start, the better.
At age 19, I read a book [The Intelligent Investor by Benjamin Graham], and what I'm doing today, at age 76, is running things through the same thought process I learned from the book I read at 19.
I remain big on reading everything in sight. And when you get the opportunity to meet someone like Lorimer Davidson (former CEO of Geico), as I did, jump at it. I probably learned more in those four hours than in almost any course in college or business school.”
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
Mohnish Pabrai, an avid student of Warren Buffett, paid about $650,000 for dinner with him in 2007. Here, he has a conversation with Market Place Money about the dinner. Great interview. Check it out.\
Link courtesy of Noise Free Investing blog.
Part 3 of our Investing like Warren Buffett series discusses his 1979 Chairman’s letter to shareholders of Berkshire Hathaway Inc. Let’s see what important investment advice he leaves with us this year.
Click here for 1979 Chairman’s Letter to Shareholders
“The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.”
On Long Term Results
It is more important to pay attention to the long term results of stock ownership, rather than the short term performance. Unrealized gains or losses from stock ownership should be viewed different from the actual earnings from operations.
“In measuring long term economic performance - in contrast to yearly performance - we believe it is appropriate to recognize fully any realized capital gains or losses as well as extraordinary items, and also to utilize financial statements presenting equity securities at market value. Such capital gains or losses, either realized or unrealized, are fully as important to shareholders over a period of years as earnings realized in a more routine manner through operations; it is just that their impact is often extremely capricious in the short run, a characteristic that makes them inappropriate as an indicator of single year managerial performance.”
Be aware of those asset-intensive businesses with great economics, they may not always be great investments. Sometimes, a simple business is the better choice.
“In some businesses - a network TV station, for example - it is virtually impossible to avoid earning extraordinary returns on tangible capital employed in the business. And assets in such businesses sell at equally extraordinary prices, one thousand cents or more on the dollar, a valuation reflecting the splendid, almost unavoidable, economic results obtainable. Despite a fancy price tag, the “easy” business may be the better route to go.”
“We can speak from experience, having tried the other route. Your Chairman made the decision a few years ago to purchase Waumbec Mills in Manchester, New Hampshire, thereby expanding our textile commitment. By any statistical test, the purchase price was an extraordinary bargain; we bought well below the working capital of the business and, in effect, got very substantial amounts of machinery and real estate for less than nothing. But the purchase was a mistake. While we labored mightily, new problems arose as fast as old problems were tamed.”
“Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”
On attracting shareholders that have similar expectations through communication and policies;
“In large part, companies obtain the shareholder constituency that they seek and deserve. If they focus their thinking and communications on short-term results or short-term stock market consequences they will, in large part, attract shareholders who focus on the same factors. And if they are cynical in their treatment of investors, eventually that cynicism is highly likely to be returned by the investment community.”
“Phil Fisher, a respected investor and author, once likened the policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A restaurant could seek a given clientele - patrons of fast foods, elegant dining, Oriental food, etc. - and eventually obtain an appropriate group of devotees. If the job were expertly done, that clientele, pleased with the service, menu, and price level offered, would return consistently. But the restaurant could not change its character constantly and end up with a happy and stable clientele. If the business vacillated between French cuisine and take-out chicken, the result would be a revolving door of confused and dissatisfied customers.”
Lessons learned from this report:
- Think long term when it comes to investing.
- Buy businesses that are simple and easy to understand.
- It is better to buy a good business at a fair price than a poor business at a bargain price.
- Look for management that are honest and consistent in the communication and policies.
“You have to be greedy when others are fearful and be fearful when others are greedy. It’s that simple. Right now, they are pretty fearful. In my lifetime, I have not seen people as fearful economically as they are now. (Oct. 2008)” ~Warren Buffett
Q1 Operating Results and Book Value
Buffett told a record crowd at a somber annual meeting of his Berkshire Hathaway Inc that first-quarter operating profit fell and the company's book value declined 6 percent, as the recession weighed on many of the company's businesses and investments.
Operating profit fell about 12 percent from a year earlier to $1.7 billion, as most of Berkshire's businesses were "basically down," Buffett told an estimated 35,000 people at the meeting in downtown Omaha.
The decline in book value results in part from falling stock prices and higher losses on derivatives contracts, and comes on top of a 9.6 percent decline last year, the biggest drop since Buffett began running the company in 1965.
Predict Gloomy Economy but Stimulate Activity Working
Buffett offered a gloomy forecast for parts of the U.S. economy and Berkshire itself, though he said massive federal efforts to stimulate activity could pay off at a possible cost of higher inflation.
"It has been a very extraordinary year," Buffett said. "When the American public pulls back the way they have, the government does need to step in.... It is the right thing to do, but it won't be a free ride."
Housing Prices, Retailers and Newspapers
Buffett said housing prices have yet to stabilize broadly, that retailers may be under pressure for a "considerable period of time," and that he would not buy most U.S. newspaper companies "at any price."
Insurance not as good
He also said that in insurance, which comprises about half of Berkshire's operations, the earnings power "was not as good last year as normal" and "won't be as good this year."
Buffett also said the four candidates to replace him as Berkshire's chief investment officer failed to outperform the Standard & Poor's 500 last year, but remained confident they could perform well over time. Berkshire still has three internal candidates to replace Buffett as chief executive.
Buffett declined to name the candidates to replace him as chief executive officer and chief investment officer, but said Ajit Jain, who runs much of his insurance businesses and whom investors believe is a CEO contender, is irreplaceable.
"It would be impossible to replace Ajit," he said. "We wouldn't give the latitude to size or risk that we would give to Ajit.... We won't find a substitute for him."
Buffett said that for any CEO candidate, "the biggest job they have will be to develop relationships with potential sellers of businesses."
But he added that while Berkshire is much less nimble than it was when it was smaller, "our sustainable competitive advantage is we have a culture and business model that people would find very, very difficult to copy."
Munger added: "The stupidity in the management practices of the rest of the corporate world will likely be ample enough to give this company some comparative advantage in the future."
No stock buyback
Berkshire 's stock has fallen 39 percent since December 2007, and profit last year fell 62 percent from a year earlier. Buffett said he would not buy back Berkshire stock now, because its share price is not "demonstrably below" the company's intrinsic value.
Much of the worry about Berkshire has focused on Buffett's use of derivatives in making long-term bets on the direction of stocks and junk bonds, and which have so far resulted in billions of dollars of paper losses.
While Buffett still expects the contracts tied to equity stock indexes to make money, he said "we have run into far more bankruptcies in the last year than is normal." He said he now expects the contracts tied to credit defaults will show a loss before investment income, and perhaps after as well.
Buffett still distinguishes his derivatives from others such as credit default swaps, given that he collects billions of dollars of premiums upfront to invest and posts little collateral. He called other derivatives "a danger to the system. There is no question about that."
Wells Fargo & US Bancorp
Buffett expressed confidence in Wells Fargo & Co, one of Berkshire's biggest investments, saying it has "by far the best competitive position" of any large U.S. bank.
He also said some banks will weather the credit crisis well, saying that if he wanted to turn Berkshire into a bank holding company, "I would love to buy all of US Bancorp, or I would love to buy all of Wells."
He also defended Berkshire's roughly 20 percent stake in Moody's Corp, a credit rating agency faulted for failing to predict the housing crisis and assigning high ratings to risky debt for too long.
"They made a huge mistake" but were not alone, Buffett said. "The rating agency business is probably still a good business, (but) it won't be doing the volume probably for a long time in certain areas of the capital markets."
Today is a very special day for Berkshire Hathaway Shareholders. The annual meeting of shareholders is happening in Omaha, Nebraska today and it is most anticipated shareholder meeting for any corporation. It is also known as the Woodstock for Capitalists.
Morningstar is blogging this event live; so go to link below to get live bloggerage (blogging + coverage) of this event. We will have a discussion of some of the main questions that were asked at the end of the day.
Part 2 of our Investing like Warren Buffett series discusses his 1978 Chairman’s letter to the shareholders of Berkshire Hathaway Inc. Since I am in the process of typing this and have not read it myself yet, I am excited to see what knowledge he had to impart on us at that stage of his life and investment career. This not only serves as great investment advice, but we are also able to learn how he analyzes businesses and what thought-processing went into picking the companies that became part of his investment portfolio.
I know we will also learn from his mistakes, which he is not shy about discussing in his letters as well. Let’s see what he has to share with us.
Warren Buffett talks about investing in equity and his inability to predict stock market movements. What’s important is that he eludes to the fact that the equity holdings of his company will be worth a lot more than they paid, meaning that they were purchased with a significant margin of safety.
“We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do. In the longer run, however, we feel that many of our major equity holdings are going to be worth considerably more money than we paid, and that investment gains will add significantly to the operating returns of the insurance group.”
Warren Buffett on textiles:
“Slow capital turnover, coupled with low profit margins on sales, inevitably produces inadequate returns on capital. Obvious approaches to improved profit margins involve differentiation of product, lowered manufacturing costs through more efficient equipment or better utilization of people, redirection toward fabrics enjoying stronger market trends, etc. Our management is diligently pursuing such objectives. The problem, of course, is that our competitors are just as diligently doing the same thing”
“The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.”
Warren Buffett again reiterates the criteria for selecting stocks for ownership. However, it is apparent that there are times where market prices do not offer great bargains.
”We get excited enough to commit a big percentage of insurance company net work to equities only when we find (1) businesses we can understand, (2) with favorable long-term prospects , (3) operated by honest and competent people, and (4) priced very attractively. We usually can identify a small number of potential investments meeting requirements (1), (2), (3), but (4) often prevents action.”
Buffett emphasizes that they will be net buyers of stocks in most years, therefore, as with any type of purchase, if you are the buyer, you would prefer to prices to be lower than higher. Therefore, this major principle is applied to stocks as well. The time to be buying is when prices are going down, not increasing.
“We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying.”
Buffett on diversification. If you believe that a company has excellent future economics, he prefers to buy large quantities of that company, than allocating capital to many different companies.
“Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.”
Buffett talks about buying companies where management is already established.
“Of course, with a minor interest we do not have the right to direct or even influence management policies of SAFECO. But why should we wish to do this? The record would indicate that they do a better job of managing their operations than we could do ourselves. While there may be less excitement and prestige in sitting back and letting others do the work, we think that is all one loses by accepting a passive participation in excellent management. Because, quite clearly, if one controlled a company run as well as SAFECO, the proper policy also would be to sit back and let management do its job.”
Buffett on use of retained earnings, dividend payments and share repurchases.
“We are not at all unhappy when our wholly-owned businesses retain all of their earnings if they can utilize internally those funds at attractive rates. Why should we feel differently about retention of earnings by companies in which we hold small equity interests, but where the record indicates even better prospects for profitable employment of capital? (This proposition cuts the other way, of course, in industries with low capital requirements, or if management has a record of plowing capital into projects of low profitability; then earnings should be paid out or used to repurchase shares – often by far the most attractive option for capital utilization.)”
Another great report with some key points.
These are some points I learned from this report.
- Do not attempt to forecast stock market movements. Focus on the underlying business.
- Businesses with low capital turnover and low profit margins should be avoided as long-term investments.
- Investments could fit all your criteria upon analysis, however, if the price is not right, it does not make a good investment. Be patient.
- Management is very important when selecting businesses.
What have you gotten from this report.
Leave a comment.
Invest Like Warren Buffett Part 1>>
Click here to ASK WARREN BUFFETT A QUESTION
Ever wanted a chance to ask Warren Buffett a question? If you had the opportunity to sit and chat with him over a burger and Cherry Coke, what would be the most important question you would want to ask him?
The top questions will be sent to CNBC's Buffett Watch so that they can have him respond to them. Exciting!!!
This is your opportunity to do so. I have high intentions of meeting him one day and I hope to be prepared for that occasion, especially to benefit the readers of this blog.
Please refer to the link below and submit, or vote on the questions that appeal to you the most. If you have been following him, you would know that he is not only a knowledgeable businessman and investor, he also knows a lot about people and life as well; a very wise man.
Enjoy and I look forward to reading them.
Click here to ASK WARREN BUFFETT A QUESTION
Our new series will discuss the investing philosophy of Warren Buffett with direct excerpts from his Chairman’s letters to shareholders. As an investment student, this is a must read for all who intend to pursue such a feat. These letters are known to be one of the greatest sources of investment advice and is probably the most anticipated investment document each year.
We will start out series by studying and analyzing his letters all the way back to 1977 until present day. It may take us some time to do so, but I know at the end, we will have learned a great deal from this entire experience. Our investment I.Q. will surely raise several points, which is incentive enough to perform this task.
Warren Buffett on Earnings Per Share:
“Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest rates earnings each year because of compounding."
What we, as investors, should be looking at:
“…we believe a more appropriate measure of managerial economic performance to be return on equity capital”.
Warren Buffett on long-term investing:
“…Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks”.
Warren Buffett’s underlying investment philosophy has been the same since 1977. There is no significant difference in buying an entire company and buying shares of a company. Similar considerations must be made.
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”
“Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.”
The importance and role of management when selecting companies for stock or full ownership.
”Capital Cities possesses both extraordinary properties and extraordinary management. And these management skills extend equally to operations and employment of corporate capital. To purchase, directly, properties such as Capital Cities owns would cost in the area of twice our cost of purchase via the stock market, and direct ownership would offer no important advantages to us. While control would give us the opportunity – and the responsibility – to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through non-control than control. This is an unorthodox view, but one we believe to be sound.”
I thought this to be an important part to include from this letter as it discusses Banking as investments. The point he was making was that a bank does not have to be a large bank to make it a good investment. The Illinois National Bank was an excellently run small bank that was extremely profitable.
“Earnings in 1977 amounted to $3.6 million, more than achieved by many banks two or three times its size.”
What I have learned from this report.
- Warren Buffett’s investment philosophy has remained fundamentally the same today as it was decades ago.
- Invest in stocks where you would feel comfortable owning the entire company.
- Buy companies with great management; rather than thinking you can change the management yourself.
- Buy companies that you understand with great management, favorable long-term economics, and most importantly at great prices.
- Big does not always mean most profitable.
What knowledge have you gained from this report?
Leave a comment.
Owner-related business principles cont’d
14. To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As that implies, we would rather see Berkshire’s stock price at a fair level than a high level. Obviously, Charlie and I can’t control Berkshire’s price. But by our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational. Our it’s-as-bad-to-be-overvalued-as-to-be-undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners.
I really believe that Berkshire is for long-term investors, and as Warren Buffett says, his communication and policies do indicate that philosophy. A philosophy of not splitting the stock, or making investments that are beneficial over the long-run all dictate this underlying philosophy. Even today, investors are doubting the decisions made by Warren Buffett, but they fail to realize one thing, he is a man of integrity that will take this company even further. Just wait and see.
15. We regularly compare the gain in Berkshire’s per-share book value to the performance of the S&P 500. Over time, we hope to outpace this yardstick. Otherwise, why do our investors need us? The measurement, however, has certain shortcomings that are described in the next section. Moreover, it now is less meaningful on a year-to-year basis than was formerly the case. That is because our equity holdings, whose value tends to move with the S&P 500, are a far smaller portion of our net worth than they were in earlier years. Additionally, gains in the S&P stocks are counted in full in calculating that index, whereas gains in Berkshire’s equity holdings are counted at 65% because of the federal tax we incur. We, therefore, expect to outperform the S&P in lackluster years for the stock market and underperform when the market has a strong year.
Bruce Berkowitz took Warren Buffett’s advice and sold off shares of Berkshire because he believes he can find bargains in today’s environment where he could earn a better return. I think however, because of Berkshire’s sheer size, it would be difficult to earn a high return as well, however, this environment offered so many opportunities, I believe he can earn a significant return for his long-term investors as well. I feel honored to have bought shares during his tenure. It is my intention to hold forever.
This is the end of the principles within the Owner’s Manual. The next section would be a discussion of his definition of INTRINSIC VALUE. Stay tuned.!!
The rest of the videos can be seen at the CNBC website.TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 7
Do you have confidence in Warren Buffett's ability to make wise decisions, specifically around these sort of instruments? YES.
Disclosure: Long BRK.B
Owner-related business principles cont'd
9. We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.
This has been the reason why Berkshire has not and will not pay dividends. If they continue to find opportunities to effectively deploy capital, they will not issue the funds to shareholders in the form of dividends. They have continuously proven that retained earnings are being effectively used, therefore shareholders should appreciate the fact that they have one of the best capital allocators in the world investing for them.
10. We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance — not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company — and that is what the issuance of shares amounts to — on a basis inconsistent with the value of the entire enterprise.
The important point to understand here is that Berkshire does not dilute the owners' common stock by issuing shares. The only time that issuing shares make sense is when there is an equitable trade in value. Also, pay attention to when companies you own issue stock and question whether or not the stock is undervalued; this is normally an indication that the managers are not wisely investing your money.
11. You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses. And we react with great caution to suggestions that our poor businesses can be restored to satisfactory profitability by major capital expenditures. (The projections will be dazzling and the advocates sincere, but, in the end, major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.) Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.
This principle speaks to the competency of the management. They will not invest unnecessarily in a sub-par business and will not exit a business if it can still act as a cash cow and add to the float. They will however, take action if a company problem's can be cured.
12. We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. Moreover, as a company with a major communications business, it would be inexcusable for us to apply lesser standards of accuracy, balance and incisiveness when reporting on ourselves than we would expect our news people to apply when reporting on others. We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private.
This is one of the most important principles that investors should pay attention to. Buffett is as clear and honest as possible when he reports results to the owners of Berkshire Hathaway. His annual reports are seen as some of the most valuable investment documents in the value investing world. They are filled with precious information about his investing philosophy and decisions over the years and is considered a must read for all in the business. His reporting techniques should be used as a model for the industry.
13. Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. Therefore we normally will not talk about our investment ideas. This ban extends even to securities we have sold (because we may purchase them again) and to stocks we are incorrectly rumored to be buying. If we deny those reports but say “no comment” on other occasions, the no-comments become confirmation.
Buffett makes it clear that they do not discuss their investment ideas because these ideas are rare and may be subject to competitive appropriation. He fully believes in discussing his investment philosophy which he learned from Benjamin Graham.
For the detailed reading of The Owner's Manual, please refer to Berkshire's Hathaway's website.