Fin 4201/8001 Topic 1: Warren Buffett, the man

Buffett, the man Lifestyle Lifestyle Salary $100,000 (old figure) Salary $100,000 (old figure) Lived in same house for 40 years Lived in same house for 40 years Eats burgers, steaks, and drinks Coke Eats burgers, steaks, and drinks Coke Money making schemes? Money making schemes? Age 6 – peddled Coke Age 6 – peddled Coke Age 11 – purchased first equity Age 11 – purchased first equity Age 14 – bought 40 acres and leased it out Age 14 – bought 40 acres and leased it out Age 16 – rented out used pinball machines Age 16 – rented out used pinball machines

Caveat Hagstrom’s New Economy? Hagstrom’s New Economy? He says yes but may defeat own argument He says yes but may defeat own argument Book printed in 2001 during bubble new paradigm – multiples high Book printed in 2001 during bubble new paradigm – multiples high Information is accessible to all – problem is “understanding” Information is accessible to all – problem is “understanding” Businesses still need profits to stay in business Businesses still need profits to stay in business Investors still use these profits to determine value Investors still use these profits to determine value Fundamental research (kick the tires) has been replaced with black boxes (LTCM) Fundamental research (kick the tires) has been replaced with black boxes (LTCM)

The partnership ( )

Dissolved partnership ( ) “I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on……….On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully, and which possible could lead to substantial permanent loss of capital.” “I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on……….On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully, and which possible could lead to substantial permanent loss of capital.”

Berkshire Hathaway, Inc. A textile mill purchased in 1962 A textile mill purchased in 1962 Buffett still owns over a third of the shares Buffett still owns over a third of the shares Look at some of the holdings Look at some of the holdings

Operating Companies

Investments

Philosophy “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now. Over time, you will find only a few companies that meet those standards – so when you see one that qualifies, you should buy a meaningful amount of stock.” annual report “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now. Over time, you will find only a few companies that meet those standards – so when you see one that qualifies, you should buy a meaningful amount of stock.” annual report

So what does this mean? Analyze stocks as businesses Analyze stocks as businesses What is value? and Is value > price? What is value? and Is value > price? Concentrated Portfolio Concentrated Portfolio Most diversification needs only 15 names Most diversification needs only 15 names Investment vs. Speculation Investment vs. Speculation Not just facts and figures, but how they combine Not just facts and figures, but how they combine

Acquisitions Coca-Cola Coca-Cola Perceived as stodgy food company in 1980s Perceived as stodgy food company in 1980s By 1985 price went up three-fold By 1985 price went up three-fold Washington Post Washington Post Purchased at height of bear market (1973) Purchased at height of bear market (1973) GEICO GEICO Buffett bought it when others thought was going bankrupt (1976) Buffett bought it when others thought was going bankrupt (1976) Recent = Business Wire, Tesco, Iscar Metals, Russell, Conoco Recent = Business Wire, Tesco, Iscar Metals, Russell, Conoco

Take-aways Long term value < price Long term value < price Honesty Honesty Know, trust, and understand Know, trust, and understand Focus Focus Let’s talk teams….. Let’s talk teams…..