Buffett Sp Report

7/27/2019 Buffett Sp Report

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Warren Buffetts8 Best Investment Plays

Financial Intelligence ReportThe Global Resource to Protect and Grow Your Wealth

Special Report

By Brian OConnell

Whats the secret to Warren Buffetts investment success?

The secret, according to the Sage of Omaha, is that there

is no secret. All there is to investing, he says, is picking

good stocks at good times and staying with them as long as

they remain good companies.

Buffett has done that in spades over the past 40 years

at the helm of Berkshire Hathaway, one of the most

successful investment companies in the history of Wall

Street. The $44 billion company is like a block of granite in

an otherwise fragile investment environment. Astute

investments in brand-name value plays like Coca-Cola,H&R Block, American Express and Comcast have fueled

Berkshire Hathaways rise to the top of the global investment

period. All solid, no-nonsense companies that offer investors

the three things that Buffett prizes in his investment picks:

steady growth, good management and no surprises.

Buffetts results speak for themselves. A $10,000

investment in Berkshire Hathaway in 1965 would be worth

nearly $30 million by 2005. In contrast, $10,000 in the

S&P 500 would have risen to roughly $500,000.

Consequently, Buffett is a Zen-like figure to both WallStreet and Main Street. Business writers and stock market

analysts jot down his every utterance. Berkshire Hathaway

annual meetings are almost mythical events, with a small

army of Berkshire investors and Buffett zealots

hanging on his every word. And he always delivers.

Prior to Berkshire Hathaways six-hour annual general

meeting in May 2002, investors began lining up for seats at

4 a.m. Attendees were not disappointed. Among the treats?

A film of Berkshire Hathaway chief Warren Buffett playing a

ukulele and singing, When the NASDAQs down, youll

never frown, Berkshires here to stay. In typical fashion, the

folksy Buffett later led a visit to the local Dairy Queen down

the street, which, by the way, he owned.

So, whats on Buffetts mind these days? In this Financial

Intelligence Reportspecial report, Warren Buffetts 8 Best

Investment Plays,well lay it all out for you. From why

China is the next big opportunity on Wall Street to why,

thanks to rampant American consumerism, the U.S. dollar

is in great peril, well show you what Wall Streets greatest

living legend considers to be the biggest economic and

investment plays on the world stage. Eight of them, in fact,all culled from the laser-sharp mind of the Sage of Omaha.

Well also delve into Buffetts personal investment

philosophy and detail, point by point, the investment traits

and characteristics that Buffett has used over the years to

drive his mega-billion company, Berkshire Hathaway, to the

top of the investment charts.

Its a story worth hearing and NewsMax is here to tell it.

The Buffett Way

Before we examine Buffett's eight key financial plays for

2005, as explained by the guru himself, the investment

philosophy that earned the Sage of Omaha $40 billion is

worth examining.

Call it the Buffett Way as many people do.

In this day and age, when traditional investment like

stocks and bonds ebb and flow along with the economic

tides, seemingly tethered to nothing and batted about in


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global financial markets on an almost daily occurrence,

there is comfort in the knowledge that a visionary like

Warren Buffett exists. His company, Berkshire Hathaway, is

one of the most successful businesses in American history,

if not the most successful. As noted above, a $10,000

investment in Berkshire Hathaway when Buffett took

control in 1965 would be worth over $50 million today.Buffet himself has a personal net wealth of more than $40

billion, making him the second-wealthiest individual in the

U.S. (behind Microsoft founder Bill Gates).

But it wasnt so long ago that the so-called experts on

Wall Street were laughing at Warren Buffett, mocking his

cautious, carefully measured methodology of investing in

the financial markets.

To the self-proclaimed gurus, Buffetts take on things

seemed out of tune. The rules of the game had changed,

and he just didnt get it. Warren Buffett should say, Imsorry, fumed Harry Newton, publisher of Technology

Investor Magazine, in early 2000. How did he miss the

silicon, wireless, DSL, cable, and biotech revolutions?

That was a year when America Online stock rose sixfold

and Amazon.com had rocketed by 1,000 percent in a year,

while shares in Berkshire Hathaway, the investment

company Buffett had built virtually from scratch, had

climbed cue ominous music only 11 percent.

But, as history has proved, the Buffett Way won out in

the end, as the Dot-Com bubble exploded, leaving millions

of Americans with huge holes in their investment portfolios

and more than a few experts with egg on their faces

experts who right now would kill for 11 percent

investment returns. Yes, wise old Warren (a lifelong

techno-phobe, as he confesses on the Berkshire Hathaway

Web site) stuck with boring blue chips like Gillette, Coca-

Cola and American Express, saying he couldnt understand

these newfangled companies.

What did Buffett know that the Dot-Com geniuses

didnt? How to look for good value plays. Buffett and his

partner, Charles Munger, began looking closely at Dot-Com company valuation sheets and came away convinced

that there was more folly than fortune in all those

celebrated new-economy companies. Instead, they returned

to the grounds they had tilled before and knew so well

value stocks. They invested in companies like Procter and

Gamble that made products that people actually used.

It is hardly necessary to point out that this was during

the age of irrational exuberance, when the NASDAQ was

flying and Berkshires stock was flopping. While the experts

considered Buffetts fixation on value (and values) old hat,

the Sage proved them all wrong. But now its an old hat

that lots of people would like to try on to see if it fits, just

like Cinderellas glass slipper.

The Buffett Saga

Warren Buffetts story is quintessentially American. He

is by most counts the second-richest man in America (the

richest is Bill Gates) with a fortune estimated by Forbes

magazine at more than $44 billion. He is the only U.S.

billionaire to have made his money entirely through

investing, and today, along with Alan Greenspan and Paul

Volcker, both chairmen of the Federal Reserve, he is

arguably the most respected voice of financial America.

His natural habitat is not Wall Street or Washington,

but the unpretentious Midwest heartlands. Weve told you

about his moniker The Sage of Omaha, but that is not

his only nickname. Buffett is also known as the Oracle of

Omaha, Omaha being the pleasant but largely

unremarkable Nebraska city on the banks of the Missouri

River where he was born and raised, where he made his

fortune and where he lives to this day, in the same gray

stucco house he bought for $31,500 back in 1956.

Buffett is today the best-known Nebraskan on earth, a

gray-haired, no-nonsense Man of the Heartland who has

been triumphantly vindicated by financial market eventstime and time again. He is not so much a financial

institution as a national institution, the object of a cult that

attracts around 22,000 people to Omaha every May for

Berkshire Hathaways annual meeting. Buffett himself has

called the occasion the Woodstock of capitalism. Some

people buy a Berkshire Hathaway share just to attend (not

as small a matter as it sounds, for old-fashioned Warren has

never been one for fancy devices such as stock splits, and a

single share of Berkshire Hathaway stock can cost upward

of $80,000).

In this age when CEO stands in many minds for chief

embezzlement officer, Buffett embodies those Midwest

virtues of probity, modesty and common sense Americans

like to think of as part of the national character. It should

be noted that this same part of the world spawned Arthur

Andersen, once held as another paragon of honesty and

good housekeeping. But Buffett has kept his halo. He is a

CEO for the nation, the self-made man who made his

fortune honestly, the scourge of less-principled peers.

Warren Buffett Financial Intelligence Report Page 2


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Not So Fast, Mr. Greenspan

Affable and avuncular with the media and, especially,

with Berkshire Hathaway shareholders, Buffett can be very

combative when it comes to getting his point across

even if his intended target is one of the most powerful men

in the world.

A few years back, Buffett and Federal Reserve Chairman

Alan Greenspan agreed to disagree about the effect that so-

called derivative securities would have on financial

markets. Greenspan said they had reduced risk. Buffett saw

things differently. In his letter to shareholders in 2003,

Buffett called them weapons of mass destruction.

A Student of Graham

The foundations of the Buffett legend were laid young.

The son of a stockbroker and Republican congressman,he made his first trade in 1941 when he was just 11, buying

three shares in a company for $38 apiece. They dropped to

$27, then rose to $40, at which point the cautious youth

sold, earning a tiny profit but missing a later climb to $200.

These events sowed the seeds of his lifelong investing

philosophy, that share-buying is for the long term.

As a child he was industrious in the extreme running

a double paper route and collecting lost golf balls, selling

them and putting the proceeds toward buying 40 acres of

farmland, which he then rented out. College in Omaha

was followed by a graduate degree at Columbia University

in New York City, where he met and worked with

Benjamin Graham, the author ofThe Intelligent Investor

and eventually Buffetts financial mentor.

Grahams strategy was to search for what he called cigar

butt companies, no longer of interest to the market and

thus undervalued, but which still had a few puffs of life in

them. In 1962 Buffett found one a rundown

Massachusetts textile concern called

Berkshire Hathaway. He poured what

resources it had into other businesses,notably insurance.

It was a stroke of genius. Insurance

companies may not be hugely profitable

intrinsically, but they have a float, up-front

premium payments from policyholders, from which claims

are settled only later. The cash pile grew during the early

1970s bear market on Wall Street.

Buffett used the money to buy stakes in companies at

bargain prices, and the Berkshire Hathaway phenomenon

was born.

Now, when Buffett speaks, ordinary Americans not only

listen, they are enraptured. But the truly sacred texts of

Warren Edward Buffett are Berkshire Hathaways annual

letters to shareholders, studied at business schools across

the country and collectively published in 1998 as TheEssays of Warren Buffett.They are pithy and wise, sprinkled

with the endearing admissions of human failure that a

deity may occasionally permit himself.

The 2001 edition, for instance, contains a huge mea

culpa for his failure to protect General Re, one of Berkshire

Hathaways re-insurance units, from the shockwaves of

the September 11 terrorist attacks. Buffett well knew

that a mega-catastrophe (albeit more likely natural than

man-made) was possible. I violated the Noah rule, he

groveled. Predicting rain doesnt count; building arks does.Few shareholder letters quote Horace. But BHs in 2001

noted that Many shall be restored that now are fallen and

many shall fall that are now in honor which pretty

succinctly describes the reversals of reputation, between

1999 and now, of Buffett on the one hand and AOL-Time

Warner on the other, not to mention disgraced erstwhile

superstars like Ken Lay of Enron and WorldComs Bernie

Ebbers.

Buffetts Keys to Profitable InvestingWhat strategies does Buffett deploy when picking stocks?

For starters, he looks for companies with solid financial

performance managed by seasoned and savvy executives.

Buffett also favors companies with histories of above-average

earnings growth. His holdings in American Express and

Coca-Cola are good examples of that.

Here is a list of additional attributes Buffett looks for

when buying stocks:

Simple Businesses. Buffett likes to

keep things simple and he likes his

companies to do the same. Again and again,

Buffett has railed against the kinds of

companies that seem too complicated or that

are difficult to valuate. His avoidance of

Internet and technology companies during the

Dot-Com bubble is the most famous manifestation of his

keep it simple dictum. Buffett jokingly calls himself a

techno-phobe, but in reality he shies away from technology


Buffett-isms In the business world,

the rearview mirroris always clearer than

the windshield.


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and telecom stocks. He likes to base his stock picks on,

among other things, what a company will look like 10

years down the road. Technology companies, he says, are

much too volatile and risky for that kind of analysis. The

10-year rule also applies in a backward sense Buffett will

consider only those companies with a good 10-year track

record. Most technology companies havent been aroundthat long and, for their lack of seasoning and earnings

history, tend to fall off Buffetts radar.

Return on Equity.Another key criterion for Buffett

is a companys return on equity (ROE). Again, he favors a

10-year plan, where he can predict ROE 10 years out.

Companies that cant be gauged accurately dont make it

into the Buffett portfolio. Buffett also favors companies

that dont need much capital. Such companies, he has said,

generate significantly higher returns on equity.

Cash on the Barrel. The Buffett Way is long oncompanies that have deep pockets. Companies that have

what Buffett refers to as ample cash flow are companies

that have plenty of financial resources both to pay their

bills and to keep growing.

Low Debt. Companies that can limit and manage

their debt are high on Buffetts priority list. Insurance

companies (he owns both Geico and General Re) are

particular favorites in this regard. With the Buffett Way,

low debt equals significant room for growth. Buffetts

emphasis on low debt is grounded in reality. With limited

debt, earnings growth is based on shareholders equity asopposed to borrowed money.

Emphasis on Value. Historically, Buffett has targeted

investments in undervalued companies with good long-

term growth potential. Identifying such companies isnt

easy, but Buffett has mastered the technique. In a nutshell,

Buffett favors stocks that are unjustifiably low based on

their intrinsicworth. He bases his calculations of intrinsic

worth by analyzing a companysfundamentals. As with

most bargain hunters, Buffett targets companies that are

good revenue producers and are capably managed, thoughunderpriced.

Buffett is also famous for his aversion to reading stock

market tea leaves. Thats not what he is about. Quite

simply, he selects stocks solely on the basis of their overall

potential as a company. Once Buffett adds a stock to his

portfolio, he will hang on to it for years even decades.

Buffett could care less if other investors ever get around to

recognizing the stock markets value. His only concern is

that his companies earn money and lots of it.

The Big Six

There are other highly visible cues to take from the Sage

on his investing philosophy. In fact, Buffetts investing

criteria are outlined in his yearly reports to shareholders.

They are:

1. Large purchases (at least $50 million of before-taxearnings).

2. Demonstrated consistent earning power (future

projections are of no interest to him, nor are

turnaround situations).

3. A history of earning good returns on equity while

employing little or no debt.

4. Management in place (he cant supply it).

5. Simple businesses (if theres lots of technology, he

wont understand it).

6. An offering price (he doesnt want to waste his or the

sellers time by talking, even preliminarily, about a

transaction when the price is unknown).

Source: Berkshire Hathaway annual report

Buffett has said candidly that, if a company falls within

these criteria, dont call an investment banker, call him.

For Buffett, Its All About Businesses

Not Stocks

Buffett can be a bit of a contrarian, sliding away from

his own investment philosophy from time to time. Some

Buffett watchers were surprised by his modest investments

in struggling companies like Level 3 Communications, a

fiber optics network operating in the red, and The

Williams Cos., an energy group. Buffett is known for

preferring old-economy companies and firms that are

already in the black. He doesnt like technology companies

because he says that he doesnt understand technology. He

invests in companies like Gillette because he loves the fact

that millions of men grow whiskers every night. But theinvestments were not a complete surprise to true Buffett

aficionados. Buffett had said that if markets fell

significantly, he would use that situation as a buying

opportunity and he did.

In the end, Buffetts investment philosophy is also

attractively simple. He believes that investors should be

buying a business, not simply a stock. Buffetts annual report

is nothing if not readable quite famously so and is

perhaps the best window into the way his mind works.


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One of his annual reports contained what is probably as

clear a one-paragraph summary of Buffetts investment

philosophy as can ever be stated: Whenever we buy

common stocks we approach the transaction as if we

were buying into a private business. We look at the

economic prospects of the business, the people in charge of

running it, and the price we must pay. We do not have inmind any time or price for sale. Indeed, we are willing to

hold a stock indefinitely so long as we expect the business

to increase in intrinsic value at a satisfactory

rate. When investing, we view ourselves as

business analysts not as market analysts,

not as macroeconomic analysts and not even

as security analysts.

Thus the Buffett paradox. On the one

hand, this paragraph is so steeped in old-

fashioned values largely vanished fromtrading-obsessed Wall Street that one can immediately

understand why Buffett has followers. On the other hand,

its clear that Buffetts investing style just isnt that difficult

to understand. Its nothing more than a balanced four-

legged stool: Buffett cares about the future prospects of the

business. He wants to know that management has both

integrity and drive. He doesnt want to overpay for the

stock. And whether the shares go up or down, he wont sell

so long as the fundamentals remain the same. Pretty

simple, right?

The Buffett Paradox

So, is it a bit over the top to call Warren Buffett a

modern-day miracle worker? Probably not.

Its not as if he is parting the Red Sea, though his

investment record an average annual gain of over 30

percent since 1965 is not too far off. He is certainly a

living, breathing antithesis of the random walk theory

beloved by economists attempting to

rationalize market behavior the theory

that stock movement is random because allinformation about the future prospects of a

company has already been built into the

share price. They try to explain away

Buffetts unusual success by pointing out

that in any game of chance someone has to

come out on top and it just happens to

be him.

But of course everyone knows thats not true. Its sort

of the equivalent of saying that the reason the golf ball

found the bottom of the cup more often for Tiger Woods

has to do with luck, not skill. No, like Woods, Buffett has

something we mere mortals have no real hope of emulating

which leads to the real Buffett paradox, a phenomenon

that is quite the opposite of the supposed random walk

theory. Just as Woods is far more likely to ascribe his

success to hard work than to his supernatural talent, so toodoes the greatest investor of our time make investing seem

easier than it actually is.

Listening to him speak, reading his many

writings on investing, absorbing his message,

even watching his investment moves over the

years, an investor is more likely to gain hope

than to lose it. How difficult can it be, after

all, to buy Coca-Cola and hold it forever

a practice at the core of Buffetts investment

methodology? It should make the averageinvestor feel a lot more confident, knowing that Buffett

firmly rejects all the fancy-pants trading techniques so

beloved by modern Wall Street techniques that make it

seem as if the big boys have an insurmountable advantage

over the rest of the hoi polloi. Simplicity is the key.

Buffettology Redux

So why doesnt everyone invest like Buffett? For one

thing, very few people can stomach the ups and downs

of the market without wanting to jump on and off. For

most investors, it is difficult not to panic when the market

tanks, and it can be tricky to resist jumping on a really hot

stock. The even-keeled thinking necessary to be a great

investor is an extremely rare thing. Buffett, however, has

that trait in spades. He is happy when markets tank

because it means he can buy stocks he wants at a cheaper

price.

The second reason most people dont invest like Buffett

is because his methods are a lot more

complicated than they appear. When Buffett

talks about the economic prospects of apotential investment, he is talking about the

position of the business 10 years down the

road. So if he can see the business remaining

dominant for the next decade, hell consider

buying the stock. Buffett has an uncanny

ability to predict very accurately which companies will be

dominant players in 10 years a gift not many investors

can claim.

This gift may be partly based on Buffetts genius when it

Buffett-isms Only buy somethingthat youd be perfectlyhappy to hold if themarket shut down

for 10 years.

Buffett-isms

We simply attempt tobe fearful when othersare greedy and to be

greedy only when othersare fearful.


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comes to numbers. Accounting, he likes to say, is the

language of business. It is a language in which his own

fluency is unsurpassed, and which gives him an enormous

competitive advantage. Usually, all he needs is a quick

glance at a balance sheet to know whether hes interested in

buying a company or not because he finds meaning in

numbers that most investors are not capable ofunderstanding.

Many students of Buffettology have struggled to get

their heads around accounting ideas that are second nature

to him. A classic example is intrinsic value, which is

Buffetts way of evaluating the true worth of a company

and which he describes as the only logical approach to

evaluating the relative attractiveness of investments and

businesses. He has said, Intrinsic value can be defined

simply: It is the discounted value of the cash that can be

taken out of a business during its remaining life.

This definition may be simple for Buffett, but its clearly

not that simple for the rest of the investment community,

who bang their heads against the wall trying to play catch-

up with his successes.

What does the future hold in the eyes of this great

investment visionary? Buffett is concerned about the trade

deficit and the decline of the value of the U.S. dollar.

In a recent interview, he said: It seems to me that a

$618 billion trade deficit, rich as we are, strong as thiscountry is, well, something will have to happen that will

change that. Most economists will still say some kind of

soft landing is possible. I dont know what a soft landing is

exactly, in how the numbers come down softly from levels

like these.

On risky trading, Buffett is very clear: Minimize risk.

There are more people [like hedge-fund managers] that go

to bed at night with a hair trigger than ever before, he

says. Its an electronic herd, they can give vent to decisions

that move billions and billions of dollars with the click of akey. There will be some kind of stampede by that herd.

When you have far greater sums than ever before, in one

asset class after another, that are held by people who

operate on a hair-trigger mechanism, then they lend

themselves to more explosive outcomes. People with very

short time horizons with huge sums of money, they can all

try to head for the exits at the same time. The only way you

can leave your seat in burning financial markets is to find

someone else to take your seat, and that is not always easy.

Warren Buffetts Eight Top

Investment Plays

So here we are.

Now, thanks to our Financial Intelligence Report

special report Warren Buffetts 8 Best Investment Plays

for 2005, you know what Warren Buffett looks for inpicking great companies and great investment plays.

Its a combination of tried-and-true value selections and

some contrarian bets on higher-risk investment vehicles

like derivatives and global currencies.

Lets take a look at the most recent additions to the

Buffett portfolio and see if they dont make sense for you:

1. Brewskies and Broadband. True to form, Berkshire

Hathaways 2005 portfolio included a stable of Buffett

standbys like Coca-Cola, American Express and Gillette.Newer wrinkles include a big bet on media giant Comcast

(Buffett & Co. now own 10 million shares); a significant

new investment in Anheuser-Busch, buying 200 million

shares; and a big sell-off in sports consumer apparel

behemoth Nike.

The Anheuser-Busch play comes straight out of the

Buffett playbook. The self-styled King of Beers is a

consumer giant mainstay with a track record of strong sales

no matter how the underlying economy performs. Simply

put, people drink Budweiser in good times and bad,

roughly in the same quantities. Its the kind of well-

managed, dependable company to which Buffett is known

to gravitate. He gave no explanation for his sell-off of

Nike (cutting Berkshires holdings from 6 million to 2.5

million) he typically does not comment on specific

trades. Buffett also sold his entire 13.5-million-share stake

in hospital operator HCA and sold smaller stakes in

Wells Fargo and information management company

Iron Mountain.

Two other potential Buffett picks are iShares Dow Jones

US Utilities and Sysco. Each offers a unique sense of contrastto the standard Buffett investment philosophy. While neither

is currently included in Berkshire's portfolio, both stocks

possess the qualities Buffett generally looks for in his picks.

The iShares ETF offers shareholders steady returns from the

utility sector while Sysco, a giant in food distribution and

marketing, parallels Buffetts value philosophy. Sysco is a

well-managed company that has a solid foothold in its

market. It also has low debt and lots of cash to fuel increased

company growth.


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sink, you can easily invest in foreign currencies through

venues like Evergreen Bank. As Buffett tends to favor the

euro, a good fund thats bearish on the dollar and strong

on the euro is the Merk Hard Currency Fund, a mutual

fund that invests in a basket of hard currencies assembled

to protect against the fall of the dollar.

(www.merkinvestments.com)

5. If You Cant Beat Em, Join Em. In mid-June 2005,

shares of China Life Insurance Co., Ltd. jumped by 4.9

percent, driven by rampant rumors that Buffett had bought

a large quantity of China Life ADRs. Hong Kong media

reported that he had acquired 8.7 million ADRs in China

Life in May, and had also bought another 10 million ADRs

in early June. Buffett reportedly has plans to become a

strategic investor in China Life. Rumors are still mulling

about that indicate he will purchase an additional 6.3

million ADRs in the company, raising the total to 25million. Buffett has bought shares in Chinas oil giant

PetroChina Company Limited as well, earning over HKD

8 billion from the deal.

Clearly, Buffett is bullish on all things China.

6. The Real Estate Bubble. Buffett owns the same

house in Omaha that hes owned since the 1950s. He also

recently sold a house he owned in Laguna Beach in

Southern California.

He agrees with many of the economic gurus that the

U.S. real estate market is in a state of disequilibrium andthat it could be a dangerous place to sink your money.

The real estate matter was a topic Buffett publicly

discussed at his annual board meeting with his longtime

business partner Charlie Munger.

Heres how the exchange went:

Buffett: A lot of the psychological well being of the

American public comes from how well theyve done with

their house over the years. If indeed theres been a bubble,

and its pricked at some point, the net effect on Berkshire

might well be positive [because the companys financial

strength would allow it to buy real-estate-related businesses

at bargain prices].

Certainly at the high end of the real estate market in

some areas, youve seen extraordinary movement. People

go crazy in economics periodically, in all kinds of ways.

Residential housing has different behavioral characteristics,

simply because people live there. But when you get prices

increasing faster than the underlying costs, sometimes there

can be pretty serious consequences.

Munger: You have a real asset-price bubble in places like

parts of California and the suburbs of Washington, D.C.

Buffett: I recently sold a house in Laguna for $3.5

million. It was on about 2,000 square feet of land, maybe

a twentieth of an acre, and the house might cost about$500,000 if you wanted to replace it. So the land sold for

something like $60 million an acre.

Munger: I know someone who lives next door to what

you would actually call a fairly modest house that just sold

for $17 million. There are some very extreme housing price

bubbles going on.

Buffett: (on the trade deficit and the value of the dollar)

That really is the $64,000 question. It seems to me that a

$618 billion trade deficit, rich as we are, strong as this

country is, well, something will have to happen that willchange that. Most economists will still say some kind of

soft landing is possible. I dont know what a soft landing is

exactly, in how the numbers come down softly from levels

like these.

There are more people [like hedge-fund managers] that

go to bed at night with a hair trigger than ever before, its

an electronic herd, they can give vent to decisions that

move billions and billions of dollars with the click of a key.

We will have some exogenous event, we will have that.

There will be some kind of stampede by that herd.

When you have far greater sums than ever before, in one

asset class after another, that are held by people who operate

on a hair-trigger mechanism, then they lend themselves to

more explosive outcomes. People with very short time

horizons with huge sums of money, they can all try to head

for the exits at the same time. The only way you can leave

your seat in burning financial markets is to find someone

else to take your seat, and that is not always easy.

Munger: The present era has no comparable referent in

the past history of capitalism. We have a higher percentage

of the intelligentsia engaged in buying and selling pieces of

paper and promoting trading activity than in any past era.

A lot of what I see now reminds me of Sodom and

Gomorrah. You get activity feeding on itself, envy and

imitation. It has happened in the past that there came

bad consequences.

Buffett: I have no idea on timing. Its far easier to tell

whatwill happen than when it will happen. I would say

that what is going on in terms of trade policy is going to



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have very important consequences.

Munger: A great civilization will bear a lot of abuse,

but there are dangers in the current situation that threaten

anyone who swings for the fences.

Buffett to Munger: What do you think the end

will be?Munger: Bad.

So, the Sage says be careful with residential real estate. A

host of companies and sectors will be hit by a real estate

bust, so choose your investments carefully.

7. Equities, Not Bonds. In his 2005 address toBerkshire Hathaway shareholders, Buffett explained why

his portfolio exposure to bonds is minimal and why his

exposure to stocks is maximized.

If you had to make a choice between long-term bonds

at around 4.5 percent and equities for the next 20 years, I

would certainly prefer equities, he told the audience of

22,000 shareholders. But if people think

they can earn more than 6 to 7 percent a

year, theyre making a big mistake. I dont

think were in bubble-type valuations in

equities or anywhere close to bargain

valuations.

If you told me I had to go away for 20

years, I would rather take an index fund

over long-term bonds. Youll get a chance todo something extremely intelligent with

your money in the next few years. But right

now there doesnt seem to be a clear enough direction to

conclude anything dramatic.

8. Baby, You Cant Drive My Car. Buffett is extremely

bearish on auto stocks, primarily because of the heavy

pension and benefit liabilities the big American car makers

are paying to workers. Says Buffett, both GM and Ford

have a steep legacy cost structure, with contracts put in

place decades ago, that make it very difficult for them tobe competitive in todays world. Just imagine if theyd

been made to sign contracts that made them pay several

more tons per steel than their competitors have to, people

would feel thats untenable, he adds. [GM and Ford]

have to pay contracts that give them immense obligations

for health-care and retirement annuities at high cost. Their

competitors can buy steel and other commodities no

cheaper, but the competitors dont have nearly the same

level of costs for these [health-care and retirement

expenses]. Someone once asked Bill Buckley what he

would do if he actually won his race for New York mayor

back in the 1960s and he said, First thing Id do is ask for

a recount. Well, thats what Id do at GM. Youve got a

$90 billion pension fund, $20 billion set aside for health-

care liabilities, and the whole equity value of the company

is $14 billion. Thats not sustainable. Something willhave to give.

Lunch and Buffetts Latest

How about lunch with the sage of Omaha? Every

year since 2000, Warren Buffett has to ask this question

and has to wait for the gavel to come down in an auction

to find out the answer. The lunches began after Buffetts

wife, Susan, introduced him to Williams Glide Memorial

United Methodist Church. In an effort to help the churchs

Glide Foundation a San Francisco non-profit

organization that offers programs for the poor, hungry andhomeless Buffett donates a lunch to be auctioned off to

the highest bidder each year.

The billionaire Buffett hosts the auction

winner and up to seven friends for lunch in

Omaha, Nebraska, where Buffett lives and

works, or in New York City. In 2003, the

auctions were moved from San Francisco to

the ether world via eBay, where they have

become an annual online pilgrimage for the

Buffett faithful.

People looking to learn from the wise one

bid every year, like Mohnish Pabrai, a

managing partner of Pabrai Investment Funds in Lake

Forest, California, and Singapore resident Jason Choo, who

won the auction in 2004 with a $250,000 price tag. Pabrai

has bid on the lunches for three years and lost every time

and as a passionate disciple of Buffett for more than a

decade, he plans to bid again next year.

The 2005 auction, brought in a winning bid of

$351,100, all of which goes to the Glide Foundation.What does the winner get for his $350,000 lunch? Somepeople consider it a cost-effective way to get one-on-onetime with the master, and the opportunity to set theagenda for the conversation. Says Buffett about what nextyears winner can expect for their investment: Well talkabout anything you want to talk about. Except I wont tellwhat were buying. I dont tell anyone that.

So make sure youre ready to place your bid for lunchwith the master next June on eBay.

Tough Old BarnacleBuffett clung to his

value investingstrategy like a barnacleto the hull of a boat.Once he was asked to

suggest the best time tosell stock and

famously replied,Never.


10/12


In the meantime, FIR can tell you about some of

Buffetts latest maneuvers.

We have been following Warren Buffett like a hawk this

year, and we will continue to closely monitor the

investment savants movements.

Heres the latest: The Oracle of Omaha is apparentlytrying to grab a piece of insurance giant Lloyds of London

and thats a controversial move considering the industry

has struggled in 2005.

So what does the visionary Buffett know that the rest of

us dont?

In this case, the details are in the back story.

Sources tell the London Telegraph that Buffett has

approached at least one managing partner at Lloyds,

offering money for a share in next years business.

Nigel Hanbury, chief executive of Hampden Agencies,

tells the paper that Buffett looks poised to pour more

money into insurance in 2006.

Premiums are expected to be very good for 2006 and

probably 2007, he says. The price of insurance for

energy risks like oil rigs is expected to soar by 400%, and

areas that have been hit by hurricanes could see premiums

up by 100%.

In addition, it was recently disclosed that Buffetts

Berkshire Hathaway holds a 5.7% stake in Anheuser-Busch, making it the largest shareholder.

As of October 2005, Berkshire held almost 45 million

shares of the worlds largest brewer, as well as close to 20

million shares in super-retailer Wal-Mart. Buffett had long

sought to keep these holdings secret in order to defend

against copycat investing.

An American Icon and a Role Model

for InvestorsThey dont make Americans like Warren Buffett anymore.

Tough, plain-spoken, and with a genuine concern

toward average investors the little guys getting a fair

shot on the stock market, Buffett is a real man of the

people, much more Main Street than Wall Street.

Hes famous for berating Wall Street on its emphasis of

churn-and-burn brokerage mindset, and has publicly stated

that every American investor would be better off if he or

she executed only 20 stock trades in their entire lives. Hehas also pounded the table a time or two on the subject of

personal liberty and the importance of Americans taking

responsibility over their own lives.

Warren Buffett is the quintessential American success

story. What makes him unique is that he genuinely believes

there is a success story in every American, just waiting to

blossom.

If, that is, the owners of those success stories spend a lot

of time doing what Buffett does: digging for those cigar

butt companies that offer value to discerning investors.To Buffett, its value that counts and hes spent the

past 40 years proving just that.


11/12


A Snapshot of the Largest Berkshire Hathaway Holdings, December 31, 2004

Berkshire Hathaway portfolio

Company 2004Q3 Shares 2004Q4 +/-%

American Express (AXP, news, msgs) 151,610,700 151,610,700 0%

American Standard (ASD, news, msgs) 10,497,900 10,497,900 0%

H&R Block (HRB, news, msgs) 14,350,600 14,350,600 0%

Coca Cola (KOK, news, msgs) 200,000,000 200,000,000 0%

Comcast (CMCSA, news, msgs) 5,000,000 10,000,000 100%

Comdisco (CDCO, news, msgs) 1,489,628 1,509,433 1%

Costco Wholesale (CSCO, news, msgs) 5,254,000 5,254,000 0%

Dean Foods (DF, news, msgs) - 375,500 New

First Data Corp. (FDC, news, msgs) 8,000,000 8,000,000 0%

Gannett (GCI, news, msgs) 3,447,600 3,447,600 0%

Gap Inc. (GPS, news, msgs) 15,000,000 15,434,243 3%

The Gillette Co. (G, news, msgs) 96,000,000 96,000,000 0%

HCA Inc. (HCA, news, msgs) 13,500,000 - -100%

Iron Mountain (IRM, news, msgs) 6,935,750 5,000,000 -28%

M&T Bank Corp. (MTB, news, msgs) 6,708,760 6,708,760 0%

Moodys (MCO, news, msgs) 24,000,000 24,000,000 0%

Mueller Industries (MLI, news, msgs) 1,361,900 1,361,900 0%

Nike (NKE, news, msgs) 6,000,000 2,500,000 -58%

Outback Steakhouse (OSI, news, msgs) 1,818,800 1,818,800 0%

Petrochina (PTR, news, msgs) 659,000 659,000 0%

Pier 1 Imports (PIR, news, msgs) 8,000,000 8,000,000 0%

Sealed Air (SEE, news, msgs) 1,113,300 1,113,300 0%

Servicemaster (SVM, news, msgs) 5,611,600 5,611,600 0%

Shaw Communications (SJR, news, msgs) 22,000,000 22,000,000 0%

Torchmark (TMK, news, msgs) 2,029,379 2,036,979 0.37%

USG Corp. (USG, news, msgs) 6,500,000 6,500,000 0%

Washington Post Co. (WPO, news, msgs) 1,727,765 1,727,765 0%

Wells Fargo (WFC, news, msgs) 56,448,380 54,483,520 -3.5%

Wesco Financial (WSC, news, msgs) 5,703,087 5,703,087 0%

Source: SEC filings

* Berkshire Hathaway does not publicly announce the dates of trades until December 31 of each calendar year.

** This list does not include all companies in the Berkshire portfolio.


12/12


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Issue 1 (Sept 03): Crisis Investing: Protect & Grow Your WealthIssue 2 (Oct 03): High-Yield Dividend Stocks

Issue 3 (Dec 03): Protecting Yourself Against the Next Market Decline

Issue 4 (Jan 04): Sector Investing: How To Beat the S&P Every Year

Issue 5 (Feb/Mar 04): Gold: The Ultimate Insurance

Issue 6 (Apr 04): Oil: The Critical Key To the World Economy

Issue 7 (May 04): The Other Warren Buffett: Meet Walter Schloss

Issue 8 (Jun 04): The Dangerous Dollar: Protecting Your Wealth By Investing Abroad

Issue 9 (Jul 04): David Tice: Protect Yourself From the Coming Bear Market

Issue 10 (Aug 04): Interest Rates and Bonds: What You Need to Know

Issue 11 (Sept 04): The Baby Boomer Crisis Looms: Prepare Before Its Too LateIssue 12 (Oct 04): The Coming Baby Boom Storm: Part II, The Pension Crisis Is Already Here

Issue 13 (Nov 04): Royalty Trusts Pay High Yields

Issue 14 (Dec 04):Wayne Rogers Beats the Market So Can You

Issue (Jan 05): 2005: Bushs Boomlet

Issue (Feb 05): Sir John Templeton: Reveals the Future of the Stock Market, Real Estate and Life

Issue (Mar 05): Cash In On the Commodity Bull Market

Issue (Apr 05): The Inflation Lie

Issue (May 05): Switzerland: Still the Ultimate Investment

Issue (June 05): Sector Investing: Navigate the Coming Bear with Profit

Issue (July 05): Special FIR Briefing With General Alexander HaigIssue (Aug 05):Warren Buffetts 8 Best Investment Plays for 2005

Issue (Sept 05): Sector Riches in Biotech and Healthcare

Issue (Oct 05): Goodbye, Mr. Greenspan: How You Can Profit From His Recession

Issue (Nov 05): The Coming Gold Bull Market

Issue (Dec 05): 2006 FIRInvestment Outlook

Buffett Sp Report

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