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

Buffett, the manBuffett, the man

Lifestyle Lifestyle Salary $100,000 (old figure)Salary $100,000 (old figure) Lived in same house for 40 yearsLived 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 CokeAge 6 – peddled Coke Age 11 – purchased first equityAge 11 – purchased first equity Age 14 – bought 40 acres and leased it outAge 14 – bought 40 acres and leased it out Age 16 – rented out used pinball machinesAge 16 – rented out used pinball machines

CaveatCaveat

Hagstrom’s New Economy?Hagstrom’s New Economy? He says yes but may defeat own argumentHe says yes but may defeat own argument Book printed in 2001 during bubble new Book printed in 2001 during bubble new

paradigm – multiples highparadigm – multiples high Information is accessible to all – problem is Information is accessible to all – problem is

“understanding”“understanding” Businesses still need profits to stay in businessBusinesses still need profits to stay in business Investors still use these profits to determine Investors still use these profits to determine

valuevalue Fundamental research (kick the tires) has been Fundamental research (kick the tires) has been

replaced with black boxes (LTCM)replaced with black boxes (LTCM)

The partnership (1957-69)The partnership (1957-69)

Dissolved partnership Dissolved partnership (1957-69)(1957-69)

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

Berkshire Hathaway, Inc.Berkshire Hathaway, Inc.

A textile mill purchased in 1962A textile mill purchased in 1962 Buffett still owns over a third of the Buffett still owns over a third of the

sharesshares Look at some of the holdingsLook at some of the holdings

Operating CompaniesOperating Companies

InvestmentsInvestments

PhilosophyPhilosophy ““Your goal as an investor should be Your goal as an investor should be

simply to purchase, at a rational price, simply to purchase, at a rational price, a part interest in an easily understood a part interest in an easily understood business whose earnings are virtually business whose earnings are virtually certain to be materially higher, five, certain to be materially higher, five, ten, and twenty years from now. Over ten, and twenty years from now. Over time, you will find only a few time, you will find only a few companies that meet those standards companies that meet those standards – so when you see one that qualifies, – so when you see one that qualifies, you should buy a meaningful amount you should buy a meaningful amount of stock.” -- 1996 annual reportof stock.” -- 1996 annual report

So what does this mean?So what does this mean?

Analyze stocks as businessesAnalyze stocks as businesses What is value? and Is value > price?What is value? and Is value > price?

Concentrated PortfolioConcentrated Portfolio Most diversification needs only 15 Most diversification needs only 15

namesnames Investment vs. SpeculationInvestment vs. Speculation

Not just facts and figures, but how they Not just facts and figures, but how they combinecombine

AcquisitionsAcquisitions

Coca-ColaCoca-Cola Perceived as stodgy food company in 1980sPerceived as stodgy food company in 1980s By 1985 price went up three-foldBy 1985 price went up three-fold

Washington PostWashington Post Purchased at height of bear market (1973)Purchased at height of bear market (1973)

GEICOGEICO Buffett bought it when others thought was Buffett bought it when others thought was

going bankrupt (1976)going bankrupt (1976) Recent = Business Wire, Tesco, Iscar Recent = Business Wire, Tesco, Iscar

Metals, Russell, ConocoMetals, Russell, Conoco

Take-awaysTake-aways

Long term value < priceLong term value < price HonestyHonesty Know, trust, and understandKnow, trust, and understand Focus Focus Let’s talk teams…..Let’s talk teams…..