Buffett

"Two Interesting Patterns For those interested in a deeper dive into Buffett’s stock market investing, two other patterns are worthy of notice. The first is a deep-rooted contrarianism. Buffett has frequently cited Benjamin Graham’s “Mr. Market” analogy, in which “an obliging fellow named ‘Mr. Market’ shows up every day to either buy from you or sell to you . . . the more manic-depressive this chap is, the greater the opportunities available to the investor.”a Buffett systematically buys when Graham’s Mr. Market is feeling most blue. The majority of Berkshire’s major public market investments originated in some sort of industry or company crisis that obscured the value of a strong underlying business. The following table demonstrates this pattern. The second pattern is timing investments to coincide with significant management or strategy changes. Buffett uses the analogy of a pro-am golf event to describe these investment opportunities, which arise when a company with an excellent “franchise-type” business invests in other businesses with lower returns: “Even if all of the amateurs are hopeless duffers, the team’s best-ball score will be respectable because of the dominating skills of the professional.”b When, however, Buffett sees that a new management team is removing the amateurs from the foursome and returning focus to the company’s core businesses, he pays close attention, as the preceding table demonstrates. a. Berkshire Hathaway annual reports, 1977–2011. b. Berkshire Hathaway annual reports, 1989."

"The CEOs who run Berkshire’s subsidiary companies simply never hear from Buffett unless they call for advice or seek capital for their businesses. He summarizes this approach to management as “hire well, manage little” and believes this extreme form of decentralization increases the overall efficiency of the organization by reducing overhead and releasing entrepreneurial energy.13"

"Buffett spends his time differently than other Fortune 500 CEOs, managing his schedule to avoid unnecessary distractions and preserving uninterrupted time to read (five newspapers daily and countless annual reports) and think. He prides himself on keeping a blank calendar, devoid of regular meetings. He does not have a computer in his office and has never had a stock ticker."

"Buffett had been attracted to Berkshire by its cheap price relative to book value. At the time, the company had only a weak market position in a brutally competitive commodity business (suit linings) and a mere $18 million in market capitalization."

"Buffett (with the exception of a few small, early buybacks) is the only CEO in this book who did not buy back significant amounts of his company’s stock. Despite admiring and encouraging the repurchases of other CEOs, he has felt buybacks were counter to Berkshire’s unique, partnership-like culture and could potentially tamper with the bonds of trust built up over many years of honest, forthright communications and outstanding returns."

"Buffett’s pattern of investment at Berkshire has been similar to the pattern of underwriting at his insurance subsidiaries, with long periods of inactivity interspersed with occasional large investments. The top five positions in Berkshire’s portfolio have typically accounted for a remarkable 60–80 percent of total value. This compares with 10–20 percent for the typical mutual fund portfolio. On at least four occasions, Buffett invested over 15 percent of Berkshire’s book value in a single stock, and he once had 40 percent of the Buffett Partnership invested in American Express. The other distinguishing"

"Buffett and Sarbanes-Oxley Buffett’s approach to corporate governance is also unconventional, contradicting many of the dictates of the Sarbanes-Oxley legislation. Buffett believes that the best boards are composed of relatively small groups (Berkshire has twelve directors) of experienced businesspeople with large ownership stakes. (He requires that all directors have significant personal capital invested in Berkshire’s stock.) He believes directors should have exposure to the consequences of poor decisions (Berkshire does not carry insurance for its directors) and should not be reliant on the income from board fees, which are minimal at Berkshire. This approach, which leaves him with a small group of “insiders” by Sarbanes-Oxley standards, provides a stark contrast with most public company boards, whose members rarely have meaningful personal capital invested alongside shareholders, whose downsides are limited by insurance, and whose fees often represent a high percentage of their total income. Which approach leads to better alignment with shareholders?"

"Buffett came to the CEO role without any relevant operating experience and consciously designed Berkshire to allow him to focus his time on capital allocation, while spending as little time as possible managing operations, where he felt he could add little value. As a result, the touchstone of the Berkshire system is extreme decentralization. If Teledyne, Capital Cities, and the other companies in this book had decentralized management styles and philosophies, Berkshire’s is positively anarchic by comparison."

"Buffett can perhaps best be understood as a manager/investor/philosopher whose primary objective is turnover reduction. Berkshire’s many iconoclastic policies all share the objective of selecting for the best people and businesses and reducing the significant financial and human costs of churn, whether of managers, investors, or shareholders."

"To Buffett and Munger, there is a compelling, Zen-like logic in choosing to associate with the best and in avoiding unnecessary change. Not only is it a path to exceptional economic returns, it is a more balanced way to lead a life; and among the many lessons they have to teach, the power of these long-term relationships may be the most important."

"Buffett stressed the potential impact of this skill gap, pointing out that “after ten years on the job, a CEO whose company annually retains earnings equal to 10 percent of net worth will have been responsible for the deployment of more than 60 percent of all the capital at work in the business.”"

"When Buffett acquired National Indemnity in 1967, he was among the first to recognize the leverage inherent in insurance companies with the ability to generate low-cost float. The acquisition was, in his words, a “watershed” for Berkshire. As he explains, “Float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money.”2 This is another example of a powerful iconoclastic metric, one that the rest of the industry largely ignored at the time."

"Whenever Buffett buys a company, he takes immediate control of the cash flow, insisting that excess cash be sent to Omaha for allocation. As Charlie Munger points out, “Unlike operations (which are very decentralized), capital allocation at Berkshire is highly centralized.”"

"Buffett’s exceptional results derived from an idiosyncratic approach in three critical and interrelated areas: capital generation, capital allocation, and management of operations."

"The company’s primary source of capital has been float from its insurance subsidiaries, although very significant cash has also been provided by wholly owned subsidiaries and by the occasional sale of investments. Buffett has in effect created a capital “flywheel” at Berkshire, with funds from these sources being used to acquire full or partial interests in other cash-generating businesses whose earnings in turn fund other investments, and so on."

"As Buffett said when he finally closed Berkshire’s textile business in 1985, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”6"

"In both insurance and investing, Buffett believes the key to longterm success is “temperament,” a willingness to be “fearful when others are greedy and greedy when they are fearful.”"

"Buffett believes that exceptional returns come from concentrated portfolios, that excellent investment ideas are rare, and he has repeatedly told students that their investing results would improve if at the beginning of their careers, they were handed a twenty-hole punch card representing the total number of investments they could make in their investing lifetimes."

"Buffett evolved an idiosyncratic strategy for his insurance operations that emphasized profitable underwriting and float generation over growth in premium revenue. This approach, wildly different from most other insurance companies, relied on a willingness to avoid underwriting insurance when pricing was low, even if short-term profitability might suffer, and, conversely, a propensity to write extraordinarily large amounts of business when prices were attractive."

"Anyone who hopes to follow Buffett’s model must be willing to take an active role, ei¬ ther as a corporate insider or by pushing companies from outside to ex¬ ploit their assets more aggressively. It is also important to understand Buffett’s reliance, throughout his career, on outright purchases of compa¬ nies (especially insurance companies), as opposed to becoming a minority sharehold"

"Buffett has stood resolute in the face of personal criticism when money was at stake."

"In 1989, Buffett’s investment vehicle, Berkshire Hathaway, invested in US Air through a specially designed convertible preferred stock. The airline was attempting to create a nationwide route system connecting midsized cities, but investors were not yet convinced that the strategy would succeed. Almost as soon as Buffett bought the stock, a fare war erupted. The following year, air travel plummeted in response to the out¬ break of the Persian Gulf War. With the benefit of hindsight, the previously cheap valuation of USAir began to look like awareness that if revenues fell, the airline would be hammered by its high employee costs. Over the next few years, US Air racked up $3 billion in losses. The carrier also suspended the dividend on Berkshire Hathaway’s convertible"

"Buffett built a vast industrial and financial empire on the founda¬ tion of a struggling textile company. On May 10, 1965, the day he gained control, Berkshire Hathaway’s closing share price was $ 18. The stock ended 1998 at $70,000 a share. (One of many conventional ideas that Buffett rejects is stock splits. “I’ve never really felt,” he explains, “that if I went into a restaurant and said, ‘I want two hatchecks instead of one for my hat’ I’d really be a lot better off.”)52 Massive wealth has rained down on Buffett’s early investors, as well as entrepreneurs who sold him their companies for stock. Forbes has estimated that there are scores of families that own $100 million or more of Berkshire Hathaway shares.53"

"In 1961, the investment partnerships managed by Buffett had total funds under management of just $5 million. Risking one-fifth of the en¬ tire portfolio, he acquired 70 percent of Dempster Mill Manufacturing, a rundown windmill and farm implement manufacturer based 90 miles south of Omaha. After appointing himself chairman, Buffett imported an operating manager from Los Angeles. His man quickly improved Demp¬ ster’s profitability by trimming inventory, slashing expenses, and laying off workers. By 1963, Buffett was able to sell the company for a net gain of $2.3 million."

"As Buffett points out, there is a serious limitation to Graham’s ap¬ proach: It is not always possible to liquidate a company immediately and pocket the difference between its inherent value and its low stock price. While the clock ticks away, moreover, the company may be losing money (a good reason why its stock is depressed in the first place). The outcome is a long wait for a disappointing payoff, which translates into a mediocre return on the supposed bargain purchase.68 A further problem is that al¬ though attractive “value stocks” are plentiful after a severe downturn such as U.S. stocks suffered in 1973-1974, they can be extremely hard to find in better times. In short, readers should not expect to reap billions by per¬ sonally investing in stocks on the basis of Graham’s statistical measures."

"The financial leverage inherent in these subsidiaries produced a staggeringly high compounded growth rate in Berkshire Hathaway’s secu¬ rities portfolio. Leverage also proved invaluable whenever Buffett spotted an attractive opportunity to acquire a company whole, notwithstanding the control premium62 ordinarily associated with such transactions. The purchasing power of Berkshire Hathaway’s equity was multiplied by the availability of insurance reserves several times as great. (Buffett also built up the company’s investment portfolio by investing the “float” repre¬ sented by funds earmarked for future redemption of Blue Chip trading stamps.)"

"However, ex ante it is often very difficult to have much assurance in sizing potential N and δ. So you are left with a situation that sometimes requires significant up front capital but an uncertain ability to monetize. This for example has plagued Twitter. Usually management gets the blame but we are back to Buffett’s observation: “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”25"

"On September 29, 2008, Buffett's investment flagship Berkshire Hathaway announced that its subsidiary MidAmerican Energy had signed a strategic investment and share subscription agreement with BYD. According to the agreement, Buffett would purchase 225 million shares of BYD at HK$8 per share, approximately 10% of BYD's shares after the offering. This was Buffett's first long-term strategic investment in a Chinese private enterprise, and he also became BYD's largest overseas shareholder. Amidst a global financial turmoil and the continuous shrinkage of equity investments, the "Stock God" Buffett chose to invest in BYD, the deep implications of which are worth pondering."

"Wang Chuanfu did not get too excited as his team, after evaluating the investment proposal, thought that the equity Buffett would hold was t"

"oo large and did not match the company’s own investment development plans, so he declined Buffett’s generous offer. Wang Chuanfu’s refusal surprised and disappointed Buffett. After further negotiations with Wang Chuanfu, Buffett agreed to reduce the investment to $230 million, and the two parties ultimately reached an investment and share subscription agreement. This broke Buffett’s record for the smallest investment amount, arguably making it the second time the "Stock God" made an exception for a Chinese company."

"When talking about why he was optimistic about BYD, Buffett pointed out that he was deeply impressed by Wang Chuanfu's past management achievements. After Buffett's investment, BYD's stock price began to rise rapidly, soaring all the way beyond 60 Hong Kong dollars, with Buffett's investment yield exceeding 500%. The stunning upward trajectory not only made Buffett hugely profitable but also turned Wang Chuanfu into an influential figure in the industry."

"GEICO was a Texas brainstorm from the 1930s. Its creator, Leo Goodwin, added two brilliant features that distinguished this auto insurer from the white bread version. GEICO sold policies by mail, cutting out the expensive sales brigade. It only sold to government geeks. Goodwin once read a study that showed federal, state, and local bureaucrats caused fewer car wrecks than blue-collar or corporate types. A bureaucrat might be boring as a date, but he or she was a dreamy client for an insurance company.Lower expenses and fewer accident claims formed a winning combination for GEICO. Ben Graham figured this out and bought half-ownership in the company in 1947. GEICO soon went public, so anybody could buy the stock by 1951, the year Buffett got interested in it. One Saturday that year, Graham's star pupil hopped a train from New York to Washington to behold GEICO in person. Finding the place locked, Buffett banged the door and roused the janitor. The 23-year-old grad student talked his way around the janitor and into a four-hour interview with the CEO."

"the eponymous founders of Bergman & Beving, always had a distinct focus on profitability. This focus remained when the company later pursued ambitious growth through acquisitions while adopting a profitability benchmark, which involved maintaining profits divided by working capital (P/WC) at levels exceeding 45%. Put simply, every dollar allocated to net working capital had to produce a return surpassing 45%, akin to the mindset behind Buffett’s $1 Test: “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.”21 This target not only generated a self-sustaining business model that enhanced per-share value creation, but also provided resilience in"

"Buffett contrasted this with Berkshire, emphasizing how the conglomerate structure can enhance the rational allocation of capital: it lets capital flow to wherever it will earn the best return. For Buffett, the conglomerate structure, “if used judiciously, is an ideal structure for maximizing long-term capital growth.”"

"Part of the benefit of creating a checklist is the process of writing down your ideas. I have always loved the point Buffett made about the importance of making the effort to actually put your ideas in writing. In Buffett’s view, if you cannot write it down, you have not thought it through."

"Tisch eventually became one of a group that joined Buffett every two years on a one-week trip for business leaders and investors. Oth- ers included the likes of Tom Murphy of newspaper publisher Capital Cities, Katharine Graham of The Washington Post, and William Ruane, whose investment fund focused on media stocks; they met in places such as Aspen, Colorado, or en route to Britain via the Queen Elizabeth II. “Half the time we discuss the media and media stocks and investments,” Tisch said of these trips. “Certain things in the investor world when you don’t have a working knowledge, you sort of shy away. When you get a familiarity with the subject, it makes it easier to take a position.”"

"The envelope was the beginning of a close friendship between the two soon-to-be giants of Wall Street who independently adopted strikingly similar investment principles around the same time: buy the shares of undervalued stocks with great long-term potential, con- tribute to strong management, and hold the stock indefinitely. They weren’t speculators—those supposedly savvy day traders who jump in and out of stocks at the expense of the market’s compulsive gamblers. Buffett and Tisch bought companies, not stocks. Culturally, they were vastly different. Buffett was an Omaha, Nebraska, Midwesterner; Tisch, the Brooklyn-born son of a Russian immigrant. But as investors they were nearly indistinguishable, moving down parallel paths to- ward major investments in the network television business."

"The news had sent Salomon’s shares into a tailspin. Buffett s belief that the selling was overdone and that the firm’s ability to generate cash essentially was unchanged gave Tisch two powerfully compelling reasons to buy: ( 1 ) it was a deeply discounted, valuable asset, and (2) it might help a friend whose judgment had yielded Tisch millions of dollars."

"No. I sat down at my desk and actively imagined that I was Buffett. I imagined what the first thing would be that he would do if he were in my shoes, sitting at my desk."

"He floored Mohnish by saying that he’d sent the report to Charlie Munger and Bill Gates. Indeed, when Buffett spoke to Fox News about our lunch, he specifically mentioned Mohnish’s charity, remarking, “He thinks as well about philanthropy as he does about investments."

"Buffett wasn’t aware that he was having this impact on me, but he set such a great example with his own fee structure that he made me want to treat my own shareholders more fairly. This was part of the power of the mere expectation of meeting him. There’s a joke on Wall"

"Buffett, Ruane Cunniff, and Tweedy, Browne."

"I also wanted to copy Buffett by allowing investors to redeem their money only once a year. This helps the fund manager to invest for the long term, which benefits his shareholders. It also helps them psychologically because they think less often about how the fund is doing and whether to sell. After all, inaction and patience are almost always the wisest options for investors in the stock market."

"clearheaded investors like Einhorn, Buffett, Munger, and Burry had helped to keep my eyes wide open."

"I’d started to play bridge around 2007, prompted by Mohnish, who is an ardent player, and by the example of Buffett, Munger, and Bill Gates, all of whom are bridge fanatics. Initially, I joined the Manhattan Bridge Club and started taking lessons. Once I’d learned the basics, I quickly realized that bridge was not only a pleasurable diversion but would help to hone my skills in life, not to mention investing."

"As a result, I met Lou Simpson, whom Buffett had handpicked to invest GEICO’s money in stocks and whom he once described as “the best I know.”"

"Here was a man who, like Buffett, did his job with every ounce of his being."