Warren Buffett- “the Sage of Omaha”

Ping Hu
Matt Neeve
Olena Olenchuk
Rachel Caldie
 Agenda

 Bio
 Management style
 Investment approach
 Methodology
 Biography/History
 Bought first stock at age 11

 Invested savings into farmland

 Had pinball machine business and

sold for a profit

 Attended Columbia University

where Ben Graham was a professor at
the time

 Worked for Ben Graham for $12,000

a year
Biography/History
 Opened his own partnership in Omaha

 By 1961, he had 5 partnerships

 In 1962, he merged partnerships to make

Buffett Partnerships, Ltd.

 Bought stock for Berkshire Hathaway at $8

 Bought Amex stock after fraud scandal

 Took control of Berkshire in 1965

 Biography/History
 Closed partnership in 1969 and
worth millions personally

 In 1974 lost over 50% of wealth

 In 1981 Buffett and Munger

create Berkshire Charitable
Contribution plan

 Crash of ‘87 lost $342 million

personally
 Biography/History
 Buffett worth $44 billion today
 Berkshire has $248 billion in assets
 CEO
 Charles Munger, vice-chairman
 Met in 1959
 Goal to increase 15% a year
 philanthropy

 85% of wealth given to philanthropy

 Bill and Melinda Gates Foundation
 Health and learning
 $1.5 billion annually
 The rest to foundations run by his
children and founded by late wife
 Management Tenets

Buffett’s three management tenets concern the

evaluation of management quality

 Is management rational?
 Is management candid?
 Does management resist the institutional imperative?
 Rationality
 If a company generates high returns on equity, the
duty of management is to reinvest those earnings
back into the company, for the benefit of
shareholders

 If the earnings cannot be reinvested at high rates,

management has three options:
 ignore the problem and continue to reinvest at below-average rates
 buy growth
 return the money to the shareholders, who then might have a
chance to reinvest the money elsewhere at higher rates

 In Buffett’s mind, only one choice is rational, that is

option 3
 Candor
 Buffett believes that a manager who
confesses mistakes publicly is more likely to
correct them

 Managers who discusses the failures of the

company with shareholders are admirable
 Resisting the Institutional Imperative

 What is the institutional imperative?

 the lemming-like tendency of corporate management
to imitate the behavior of other managers, no matter
how irrational it may be

 Buffett points out that thinking independently and

charting a course based on rationality and logic are
more likely to maximize the profits of the company
than a strategy that can best be described as “follow
the leader”
 Management Style
 He will not interfere with the running of the
company.

 He will be responsible for hiring and setting the

compensation of the top executive.

 Capital allocated to the business will have a price

tag (a hurdle rate) attached.
 Some Management Tips
 Review annual reports from a few years back, paying special
attention to what management said then about strategies for
the future.

 Compare those plans to today’s results: How fully were they

realized?

 Compare the strategies of a few years ago to this year’s

strategies and ideas: How has the thinking changed?

 Compare the annual reports of the company you are

interested in with reports from similar companies in the
same industry. It is not always easy to find exact duplicates,
but even relative performance comparison can yield insights
 What type of investor is Buffett?

Value Investor

 What is a value investor,

and what makes Warren
“the best” ?

 Amex
 The Buffett Way
So you say I can
make great
returns here?

 “Economic moat”

 Intrinsic value

 Do what is the best for you, not

what people think you should
be doing.
 Buffet’s famous statements
 Rule No.1: Never lose money. Rule No.2: Never
forget rule No.1.”

 “The stock market is designed to transfer

money from the active to the patient.”

 “The most important quality for an investor is

temperament, not intellect.”

 "Risk comes from not knowing what you're

doing."
His Portfolio
 performance

Berkshire Hathaway’s
Class A shares vs. S&P 500

Berkshire Hathaway’s
Class A & B shares vs. S&P 500
 Methodology

1. Has the company consistently performed well?

 ROE for 5-10 years

2. Has the company avoided access debt?

 Small amount of debt indicating that earnings growth is being
generated from equity as opposed to borrowed money

3. Are profit margins high? Are they increasing?

 Look back at least 5 years
 Methodology

4. How long has the company been public?

 At least 10 years
 Recent IPO is not a target

5. Do the company’s product rely on commodity?

 Characteristics must be hard to replicate –
competitive advantage, or “economic moat”
 Product must be distinguishable
 Must not rely solely on commodity
 Methodology
W. Buffett’s most important skill!!!

6. Is the stock selling at 25% discount or at its real value?

 Determine intrinsic value by analyzing business
fundamentals:
 Include analysis of earnings, revenues and assets
 Usually higher than its liquidation value
 Compare company’s intrinsic value to its current
market capitalization
 If intrinsic value is at least 25% higher – company
has value
 conclusion

 Complete understanding of the industry

 Value investing (based on fundamental analysis)
 Longevity (in established businesses, for long-term)
 Questions?

Great Buffet Quotes:

"Someone's sitting in the shade today because someone planted a
tree a long time ago."

"Wall Street is the only place that people ride to in a Rolls Royce
to get advice from those who take the subway."
Sources:
http://www.investopedia.com/university/greatest/warrenbuffett.asp
http://www.investopedia.com/articles/01/071801.asp
http://www.investopedia.com/articles/06/threewisemen.asp
http://en.wikipedia.org/wiki/Warren_Buffett
http://finance.yahoo.com/