An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news.

“You’re qualified for residence,” said St. Peter, “but, as you can see, the compound reserved for oil men is packed. There’s no way to squeeze you in.” After thinking for a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hand and yelled, “Oil discovered in hell.” Immediately the gates to the compound opened and all the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No.”, he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumour after all.

Warren Buffett
The Greatest Investor of All Time?

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Outline of Presentation
w Introduction w Buffet's Investment Style w Buffet’s Success w Value Investing for the Lay Investor w Conclusion

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Introduction
w Warren Edward Buffett w Born August 30, 1930, Omaha. w Son of Howard and Leila Buffett

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Background
w Born during the Great Depression w Father was a stockbroker w Emerged with strong drive to get very rich

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Peddled Coke Age 9 .Rented out used pinball machines making up to $50 a week.Sold used golf balls.Bought his first stock Age 11-13 . 6 .Carrying golf clubs for $3 per day Age 11.Money-Making Schemes M M M M M Age 6 .Bought 40 acres of farmland and leased it out. M Age 14 . M Age 16 .Carrier for Washington Post and 4 other newspapers. Age 13 .

(1956-1969) M Bought over Berkshire Hathaway Inc in 1962 and became Chairman and CEO in 1970 7 .. Ltd and appointed himself General Partner. as an investment salesman after graduating with a Masters in Economics. as a securities analyst (1954-1956) M Formed Buffett Partnership. (1951-1954) M Worked for Graham-Newman Corp.Employment M Worked for Buffett-Falk & Co.

4%) 8 .5 small partnerships.000 M 2nd year .Buffett Partnership.5% (Dow 7. totalling range of $500.000 each from a group of investors M 1st year .Investment ballooned at compound rate of 29.Partnerships soared 41% (Dow 39%) M 3rd year . Ltd M $25.Original partnership money doubled M 1969 .

Intrinsic value unknown. McDonalds. Class A stock priced between $61.50/share of working capital. Disney. Priced at $8/share though it had $16.900 and $81. Suffering a $2.2m loss at time of purchase. valued at total of $36bn M Has stakes in Coca-Cola (2nd largest shareholder). M Buffett currently holds 38% of shares.100 in 1999 9 . American Express.Berkshire Hathaway M A textile mill purchased in 1962.8bn book value. Dairy Queen M Currently valued at $57. Gillette.

import and distribution of footwear 10 . – newspaper publishing.Holdings of Berkshire Hathaway. – retailing of home furnishings. – manufacture. w Capital deployed into other fields – underwriting of property and casualty insurance. – retail jewellery. Inc.

by Warren Buffett.Business Activities M All operating decisions for the different Berkshire businesses are made by the respective managers of those business units M All investment decisions and other capital allocation decisions are made for Berkshire and its subsidiaries. 11 . in consultation with Charles E Munger M Main business of Berkshire Hathaway is involved in property and casualty insurance.

w Lived in the same house for 40 years.Warren Buffett’s Lifestyle w Salary of $100000 a year. w Eats burgers and drinks Coke w Only extravagance: A Gulfstream IV-SP jet called “The Indefensible”. 12 .

Buffet’s Investment Style 13 .

Buffett’s Investment Style w Strong business fundamentals w Buy low. sell high w Traits of a good investor w Intrinsic value vs stock price w Invest for the long term w Circle of Competence w Minimize risks 14 .

Strong Business Fundamentals w stable company w strong management team w certainty of future cash flows 15 .

Buy Low. Sell High w Stocks ↓ – Investors get cold feet => sell w Stocks ↑ – Herd instinct => buy w In effect. selling low! 16 . buying high.

sell high w Short-term market volatility does not concern him w Day-to-day stock quotes are meaningless 17 . Sell High w Stocks ↓ – Buffett buys w Stocks ↑ – Buffett sells w Buy low.Buy Low.

confidence. flexibility. decisiveness 18 .Traits of a Good Investor w difference between investors and speculators → attitudes toward stock pricing w master their emotions w not get caught up in the market momentum w discipline. courage. patience.

Intrinsic Value vs Stock Price Critical Investment Factor determining the intrinsic value of a business and paying a fair or bargain price for it Intrinsic Value w discounted value of cash that can be taken out of a business during its remaining life 19 .

& capital expenditure needs w Company’s cash generating ability 20 . debt levels.Intrinsic Value Buffett values a company based on: w Return on beginning shareholder’s equity w Change in operating margins.

Invest for the Long Term w Market is for buying & selling w Fluctuations do not bother him w Investors overreact – Stock prices too high or low – Do not reflect true value of company w In long run. price ≈ true value 21 .

Circle of Competence w Draw a circle only around businesses that he understands w does not bother about those outside this circle w Never invests in businesses he cannot understand w Tech stocks – do they possess a durable competitive advantage? 22 .

” 23 .Buffet … on tech stocks “We're perfectly willing to trade away a big payoff for a certain payoff.

Minimize Risks w searches for investments in which risk is eliminated or minimized w only take risks where the chances of total loss are low and gains are substantial w reduced greatly by concentrating on only a few holdings (opp. of diversification) w invest over long term & in stable companies 24 .

M Do not use leverage.Rule-of-Thumb M Think of owning stock as being an owner of the company. M Invest in it for the long haul (> 5 years). M Study that company and its competition thoroughly. 25 . and M Do not be led by the market's moves or by what other investors do.

Buffett’s Success 26 .

Buffett’s Success Stocks = Business Little Diversification Long-term Oppose Herd Instinct Patience Perception + Discipline Folly / Wise Rationality 27 .

we view ourselves as business analysts…” – Holistic view of business.Views Stocks as Business M Buffett’s Point of View – “When investing. M Investors’ Point of View – Mostly do not view buying shares as buying a business. 28 . – Seldom looks into the management aspect of a business.

” 29 . “I am a better investor because I am a businessman. M Implication is that investors will pull out of the investment once they see signs of trouble. Buffett buys stocks based on business fundamentals.Views Stocks as Business M Thus. investors buy stocks because of superficial notions. M While. & this is where they will lose money. and a better businessman because I am an investor.

• Bank remained very solvent & even had profit of $21 million in 1991. 30 .30 • Actual losses less than expected. set aside $1.3 billion for potential loan losses • Stock price dropped from $86 to $41. financially strong • Nationwide recession in 1990.Views Stocks as Business w Example: – Wells Fargo • Money-centre bank.

Views Stocks as Long-term Investment M Buffett’s Point of View – “If the business does well. the stock eventually follows. 31 .” – Short-term: investors’ sentiments – Long-term: intrinsic value M Investors’ Point of View – Tempted to buy shortterm for large quick profits. – Stock market is the final arbiter.

The Coca-Cola Company. Capital Cities/ ABC… all without looking at daily price quotes.Views Stocks as Long-term Investment w Example: – Buffet managed to own Borsheims. The Washington Post.” 32 . – “He would not care if the stock market closed for 10 years. See’s Candy Shops.

no matter how pessimistic the market sentiments are. M Investors’ Point of View – Difficult to ignore market sentiments – Require confidence and courage – Easily influenced 33 . he will buy boldly.Good Business Judgement + Ignoring Market Sentiments M Buffett’s Point of View – As long as the stock is attractive & at reasonable prices. or how high the market level is.

34 .Good Business Judgement + Ignoring Market Sentiments M Examples: – General Foods Company • In 1980s. – The Washington Post Company • Buffett bought it even during height of 1973-1974 bear market. perceived as stodgy food co. price went up 3-fold after Buffett’s purchase. • Buffett bought in 1988-1989. but unappealing to investors. stock price has quadrupled. – GEICO Corporation • Buffett bought it when others thought GEICO was going bankrupt. by investors • In 1985. – The Coca-Cola Company • Safe co.

– Willing to wait until a good stock comes by. – Hard to stay inactive 35 . M Investors’ Point of View – Hard to say “no”. – To hold a few good stocks than many mediocre stocks. – Often felt the need to buy many stocks.Resists Inactivity + Holds Few Stocks M Buffett’s Point of View – Willing to say “no”.

made up 93% of Berkshire’s portfolio. – In 1987 • Market crashed. (worth $1.Resists Inactivity + Holds Few Stocks w Examples: – In 1986 • 3 major stocks: Capital Cities/ ABC.7 billion) • Could not find stocks that met his requirements. GEICO & The Washington Post Co. • 3 major stocks now worth more than $2 billion. 36 . but Buffett didn’t invest.

37 .Resists Conformity M Buffett’s Point of View – To wait for stock prices to go down – To add stock more cheaply to portfolio M Investors’ Point of View – To wait for stock prices to go up – Tendency to follow herd instinct.

• Stock prices fell. – American Express • Loss of $60 million. • Many investors pulled out. Buffett invested. 38 . on the brink of insolvency.Resists Conformity w Example – GEICO Corporation • Made net loss of $126 million. Buffett bought GEICO stocks instead.

Value Investing for the Lay Investor 39 .

maximising returns) w objectives and goals 40 .Value Investing for the Lay Investor Analyse Buffett’s strategy in terms of : w the period (old economy vs. w general soundness of strategy (avoiding risk. new) and circumstances. w available resources (capital. company and market information).

experience w An ordinary investor would most probably start out in the early / late twenties onwards w Not much capital. limited funds 41 .Starting Out w Buffet started out early w à more capital.

volatile technology stocks 42 .Starting Out w Buffet’s peak w à market boom. fortunate times w Such circumstances no longer present w Emergence of new economy.

friends in high places c) years of experience. tendency to follow market trends 43 . streetwise The ordinary investor has a) limited capital b) have to rely on advice.Resources Buffet has phenomenal resources a) capital b) information networks. fund managers c) low experience.

with good management b) Invest for the long term c) Ignore stock market d) Holding on to a falling company e) Buying businesses with “strong histories of profitability and with a dominant business franchise” f) Focusing on only a few holdings 44 .General Soundness of Strategy a) Looking for bargain companies.

45 .Objectives Objectives and Goals w Buffett – Build. affording luxuries etc. upgrading status in life. for comfortable retirement. develop and sustain a company/ empire w Ordinary Investor – Increase and accumulate personal wealth.

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General Re. rising media rates. Reason? One of the insurance subsidiaries. and also one of the worst relative performance compared to the S& P 500. diminishing returns. larger capital base now. 47 . suffered a huge underwriting loss.Commentary M 1999 saw one of the worst absolute performances since Berkshire Hathaway was formed. M Other factors: Less attractive prices of businesses now.

Summary w If you had put $10000 into Berkshire Hathaway in 1965. w But what will happen when Warren Buffett dies? Is his personal worth tied to the balance sheet of Berkshire Hathaway. or will it continue to run smoothly even after he leaves? 48 . you would have more than $50 million today.

Q&A Session “Fools give you reasons. wise men never try.” – Warren Buffett .

comp.Proudly Presented By: Chua Woon Leng Gerard Koh Rachel Chong Ee Ping Hashikin Maraican bin Mohd Latiff Online resources available at: http://www.edu.nus.sg/~kohjoohe/wb 50 .

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