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

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

5% (Dow 7.Partnerships soared 41% (Dow 39%) M 3rd year . Ltd M $25. totalling range of $500.4%) 8 .Buffett Partnership.5 small partnerships.000 M 2nd year .Original partnership money doubled M 1969 .000 each from a group of investors M 1st year .Investment ballooned at compound rate of 29.

900 and $81. M Buffett currently holds 38% of shares. Intrinsic value unknown. valued at total of $36bn M Has stakes in Coca-Cola (2nd largest shareholder).2m loss at time of purchase.100 in 1999 9 .8bn book value.50/share of working capital. Gillette. Disney.Berkshire Hathaway M A textile mill purchased in 1962. Suffering a $2. Dairy Queen M Currently valued at $57. American Express. Priced at $8/share though it had $16. Class A stock priced between $61. McDonalds.

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

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. in consultation with Charles E Munger M Main business of Berkshire Hathaway is involved in property and casualty insurance. 11 .

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

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 .

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

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

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. decisiveness 18 . patience. flexibility. confidence.

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 .Intrinsic Value Buffett values a company based on: w Return on beginning shareholder’s equity w Change in operating margins. debt levels.

price ≈ true value 21 .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.

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 .

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

Buffett’s Success 26 .

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

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

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

30 .Views Stocks as Business w Example: – Wells Fargo • Money-centre bank. • Bank remained very solvent & even had profit of $21 million in 1991. set aside $1.3 billion for potential loan losses • Stock price dropped from $86 to $41.30 • Actual losses less than expected. financially strong • Nationwide recession in 1990.

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

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

Good Business Judgement + Ignoring Market Sentiments M Buffett’s Point of View – As long as the stock is attractive & at reasonable prices. 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 . or how high the market level is. he will buy boldly.

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

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

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

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

Value Investing for the Lay Investor 39 .

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

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.

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

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

General Soundness of Strategy a) Looking for bargain companies. 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 .

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

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

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

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

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

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