Professional Documents
Culture Documents
1 | Page
PREPARED BY:
Anupam Roy.
Ashish Naidu.
Sumit Mishra.
Uddipan Pal.
Vijayakumar
Kattamanchi.
2 | Page
Warren Buffet belongs to the Graham & Dodd school of Value Investing. Major
conclusions from
the letters to shareholders from 1977-1981 are as follows :
1. Stock Markets are the best place to buy businesses at discounted prices
bargains in business
2. Stock Selection Criteria
a) Businesses we can understand.
b) With favorable long-term prospects.
c) Operated by honest & competent people, extraordinary properties &
management quality
d) Priced very attractively.
e) Businesses with higher intrinsic value than the common stock price.
3. It is difficult to predict stock market movements in the short run.
4. Institutional investors are not always right.
5. Investors should have concentrated portfolios.
6. Return on Capital employed (ROCE) is a good measure of the business
strength.
7. Avoid investing in companies with a relatively undifferentiated goods/product
pipeline.
8. Invest in businesses where tail-winds prevail rather than head winds.
9. Low returns are a result of slow capital turnover & low profit margins.
Improved
profit
margins
involve
product
differentiation,
lowered
manufacturing costs more efficient use of equipment & people.
10.Buffet prefers acquisition of small fractions of businesses as common stocks
@ bargain prices for which little enthusiasm exists in contrast to general
corporate trend of acquisition activity in which much enthusiasm exists.
11.Managerial economic performance is determined by higher earnings rate on
equity capital rather than gains in EPS.
12.Buffet agrees to organizations which hold their entire profits & pump it back
into the business provided they can provide a higher rate of return on the
profits reinvested.
13.Berkshire acquisitions are based on maximizing real economic benefits. He
quotes We would rather buy 10% of Wonderful Business T at X per share
than 100% of T at 2X per share
14.Buffet further divides businesses into 2 categories:
a) Businesses well adapted to inflationary environment
b) Extraordinary Businesses disguised as ordinary or below ordinary ones.
Business adapted to inflationary environment:
These businesses have characteristics:
1) Ability to increase prices easily without fear of loss of market share &
volume.
2) Ability to accommodate large dollar volume increases in business with low
additional investment capital.
Extraordinary Business disguised as ordinary ones:
Buffet states that he is not good enough to identify these managerial
superstars.
3 | Page
Buffett focuses on the micro (specific companies) but hes always mindful of the
macro. And he certainly understands that his success couldnt have happened
without riding the biggest macro wave of the last 100 years the amazing growth of
the US economy.
Who has ever benefited during the past 238 years by betting against America? If
you compare our countrys present condition to that existing in 1776, you have to
rub your eyes in wonder. In my lifetime alone, real per-capita US output has
sixfolded. My parents could not have dreamed in 1930 of the world their son would
see.
He quotes that it is very difficult to beat the market no matter how bright you are
with an example where a commentator interpreted that the book value of Berkshire
Hathaway in 1964 could have bought ounce of gold & 15 yrs later with much
blood sweat & tears the book value produced will buy the same ounce of gold.
Buffet further states in 1982 that American businesses are currently bad
businesses economically producing less for their individual investors after-tax than
the tax-exempt passive rate of return on money. But American equity capital, in
aggregate, produces no value-added for individual investors.If the causes of long4 | Page
term inflation can be tempered, passive returns are likely to fall and the intrinsic
position of American equity capital should significantly improve. Many businesses
that now must be classified as economically bad would be restored to the good
category under such circumstances.
BERKSHIRE HATHWAY STATISTICS
Buffet shares that on GAAP basis, during the present managements term of
seventeen years, book value has increased from $19.46 per share to $526.02 per
share, or 21.1% compounded annually. This rate of return number is highly likely to
drift downward in future years.
Conventional accounting only allows less than half of our earnings iceberg to
appear above the surface, in plain view. Within the corporate world such a result is
quite rare; in our case it is likely to be recurring
5 | Page
1977 78
6 | Page
1979
-
1980
-
7 | Page
1981
-
References: 1. http://www.berkshirehathaway.com/letters/letters.html
2. https://en.wikipedia.org/wiki/Berkshire_Hathaway
8 | Page