1995 meeting

Assess what the average returns of the business  this can be hard if annual earnings are volatile.

Do you have a high probability of forecasting accurately the earnings in the next 2-3 years? Can you
have a high probability you know what average earnings will be in the future?

The question is: What is the average return on capital going to be?

 If too hard to predict, ignore

 If not too hard to predict, deep dive

Look for a good record and good assets on the books

Economic value added has some flaws but its pretty much getting at the same thing that we are
trying to do (1:04)

“The heart of investing is and the framework in which we operate is: What time of cash can they
produce and what discount rate do we bring it back? How far out do we look? Despite the fact we
can define this in a simple equation we have never actually sat down and written out the set of
numbers to get this equation – we do in our heads in a way. There is no piece of paper and there
never was a piece of paper which shows our calculation on the buffalo news or sees candy in this
respect. It would be attaching a more scientific quality to our analysis than there really is if we said
we forecast for 18 years and stick a terminal value on. We don’t do terminal value stuff. We are
sitting in the office thinking about this question for each investment and we have discount rates
generally in our mind, but we really want the investment decision to be obvious enough to us that it
doesn’t require making detailed calculation. It’s the framework but its not applied in the sense that
we actually fill in all the variables.” (1 hour 39 minutes)  you really shouldn’t need to use a
calculator too much. It is just common sense.

Float is a big asset of Berkshires. Because our equity (net assets) is so large, it means we can put this
float to work in ways that we otherwise couldn’t if we had small equity and less financial strength.
Because of our large financial strength (i.e equity) we don’t have to impose many restrictions on
what we do with the float.

“Most moats aren’t worth a damn - Why is that castle still standing and what is going to keep it
standing or cause it not to be standing 5, 10, 15 years from now? What are the key factors? How
permanent are they? How permanent does the moat depend on the lord in the castle? If we feel
good about the moat, then we try to figure out whether the lord will do something stupid with the
proceeds or will try to take all the proceeds to himself”

 Scale – there are different types

o Economies of scale – buying power (buy cheaply)
o Scales of intelligence

In terms of working out the value of Berkshire’s operating businesses? “we try to give you the
information that we would want in answering that question in the annual report. We don’t stick a
number on each company but we try to give enough information about the capital employed, the
margins that you could make estimates that are just about as good as ours. Charlie and I would not
need more information than is in the report to come up with a good idea of what the controlled
businesses are worth. There is no information that we are holding back which would be of any real
importance to valuing those businesses. With the operating businesses, many are worth far more
than the carrying value in the books.

The second edition of security analysis is better

The formula of intrinsic value in Ben Graham’s Intelligent Investor which uses book value and growth
value  book value is not a consideration in intrinsic value. The best businesses are ones that earn
high returns on capital employed over time. By nature, if we want to own good businesses we want
businesses that employ very little capital compared to our purchase price  this is not ben graham’s
approach.

Attitude to the stock market + margin of safety + looking at stocks as businesses  these are the 3
most important philosophical benchmarks from ben graham. With these, the exact valuation method
you use isn’t that important

Charlie munger - To the extent that the method of estimating future cash flow requires projects, I
would say that projects while they are logically required on average do more harm than good in
America. Most of them are put together by people with an interest in the outcome (subconscious
bias in the process) – its apparent precision makes it somewhat foolish.

Charlie and I have never looked at a projection in connection with a security we’ve bought or a
business we’ve bought. But we have had them offered to us. We voluntarily turn away when
people want to thrust them to us. The fact they are prepared so meticulously is a ritual that
managers to go through to justify what they wanted to do in the first place.

The first question you ask when looking at a potential investment is “can I understand it?” Has it got
good economics? Does it earn high returns on capital? Is it likely to earn high returns on capital in the
future? - we judge by the past record. If the thing has a lousy past record and a bright future, we
will pass on the opportunity.

1996 meeting

We get more money to invest when our float grows, when we retain earnings, when we have
dividends

Books warren has read

 Moodys bank and finance manual

 Japanese company handbook

https://searchworks.stanford.edu/view/10034758