On Saturday 1st of March, Warren Buffet released his 2013 annual letter to shareholders of Berkshire Hathaway. As always his letter is a great read, because it does not only tell you about his company but also gives general advice on investments and finance. He has been helping people for years to better understand the investment process and what they should look for and what to avoid. His insights on how to value companies are priceless. In addition, he sometimes gives general finance advice to help people who are not investment professionals themselves and they just want to look after their wealth and grow it.[...]
There seems to be a lot of confusion and discussion on how to value a business and determine what is a fair price to pay. If you are wondering whether to buy a share or the whole business you must be able to answer a simple question. How much is the value of the business and is the current price fair? After all a stock is part ownership of a business.
So let’s start from the beginning. Valuing a business is an eight step process and it takes time and effort.[...]
I have heard that nothing gives an author so great pleasure, as to find his works respectfully quoted by other learned authors. This pleasure I have seldom enjoyed; for tho’ I have been, if I may say it without vanity, an eminent author of almanacs annually now a full quarter of a century, my brother authors in the same way, for what reason I know not, have ever been very sparing in their applauses; and no other author has taken the least notice of me, so that did not my writings produce me some solid pudding, the great deficiency of praise would have quite discouraged me.[...]
Benjamin Franklin was a man of many roles – printer, author, philosopher, scientist, inventor, diplomat and politician to name a few. One of the most bold and arduous projects he undertook was to arrive at moral perfection. He wanted to live without committing any fault at any time and to conquer all that either natural inclination, custom or company might lead him into. As he knew, or thought he knew, what was right and wrong, he did not see why he might not always do the one and avoid the other.[...]
Last weekend I went to Omaha for the annual Shareholders meeting of Berkshire Hathaway. It was an opportunity to see and hear Warren Buffet and Charlie Munger speak live and answer questions for more than 5 hours. It is a great experience and really well worth it.
On Friday evening, there were welcome drinks with food and a live band at Borsheims. It attracted a big crowd and it was a great place to socialise and meet fellow shareholders. Some of them have been going to the annual meeting for 30 years, but there were also a few that this was the first meeting that they attended.[...]
By WARREN E. BUFFETT
Published: February 9, 2012
Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway (BRKA) we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.
From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a nonfluctuating asset can be laden with risk.[...]
The “know” and “don’t know” schools
The “I know” school people believe they can discern what the future holds, and in their world investing is a simple matter:
- First you decide what the economy is going to do in the period under consideration.
- Then you figure out what the impact will be on interest rates.
- From this you infer how the securities markets will perform.
- You choose the industries that will do best in that environment.
- You make judgments about how the industries’ companies will fare in terms of profits.
- Based on all of this information, you pick stocks that are bound to appreciate.[...]
A bit above average performance is not that bad if you can consistently do it for many years. You do not need to swing for the fences in order to achieve long term gain. If you are willing to take huge bets on assets to gain the spectacular results you should be ready to fail some times and then have huge losses. That will give you an average return over the years, unless of course you can be right about the future most of the times. Not an easy task to accomplish.[...]
Telling the future
Making market forecasts on a consistent basis is not an easy thing. Many people try and none succeed on it. If you are always crying ‘wolf’ then at some point you will be right, but that does not tell us about your ability to forecast market movements. A useful market forecast is only useful if it is in contrary to popular belief. If everyone predicts it then this is already reflected in the price of assets. [...]
When the world’s self-made billionaires speak it is good to listen. Then when you find out who they follow on a regular basis, maybe you should look at them too. This is how I learned about Howard Marks. Howard is the chairman of Oaktree since 1995. His approach to money management is based on a simple motto: “if we avoid the losers, the winners will take care of themselves”. His memos to clients are a must read for investors. Here are some pieces of advice taken directly from his memos.[...]
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