Archive for December, 2009

Tuesday, 8th December 2009

Warren Buffett Investment Lessons, part 7

Written by George Traganidas Topics: Stock Investing

How he runs Berkshire Hathaway

In 1992, Warren Buffett say that Berkshire’s after-tax overhead costs are under of 1% of reported operating earnings and less than 1/2 of 1% of look-through earnings. In 1996, the after-tax headquarters expense amounts to less than two basis points (1/50th of 1%) measured against net worth.

Warren Buffett does not believe in flexible operating budgets, as in “Non-direct expenses can be X if revenues are Y, but must be reduced if revenues are Y – 5%”. In addition, it makes no sense to add unneeded people or activities because profits are booming, or cutting essential people or activities because profitability is shrinking.[…]

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Tuesday, 8th December 2009

Warren Buffett Investment Lessons, part 6

Written by George Traganidas Topics: Stock Investing

Debt and Leverage

Warren Buffett prefers to get finance (debt) in anticipation of need rather than in reaction to it. Warren Buffet has an aversion to debt, particularly the short-term kind. He is willing to incur modest amounts of debt when it is both properly structured and of significant benefit to shareholders.

Warren Buffett does not like leverage. Even if the odds of disaster are 99:1, he does not like them. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results.[…]

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Tuesday, 8th December 2009

Warren Buffett Investment Lessons, part 5

Written by George Traganidas Topics: Stock Investing

Economic franchises

An economic franchise is a product or service that:

  • Is needed or desired
  • Is thought by its customers to have no close substitute
  • Is not subject to price regulation

The company can regularly price its product or service aggressively and earn high rates of return on capital. Franchises can tolerate mis-management, because the managers might diminish the franchise’s profitability but they cannot inflict mortal damage.

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Tuesday, 8th December 2009

Three suggestions of investors

Written by George Traganidas Topics: Stock Investing

After many years of investing, Warren Buffett has some suggestions for investors.


First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen.[…]

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Tuesday, 8th December 2009

The formula for valuing assets

Written by George Traganidas Topics: Property Investing, Stock Investing

In one of his letters to the shareholders of Berkshire Hathaway, Warren Buffett told them what is the formula to value any assett.

The formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.[…]

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Tuesday, 8th December 2009

Warren Buffett Investment Lessons, part 4

Written by George Traganidas Topics: Stock Investing

Management

Making the most of an existing strong business franchise is what usually produces exceptional economics. Managers need to protect their franchise, control costs, search for new products and markets that build on their existing strengths and do not get diverted. They need to work exceptionally hard at the details of the business. He advocates leaving management alone to do their job.

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Only do business with people that you like, trust and admire.[…]

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Tuesday, 8th December 2009

Warren Buffett Investment Lessons, part 3

Written by George Traganidas Topics: Stock Investing

Be a successful investor

You do not have to make it back the way that you lost it.

I would rather be certain of a good result than hopeful of a great one.

To be successful, concentrate on identifying one foot hurdles that you could step over rather than acquire any ability to clear seven footers. An investor needs to do very few things right as long as he/she avoids big mistakes.

In each case you want to acquire, at a sensible price, a business with excellent economics and able and honest management. Thereafter, you need only to monitor whether these qualities are being preserved.

When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of his portfolio. This investor would get a similar result if he followed a policy of purchasing an interest in, say, 20% of the future earnings of a number of outstanding college basketball stars. A handful of these would go on to achieve NBA stardom, and the investor’s take from them would soon dominate his royalty stream. To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.[…]

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Tuesday, 8th December 2009

Warren Buffett Investment Lessons, part 2

Written by George Traganidas Topics: Stock Investing

Buying a business

Here are the thought of Warren Buffett on what to look for when you are considering buying a business. It must have a good management team, good future economics for the business and the price you pay must be right. The business itself should have the ability to increase prices easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume. You should be able to accommodate large dollar volume increases in business with only minor addition of investment of capital. The best business to own is one that over an extended period can employee large amounts of incremental capital at very high rates of return.

The following are dismal economic characteristics that make for a poor long-term outlook for a business:[…]

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Thursday, 3rd December 2009

How to Minimize Investment Returns

Written by George Traganidas Topics: Stock Investing

In his Berkshire Hathaway annual report of 2006, Warren Buffet wrote an article that explained how investors were achieving lower returns by employing professional help. Below if the full test.


Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.[…]

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