The Value Investing Approaches of Warren Buffett, Charlie Munger, Todd Combs, and Ted

Weschler at Berkshire Hathaway

David I. Kass, Ph.D.Clinical Professor of Finance

Robert H. Smith School of BusinessUniversity of Maryland

October 19, 20171

15 Largest Common Stock Investments (12/31/2016)

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5 Largest Common Stock Investments (6/30/2017)

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These 5 holdings comprise 63% of Berkshire Hathaway’s Common Stock Holdings

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Berkshire Hathaway vs S&P 500 (1965-2017)

In dollar terms, $1,000 invested in Berkshire Hathaway 52 years ago is now worth $18.5 million. The same amount invested in the S&P 500 would be worth $123,000. (Values were calculated using the compounded annual gain of 20.8 percent from 1965-2017 for per-share market value of Berkshire, and the compounded annual gain of 9.7 percent from 1965-2017 in the S&P 500, with dividends included.)

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Warren Buffett• CEO and Chairman

of Berkshire Hathaway

• 1965-present

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Forbes 400 (2017)

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Forbes World’s Largest Companies by Market Capitalization (2017)

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Early Life• Born August 30, 1930 (age 87)• Enrolled in the University of Pennsylvania’s Wharton

School– Transferred to and graduated from the University of

Nebraska-Lincoln• Graduated from Columbia Business School in 1951• Married Susan Buffett in 1952

– They had three children: Susie, Howard, and Peter• That same year he began teaching “Investment

Principles” night class at the University of Nebraska

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Career Progression

• 1951 to 1954 – Buffett-Falk & Co as an investment salesman

• 1954 to 1956 – Graham-Newman Corp as a securities analyst

• 1956 to 1969 – Buffett Partnership, Ltd as general partner

• 1965 – Chairman and CEO of Berkshire Hathaway

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Charlie Munger• Vice Chairman of

Berkshire Hathaway• Munger and Buffett

built an informal investing partnership in the 1960s and 1970s

• Buffett refers to him as “his partner”

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Charlie Munger• Born January 1, 1924 (93 years old)• Born and raised in Omaha, Nebraska

– Worked at Buffett & Son as a teenager• Studied Mathematics at the University of Michigan

– Dropped out to join the Air Force during World War II• He continued his education at Caltech

– Studied Meteorology• Graduated from Harvard Law School in 1948

– Graduated magna cum laude with a J.D.

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Charlie Munger Career• Moved to California and joined the law firm Wright &

Garrett• In 1962 he created the law firm Munger, Tolles & Olson

working as a real estate attorney • Also ran his own investment firm from 1962-1975

– Generated compound annual returns of 24.3%– Compared to just 6.4% annual appreciation for the Dow

Jones Industrial Average

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Charlie Munger • Wesco Financial – Served as chairman from 1984 to 2011

– Diversified financial corporation

• Daily Journal – Currently serves as chairman– American publishing company covering legal affairs in California and

Arizona• Portfolio (as of June 30, 2017):

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Todd Combs• Current portfolio manager at

Berkshire Hathaway• Born January 27, 1971 (age 46) • Graduated from Florida State

University in 1993– degrees in Finance and

Multinational Business Operations• Graduated from Columbia

Business School in 2002 with an MBA

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Career Progression• Began as a Florida bank regulator • Left to take on a role in Progressive’s pricing

department• In 2005 he launched his hedge fund - Castle Point

Capital– Closed it down in 2010 to work with Warren Buffett at

Berkshire Hathaway

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Castle Point Portfolio (2010)

Performance (2000-2010):

34% cumulative return vs.

negative 46% for the XLF(Financial Sector Fund)

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Ted Weschler• Current portfolio manager at

Berkshire Hathaway• Born May 16, 1962 (55 years

old)• Graduated from University of

Pennsylvania’s Wharton School– Degree in economics with

concentrations in accounting and finance

• Winning bid (anonymously) of two lunches with Warren Buffett in 2010 and 2011– $2.6 million each year (for

charity/Glide Foundation)18

Ted Weschler Career

• Worked for chemical manufacturer WR Grace– Including two years as assistant to its Chairman J.

Peter Grace• Later joined the private equity firm Quad-C

Management in Charlottesville, VA– Started by the former vice chairman of WR Grace

• Ten years later (2000) he started his own hedge fund – Peninsula Capital– Closed it in 2011 to join Berkshire Hathaway

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Peninsula Capital Advisors Portfolio (2011)

Performance (2000-2011):

over 1,000% appreciation

vs. S&P 500 unchanged

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How are Todd Combs and Ted Weschler compensated?

• Each receive a salary of $1 million per year plus 10% of the amount by which they beat the S&P 500

• They get paid 80% based on their own record and 20% based on the record of the other

• Each manages $10 billion• Performance

– Both have outperformed the S&P 500 since joining Berkshire

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Working at Berkshire Hathaway

• "I get in around 7 or 8 and I read until about 7 or 8 at night. And I go home and see my family and then I'll read for another hour or two in bed at night. And you know, there might only be three to four phone calls the entire week. So there are very, very few interruptions … But it's literally just reading about 12 hours a day.” - Todd Combs

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Berkshire Hathaway’s Evolution from a Portfolio of Stocks to a Conglomerate

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Berkshire Hathaway Companies

• Berkshire has acquired approximately 80 companies within its 4 major sectors of operations – Insurance (Geico, General Re)– Regulated, Capital Intensive businesses (Burlington

Northern Santa Fe Railroad, Berkshire Hathaway Energy)

– Manufacturing, Service & Retailing Operations (Precision Castparts, Marmon, Lubrizol, IMC)

– Finance & Financial Products (Wesco Financial)

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Warren Buffett’s Investment Strategy

• Find a good business – and one that he can understand – Durable, competitive advantage, run by able and honest

people– Will earn more money 10 and 20 and 30 years from

now– A management team he admires and trusts

• His favorite investment that embodies this philosophy is Geico– He learned about this when he was 20 years old on a

Saturday from future CEO Lorimer Davidson– Berkshire bought control in 1995 when it had a 2%

market share, now it has a 12% market share

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Berkshire Hathaway’s Portfolio in 1977

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Berkshire Hathaway’s Portfolio in 1986

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Berkshire Hathaway’s Portfolio in 1996

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Berkshire Hathaway Portfolio in 2006

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Berkshire Hathaway’s Portfolio in 2016

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Berkshire’s Investments in Bank of America and Goldman Sachs

• $5 billion dollar investment in each• Goldman Sachs in 2008

– $2.6 billion return – 50% return on investment

• Bank of America in 2011– Earned $13 billion – 28% return per year

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Berkshire’s Recent Returns

• 23.8% in 2016– 12.25% for the S&P 500

• 14.44% in 2017 YTD– As of October 6, 2017

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Warren Buffett’s Advice

• “Invest in yourself. Address whatever you feel your weaknesses are, and do it now. I was terrified of public speaking when I was young. I couldn’t do it. It cost me $100 to take a Dale Carnegie course, and it changed my life.”

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