WARREN BUFFETT “THE SAGE OF OMAHA”

WARREN BUFFETT “THE SAGE OF OMAHA”

AMAR

RAVEENDRAN

AMAR

RAVEENDRAN

Agenda

Bio Management style Investment approach Methodology

Biography/History Bought first stock at age 11

Invested savings into farmland

Had pinball machine business and sold for a profit

Attended Columbia Universitywhere Ben Graham was a professor at the time

Worked for Ben Graham for $12,000 a year

Biography/History Opened his own partnership in

Omaha

By 1961, he had 5 partnerships

In 1962, he merged partnerships to make Buffett Partnerships, Ltd.

Bought stock for Berkshire Hathaway at $8

Bought Amex stock after fraud scandal

Took control of Berkshire in 1965

Biography/History

Closed partnership in 1969 and worth millions personally

In 1974 lost over 50% of wealth

In 1981 Buffett and Munger create Berkshire Charitable Contribution plan

Crash of ‘87 lost $342 million personally

Biography/History

Buffett worth $44 billion today Berkshire has $248 billion in assets CEO Charles Munger, vice-chairman

Met in 1959 Goal to increase 15% a year

philanthropy

85% of wealth given to philanthropy

Bill and Melinda Gates Foundation Health and learning $1.5 billion annually

The rest to foundations run by his children and founded by late wife

Management Tenets

Buffett’s three management tenets concern the evaluation of management quality

Is management rational? Is management candid? Does management resist the institutional

imperative?

Rationality If a company generates high returns on

equity, the duty of management is to reinvest those earnings back into the company, for the benefit of shareholders

If the earnings cannot be reinvested at high rates, management has three options:

ignore the problem and continue to reinvest at below-average rates

buy growth return the money to the shareholders, who then might have

a chance to reinvest the money elsewhere at higher rates

In Buffett’s mind, only one choice is rational, that is option 3

Candor

Buffett believes that a manager who confesses mistakes publicly is more likely to correct them

Managers who discusses the failures of the company with shareholders are admirable

Resisting the Institutional Imperative

What is the institutional imperative? the lemming-like tendency of corporate

management to imitate the behavior of other managers, no matter how irrational it may be

Buffett points out that thinking independently and charting a course based on rationality and logic are more likely to maximize the profits of the company than a strategy that can best be described as “follow the leader”

Management Style

He will not interfere with the running of the company.

He will be responsible for hiring and setting the compensation of the top executive.

Capital allocated to the business will have a price tag (a hurdle rate) attached.

Some Management Tips Review annual reports from a few years back, paying

special attention to what management said then about strategies for the future.

Compare those plans to today’s results: How fully were they realized?

Compare the strategies of a few years ago to this year’s strategies and ideas: How has the thinking changed?

Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights

What type of investor is Buffett?

Value Investor

What is a value investor, and what makes Warren “the best” ?

Amex

Buffet’s famous statements

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

“The stock market is designed to transfer money from the active to the patient.”

“The most important quality for an investor is temperament, not intellect.”

"Risk comes from not knowing what you're doing."

His Portfolio

performance

Berkshire Hathaway’sClass A shares vs. S&P 500

Berkshire Hathaway’sClass A & B shares vs. S&P 500

Methodology

1. Has the company consistently performed well?

ROE for 5-10 years

2. Has the company avoided access debt? Small amount of debt indicating that earnings

growth is being generated from equity as opposed to borrowed money

3. Are profit margins high? Are they increasing?

Look back at least 5 years

Methodology

4. How long has the company been public? At least 10 years Recent IPO is not a target

5. Do the company’s product rely on commodity?

Characteristics must be hard to replicate – competitive advantage, or “economic moat”

Product must be distinguishable Must not rely solely on commodity

Methodology

W. Buffett’s most important skill!!!

6.Is the stock selling at 25% discount or at its real value?

Determine intrinsic value by analyzing business fundamentals:

Include analysis of earnings, revenues and assets

Usually higher than its liquidation value Compare company’s intrinsic value to its

current market capitalization If intrinsic value is at least 25% higher –

company has value

conclusion

Complete understanding of the industry

Value investing (based on fundamental analysis)

Longevity (in established businesses, for long-term)

Great Buffet Quotes:

"Someone's sitting in the shade today because someone planted a tree a long time ago."

"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."

THAK YOU