Warren buffett

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Warren Buffett

Transcript of Warren buffett


2. Agenda Bio Management style Investment approach Methodology 3. Biography/History Bought first stock at age 11 Invested savings into farmland Had pinball machine business andsold for a profit Attended Columbia Universitywhere Ben Graham was a professorat the time Worked for Ben Graham for $12,000a year 4. 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 5. Biography/History Closed partnership in 1969 andworth millions personally In 1974 lost over 50% of wealth In 1981 Buffett and Mungercreate Berkshire CharitableContribution plan Crash of 87 lost $342 millionpersonally 6. 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 7. 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 hischildren and founded by late wife 8. Management TenetsBuffetts three management tenets concern theevaluation of management quality Is management rational? Is management candid? Does management resist the institutional imperative? 9. Rationality If a company generates high returns on equity, theduty of management is to reinvest those earningsback into the company, for the benefit ofshareholders 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 toreinvest the money elsewhere at higher rates In Buffetts mind, only one choice is rational, that isoption 3 10. Candor Buffett believes that a manager who confessesmistakes publicly is more likely to correct them Managers who discusses the failures of thecompany with shareholders are admirable 11. Resisting the Institutional Imperative What is the institutional imperative? the lemming-like tendency of corporate managementto imitate the behavior of other managers, no matterhow irrational it may be Buffett points out that thinking independently andcharting a course based on rationality and logic aremore likely to maximize the profits of the companythan a strategy that can best be described as followthe leader 12. Management Style He will not interfere with the running of thecompany. He will be responsible for hiring and setting thecompensation of the top executive. Capital allocated to the business will have aprice tag (a hurdle rate) attached. 13. Some Management Tips Review annual reports from a few years back, payingspecial attention to what management said then aboutstrategies for the future. Compare those plans to todays results: How fully werethey realized? Compare the strategies of a few years ago to this yearsstrategies and ideas: How has the thinking changed? Compare the annual reports of the company you areinterested in with reports from similar companies in thesame industry. It is not always easy to find exact duplicates,but even relative performance comparison can yieldinsights 14. What type of investor is Buffett?Value Investor What is a value investor,and what makes Warrenthe best ? Amex 15. Buffets famous statements Rule No.1: Never lose money. Rule No.2:Never forget rule No.1. The stock market is designed to transfermoney from the active to the patient. The most important quality for an investor istemperament, not intellect. "Risk comes from not knowing what youredoing." 16. His Portfolio 17. performance Berkshire Hathaways Class A shares vs. S&P 500Berkshire HathawaysClass A & B shares vs. S&P 500 18. Methodology1. Has the company consistently performed well? ROE for 5-10 years2. Has the company avoided access debt? Small amount of debt indicating that earnings growth is being generated from equity as opposed to borrowed money3. Are profit margins high? Are they increasing? Look back at least 5 years 19. Methodology4. How long has the company been public? At least 10 years Recent IPO is not a target5. Do the companys 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 20. Methodology W. Buffetts most important skill!!!6. Is the stock selling at 25% discount or at its real value? Determine intrinsic value by analyzing businessfundamentals: Include analysis of earnings, revenues and assets Usually higher than its liquidation value Compare companys intrinsic value to its currentmarket capitalization If intrinsic value is at least 25% higher company has value 21. conclusion Complete understanding of the industry Value investing (based on fundamental analysis) Longevity (in established businesses, for long-term) 22. Great Buffet Quotes:"Someones sitting in the shade today because someone planted atree a long time ago.""Wall Street is the only place that people ride to in a Rolls Royceto get advice from those who take the subway." 23. THAK YOU