Warren Buffet
Buffett Is Not a Leader, Just a Great Investor - posted by Steven Wevodau
I recently finished reading the new Buffett biographay, Snowball. I’m not going to write a proper review of it as I didn’t enjoy the book much and am not sure if my views on it would be helpful for those who are considering the book. Perhaps it was my own expectation that prevented me from enjoying Alice Schroeder’s book. I was hoping for more insight into Buffett’s investing methodology; instead, I got reams of pages discussing Buffett’s strained relationship with his mother, his absentee relationship with his children and Susie Buffett’s (his first wife) bohemian relationship with the world. But Schroeder promised a biography, not a how-to investing Buffettology, so the fault lays with me.
Despite the minutiae delving into Buffett’s personal life, I did glean some investment insights. I appreciated Buffett’s enthusiastic endorsement of coattailing (piggybacking, whale-watching, copycatting, etc.) and I will discuss that in another post.
Reading the book crystallized my feeling that Berkshire Hathaway (BRK.A) deserves a Buffett discount, not a premium. Obviously, this discount is premised largely on Buffett’s advanced age but also on my impression that Buffett has failed one of the true tests of leadership: developing new leaders.
Buffett has always been credited with finding great managers to run Berkshire’s various enterprises: Ken Chace at the Berkshire textile business, Ajit Jain with insurance, Lou Simpson at GEICO, even Mrs. B. at Nebraska Furniture. The problem is these managers were largely self-formed — one could hardly credit Buffett as being a primary factor in their development.
Contrast that with Buffett’s investing mentor, Benjamin Graham. In fact, Buffett himself has discussed the many oaks which have fallen from the tree of Graham-and-Doddsville. While Graham wasn’t trying to create a new generation of followers to carry his mantle, by all accounts, he was generous with his time and knowledge. Buffett acknowledges that Graham put him on the true path of value investing.
Buffett, despite his fondness for holding an audience, has never been as generous a teacher. His shareholder letters, the Partnership letters, his various speeches and articles through the years are all valuable study guides, hinting at the path to investment success. But these pale in comparison to the work Benjamin Graham left behind in Security Analysis and The Intelligent Investor, which laid the path bare for all who chose to follow it.
As Schroeder portrays in her book, Buffett is given more to “preaching”, which is quite different than teaching/mentoring. Ultimately, Buffett has always been too much of a “taker” to give enough to develop leaders.
Bringing it back to Berkshire, one of Buffett’s most well-known witticisms talks about buying great companies that can be run by a ham sandwich because one of these days, it probably will be run by one. There is a high risk of Berkshire being run counter to Buffett’s core values or competencies. To this day, Buffett keeps his succession plans under wrap; Schroeder implies some combination of ego and mortality prevents Buffett from sharing the spotlight with his chosen successor.
Investors should be wary that there is only one Warren Buffett. As he has never taken the time to mentor another, any combination of successors would likely be far different in approach, temperament and perhaps, ability.
Source: SeekingAlpha
Buffett Behind Stock Buy Backs - posted by Steven Wevodau
Warren Buffett took the opportunity last Friday to lend his considerable intellectual weight to the debate about buy backs, saying, “I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity.”
We’ve been banging the drum for buy backs quite a bit recently. We wrote on Friday that they represent the lowest risk investment for any company with undervalued stock and we’ve written on a number of other occasions about their positive effect on per share value in companies with undervalued stock.
In a Nightly Business Report interview with Susie Gharib, Buffett discussed his view on stock buy backs:
Susie Gharib: What about Berkshire Hathaway (BRK.A) stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?
Warren Buffett: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I’ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.
SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.
SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…
SG: What are your feelings with Berkshire? The stock is down a lot. It was up to $147,000 last year. Would you ever be opposed to buying back stock?
WB: I’m not opposed to buying back stock.
You can see the interview with Buffett here (via New York Times’ Dealbook article Buffett Hints at Buyback of Berkshire Shares
Source: SeekingAlpha
Warren Buffett’s ‘Secret’ Investment Formula
Posted by Steven Wevodau
As one of the most successful investors ever, Warren Buffett’s methods are widely studied and many attempt to replicate them. Mr. Buffett has frequently discussed his investing criteria and the influence Ben Graham had on him in the early days. And he has repeatedly said over the decades that value investing is simple, but not easy.
So just how simple is Buffett’s investing methodology? There are many stories out there that Buffett does not use a computer (other than to play bridge online), hence he does not use the ubiquitous Wall Street crutch, the spreadsheet financial model. Buffett also doesn’t use a calculator. Maybe it’s that Buffett is just so darn sharp that his brain is the only calculator he needs.
There is no doubt Buffett is super sharp, and able to see what matters and quickly and efficiently evaluate it. But, I think that is just a bonus for Buffett - not a requirement to practice his investing style. He would agree, I think, since he has frequently stated that investing success only requires an average IQ. Certainly we are now very familiar with the damage done by those who supposedly have superior IQ’s.
Alice Schroeder recently released “The Snowball”, the most complete account of The Man to date (and next on my reading list - if I only had any time to read books). Ms. Schroeder had unprecedented access, spending years in Buffett’s office going through his old files. How did she gain Buffett’s approval? Through her work as an insurance analyst a decade ago for Paine Webber and Morgan Stanley. Her reports from that era on Berkshire (BRK.A) are the only coherent analyst reports on Buffett’s empire that I have ever read. And her valuation model for Berkshire was the best I’ve seen. I still use my own version of it. I think she won the Buffett lottery because she was the only one who “got” Berkshire on Wall Street.
Schroeder recently gave a keynote at the Darden Value Investing Conference. In it she clearly laid out Buffett’s “secret” investment methodology. But first she also made it clear that Buffett is a unique animal. At age 7 he asked for a book titled “Bond Salesmanship” for Xmas and read it cover to cover. She describes him as someone who is always thinking “what more can I do”, especially to get an edge on the other guy. And, he is a learning machine with a cumulative mental file cabinet. And he always thinks like a horse handicapper, he’s always thinking about probabilities.
So what is Buffett’s secret method? Here it is step by step:
- Look at the risk of loss. What is the probabilty that I will permanently lose money here, and what could happen that would result in total loss? If there is ANYTHING that could reasonably result in a total loss, stop right there. Buffett never tries to talk himself into any investment. He says that much of his success is from immediately passing on things due to realistic appraisal of catastrophic risk.
- Look at historical financial data. Look at the historical quarterly sales, expenses and profits (and cash flow of course) for each line of business or operating unit. DO NOT build a model or try to predict the future. Schroeder says there was not one model of any kind in Buffett’s files - just simple hand-written tables with historical financial data.
- Once he’s happy with the first two critieria, he sets his price. He “only” requires that he receive a day one return of 15%, with a good likelihood that his return will compound from there. Although Schroeder is not clear on this, I assume he looks at cash earnings or the so-called “owner’s earnings” for his 15% return. Essentially this is cash from operation, less one-time and options benefits, minus maintenance or essential capital expenditures. So you could say he is looking to buy in at 6.67 (or less) x today’s cash flow - something that’s been nearly impossible up until September.
There you have it, Buffett’s secret. Extreme simplicity that requires extreme discipline to execute. Buffett has the advantage of not having to answer to anyone. He says he gets up and looks in the mirror, then everyone has had their say for the day. Furthermore, he believes that 90% of being successful in business is guts: you must only answer to yourself. He can wait indefinitely for a good opportunity. This is in direct contrast to the typical money manager, who has to answer to clients, employers, media, and on and on. Hence Buffett’s is largely an IMPOSSIBLE strategy to execute on Wall Street. However, as an individual investor you only have to wrestle with your own psyche, and that will be the hardest part of investing like Buffett.
What about future predictions?? Everyone knows the stock market is always looking 6 months ahead, always anticipating the future. Buffett says that the whole purpose of investing with Graham’s infamous “margin of safety” is to render forecasting unnecessary. And margin of safety is ALWAYS a function of price paid - hence Buffet’s 15% day one return requirement. Imagine if everyone invested this way. Even more Wall Streeters would be out of jobs: analysts, strategists, economists - worthless (not that they have any value now - they’re just paid as if they do).
I plan on presenting a series of stock ideas over time in the premium blog that I think fit Buffett’s “secret” method. There has been no better time in my 12 year investing career to look for such bargains. Sure it’s tough out there, and anything you buy today will likely go down tomorrow. Buffett was recently interviewed by Tom Brokaw, and had this to say about how to deal with today’s market, and how investors can steel themselves against the rampant fear and panic:
If you own a farm nobody tells you when it’s gone down 50 percent ’cause you don’t get a quote every day. But you really look to the farm and what it produces to determine whether you made a good investment. Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they’re making a mistake.
They have to look to the business, the asset itself. If you own an apartment house you wouldn’t get a quote on it every day. You’d just look at– what the rent rolls were, and your taxes were and expenses were. And if they all came in with–in line with what you expected when you bought it, you’d feel you’d made a satisfactory investment, and you’d never get a quote on it. So I don’t look at quotes. I can’t tell you what Berkshire Hathaway is selling for today.”
No Mere Buffett, A 14-Course Menu - Steven Wevodau
Dear Mr. Buffett
What an Investor Learns 1,269 Miles from Wall Street
by Janet Tavakoli
Wiley 2009 $24.95 (list) Hardcover
Chicago derivatives consultant Janet Tavakoli is a rare jewel in the financial markets. Arguably best known for weighty textbooks with such alluring titles as ‘Structured Finance & Collateralized Debt Obligations,’ she has a nice sideline in delivering uniquely pungent commentary on credit-related conundra in venues including her own website, US Securities and Exchange Commission comment filings, and on-the-record in the allegedly grown-up media where “people familiar with the matter” usually lurk.
Most remarkably, she deserves as much acclaim as anybody, and much more than most claimants, for calling both the cliff-edge and the depth of the ravine into which global capital markets have tumbled.
But another Buffett hagiography? Is anything left to be said about Avuncular of Omaha, the genial great white with a penchant for apparently ignoring his own epithets (especially that one about “financial weapons of mass destruction”)? Just in the last few months we’ve had ‘The Snowball,’ Alice Schroeder’s near 1000-page authorized doorstop; Roger Lowenstein’s ‘Buffett: The Making of an American Capitalist;’ and ‘Pilgrimage to Warren Buffett’s Omaha,’ Jeff Matthews’ dispatches from the Berkshire Hathaway (BRK.A) annual meeting. Among plenty of others.
But this book is much more than mere make-weight for Barnes & Noble’s Buffettophilia section. It is just as much the first of what will doubtless be dozens of books telling the story behind the global dodgy asset securitization scam, which Tavakoli, noting the first breathless Madoff Meltdown headlines, recently characterized as the real “largest Ponzi scheme in the history of the capital markets.”
It’s great to have an open mind,
but don’t leave it so
open that your brains fall out.
A long-time Buffett fan and Berkshire Hathaway shareholder, Tavakoli builds her plot around a fitful correspondence that turned into an afternoon in Omaha where her low expectations — “If Warren had simply avoided overt rudeness, it would have been an upgrade from most finance professionals” she had dealt with — were dashed on the rocks of mutual respect and a shared thesis, in the dog days of late summer 2005, that the world had strapped itself into a handbasket headed straight to financial hell.
The narrative lives up to the book’s title as Tavakoli holds her personal portfolio decisions to Buffett’s standards, contrasting his philosophy and behavior with those of a long roll-call of Icaruses on such topics as transparency, complexity (or relative lack thereof), risk comprehension (and tolerance), leverage (in both its overt and covert forms) and that little something that mostly comes across as, for want of a better word, honesty.
She even indulges a little Buffett-like do-as-I-say, not-as-I-do: “I run a hedge fund. My strategy? It’s proprietary…but you are not entitled to that much information,” setting up familiar arguments about the impact of fees, liquidity, the fragility of genius and various other demerits of the ‘asset class’ now well down the road toward a well-deserved bout with humility.
So far, so Buffett. But the book’s real strength is the sub-plot that emerges as Tavakoli tugs vigorously at the seemingly disparate threads of the current financial crisis, naming names, citing cases and leaving no schmuck — whether investment bank, credit rating agency, monoline insurer, mortgage brokers, regulators and their ilk — unspared. Based on more than 20 years in the derivatives arena, and having served time at Salomon Bros, Bear Stearns and Goldman Sachs, she knows that of what and whom she speaks.
‘Dear Mr Buffett’ is, like its author, strongly, often harshly, and, more than rarely, tartly, opinionated. The attitude is, however, well-supported by the facts; should anyone ever display the slightest interest in criminalizing the criminals who led us down this path, a prosecutor could do worse than ordering up copies for the grand jury.
One thing the world is not going to run out of any time soon is books on subprime credit-turned-global financial meltdown. But it’s doubtful that many, or any, will so closely match the ripping yarn of financial upset with concepts that any — and perhaps every — investor can apply to their own financial security. This book was already at the printer when the Madoff Maelstrom broke, but it’s highly doubtful that anybody who absorbs the message of ‘Dear Mr Buffett’ will ever need confront that kind of mayhem.
Buffett gives cowboy boots to cancer fundraiser
POSTED BY STEVEN WEVODAU
Billionaire Warren Buffett gives autographed cowboy boots to cancer research fundraiser
Besides signing a boot, Buffett wrote “I love beef.” The 78-year-old’s love for T-bone steak dinners is legendary, and he even uses “tbone” as his monicker when playing bridge online.
The boots Buffett donated will be auctioned off when the ball is held June 5-6 near Doniphan, Neb.
The auction will also feature a camouflage pair donated by Larry the Cable Guy. The comedian, whose real name is Dan Whitney is a Nebraska native.
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