Intelligent Investor Club

It has been a while since I last sumarised the annual letters that Warren Buffett writes to his shareholders. I was halfway through the 2001 letter, and will attempt to round it up here.

In that year, Warren Buffett had lukewarm feelings about stocks for the rest of the decade. He felt that the market had outperformed the business for a long period of time, and that had to end. Any investor buying in at that time would likely be disappointed.

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There are many reasons why an investor or a trader can lose money.

One main reason is being too fixated on the price of his stocks.

When Warren Buffett buys shares, he treats it as a purchase of a business (either whole or part of). The market price is simply a quote that he can use to buy up stakes. He can choose to take it or ignore it. If the price is favorable, he makes use of it to his advantage. If the price is not, nothing needs to be done.

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Berkshire Annual Letter 2000 (Part 2)

Warren Buffett prefers to buy entire businesses rather than just a portion of a listed stock.

One reason is that their managers tend to be more rational and owner-oriented than at many public companies.

The main reason, however, is because of the tax benefits. Without going into details, owning 100% of a company ensures that Berkshire will only be taxed once and not twice on the holding.

All assets can be valued using an investment philosophy laid out in 600 B.C.

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One of my readers, Ken, asked me this question:

Read your blog. Very good- I wonder if you do discounted cash flow analysis for the stocks you value (as opposed to the PE multiples approach).

If you do, then, how do you evaluate a company with decrease in earnings growth in the first year of projection?

Thanks for your input.

I gave Ken a very concise reply:

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Berkshire Annual Letter 1997 (Part 3)

If you intend to eat hamburgers all your life and you are not a cattle producer, do you prefer higher or lower prices for beef?

If you are going to buy a car from time to time but are not an autor manufacturer, would you prefer higher or lower car prices?

The answer to these two questions are obvious. Now, for the third question.

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The gain in networth for Berkshire in 1997 was $8.0 billion, a good 34.1%. According to Warren, this return was no big deal. When the market goes on a bull run, any investor can get large returns.

It is important to recognise this and not become over-confident of one’s investment abilities during a bull run.

In fact, the S & P index rose almost as fast as Berkshire. Berkshire tends to underperform the S & P during a market boom. The reason is that Berkshire always has to pay tax, something that neither an index nor a mutual fund needs to pay.

Continue Reading » …Continue reading » Berkshire Annual Letter 1997 (Part 1)

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Berkshire Annual Letter 1996 (Part 7)

Warren Buffett feels that the best way for the majority of people to invest is through an index fund. These people are sure to beat the net results delivered by the majority of professional fund managers.

For the people who elect to do their own investments, there are a few important things to remember. Smart investing is not complex. Neither is it easy.
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Berkshire Annual Letter 1996 (Part 6)

The portfolio of Berkshire shows little change compared to the previous year.

Warren Buffett considers inactivity as intelligent behaviour.

He will never trade highly-profitable subsidiaries just because of a small change in some economic indicator. Neither will he do so because some Wall Street expert changes his views on the market.

In fact, this principle applies to his minority positions as well. In both cases, you want to acquire at a reasonable price, a business with excellent economics and able, honest management.
Continue Reading » …Continue reading » Selecting Stocks Investments

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In 1995, Berkshire had an increase in networth of 45%. Despite this, Warren Buffett does not think of it as anything amazing as it is a year in which any fool would have made a great deal in the stock market. As he paraphrases President Kennedy, “a rising tide lifts all yachts“.

There were also three good acquisitions: Helzberg’s Diamond Shops, R.C. Willey Home Furnishings and GEICO. These will be discussed later on. Warren Buffett and Charlie Munger likes to make acquisiton of two types:

1) A negotiated transaction that allows them to buy 100% of a company at a fair price.

2) A modest percentage purchase of an outstanding business from the stock market at a pro-rata price well below what it would take to buy 100%.

The employment of these two strategies gives them an advantage over other people who only stick to one strategy.

In addition, they have two factors operating in their favour:

1) Outstanding managers with strong attachment to Berkshire.

2) Their own considerable experience in allocating capital rationally and objectively.

The main disadvantage that they face is their big size. Instead of coming up with just good ideas, now they need to come up with good ideas that are big.

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Common Stock Investments

The number of companies where Berkshire had a stake of over $100 million continued to be low in number and simple in concept. The big investment ideas is summarised by Warren Buffett as:

“We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong.”

The performance of an investment does not depend on the complexity of the investment. If you can evaluate correctly a company that is simple to understand and enduring, the result is the same if you had correctly analysed another complex investment alternative.

Rather than try to time his purchases, Warren Buffett will determine the fair value and buy when there is a margin of safety.

It is foolish to stop buying shares in an outstanding business whose long-term future is predictable, because of short-term concerns over the economy or stock market.

Also, before buying new investments, Warren will consider adding to old ones first. If a business is attractive in the past, it could still be in the present/future.

Incidently, quite a number of the purchases that Warren Buffett made for Berkshire are what similar to what he bought many years ago as a private investor.

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