Best Quote: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale will give good results
Warren Buffett is by far the most successful investor of all times. He buys businesses that are simple and easy to understand. Once a business has been bought the time to sell it is “almost never”. Warren Buffet tries to look at stocks as pieces of part ownership of businesses. Buffet rarely follows the minute-to-minute fluctuation in stock prices and prefers to stay in the small town of Nebraska. Buffet’s holding period often extends into decades and this particular quote makes for a very interesting reading. In a a recent letter to the shreholders of his company, Buffet wrote:
“We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody’s in 2000. Brokers don’t love us”
Buffet argues that the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and above all the durability of that advantage.
Key Strategies
• Be focused and buy concentrated portfolios – they perform better. Buying two stocks in every sector will help you create a zoo not a portfolio. A person who diversifies is the one who is unsure of his investments. Buffet once put about half of his wealth in a single stock “American Express” when he believed that the company was into a one off problem.
• Buy what you see and understand. Buffet never bought a single technology company in spite of being a very good friend of Bill Gates.
• Buy businesses not stocks. Buffet advocates investors to be and think like passive a owner of that business
• Understand the Margin of Safety and the Circle of competence. These are Buffet's favourite words. Do not be a jack-of-all-trades buy stocks of businesses that you understand.
• Employ the magic of compounding
• Investing is a full time job (24x7x52). If you can go to a dentist for your teeth, cobbler for your shoes, barber for your hair then why can’t you go for an expert for your wealth.
Piquant styles:
Separated bottle corks from the garbage so that he could know which company sold more cold drinks
• It took him about 2 years to figure out that his room was painted in his absence as he just looked at books inside the room.
• Although he owns a private jet he preferred to stay away from Wall Street in a small town and declined to invest in a company whose CEO took out a brand mew letter pad to explain the company’s plans
• He once invested in a company located on the seashore which had only three sides of its building painted. The side facing the sea was left without paint.
• When his wife spent US $ 15,000 on home furnishing his first comments to a friend were” You know how much is that worth if you compound it for 20 years.
Key learning
Business
Simple understandable – mostly buy what you see category
• Consistent operating history
• Favorable long-term prospects
• Strong Franchises with pricing power. Buffet wanted to hold on to companies that were surrounded by a moat so that your competitors could not squeeze you on prices and profits.
Amongst Buffet’s favorite businesses were Banks. Media and Consumer related stocks. Buffet liked T.V stations as he thought that the fixed capital requirements were low, companies operated with little inventories and negative working capital and had a very high profit margin on sales.
Management.
• Trust worthy managements deserve premium. They should be clear and forthcoming
• Avoid companies with managers following lavish and extravagant styles
Financials
• Look for High Return on Equity (RoE)
• Look for high and stable profit margins
Markets
• Use conservative earning estimates and the risk free rate of return as the discount rate
• Valuable companies can be bought at attractive prices when investors turn away.
Companies to avoid:
• Buffet avoided investing into companies that required a high degree of research. He did not buy technology and pharmaceutical companies.
• Buffet was apprehensive about retailing companies his concern – A company could report good numbers year after year and then suddenly go bankrupt. Buffet avoided investments into aircraft carriers as well.
• Companies that had a very long inventory cycle like farm (agricultural) businesses should also be avoided.
• Buffet advised investors not to put money into Cash guzzling businesses but instead look for businesses that generated free cash flows year after year.
• Commodities were an absolute no - no. Buffet stated that agricultural commodities in particular are dependent upon the mercy of weather, which adds another twist to computation of the probability of an event.
References:
• Warren Buffet – The making of an American Capitalist – Roger Lowenstien
• The Warren Buffet way – Robert.G. Hagstorm.
• The Essays of Warren Buffett : Lessons for Corporate America by Warren E. Buffet
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