Stock Investing With Warren Buffett, Investment Advice From a Billionaire
How to Make Money With Value Investing
Warren Buffett, billionaire investor, businessperson and philanthropist, is often called the "Sage of Omaha" or the "Oracle of Omaha." He is well known as the second or third richest man in the world, behind Bill Gates of Microsoft and recently outranked by Mexican telecom titan Carlos Slim Helú. Time Magazine included him with the 100 Most Influential People in The World.
His timeless philosophy of value investing
has proven relevant and profitable in all types of markets and financial environments, and has never gone out of style. Following his simple strategies, he has built the holding company Berkshire Hathaway to a powerhouse with a market value of $196 billion. As the largest shareholder and CEO, his net worth is about $52 billion. Warren Buffett has made his reputation as the "world's greatest investor" by taking the longer view, buying quality stocks with good earnings power and staying with them through bull and bear markets. He is a legend in the investment world.
A Teenage Business Whiz
Warren Buffett was born in 1930 In Omaha, Nebraska. His father was a stockbroker and U.S. Representative. In school he was an excellent student, particularly in mathematics. At the tender age of 11, he started working at his father’s brokerage. His first stock purchase taught him a lot about investing. He bought Cities Services, CITGO, shares for $38.25 and sold too soon at $40, while the stock continued on to $200 a share.
At the age of 14, Buffett
and a fellow high school student began a small business, Wilson Coin Op, installing pinball machines in barber shops. He also had several newspaper routes and sold soda pop and chewing gum door-to-door. Next he rolled his profits into 40 acres of farmland, which he rented to tenant farmers. By the time he graduated from high school, Buffett was a successful entrepreneur who didn’t think he needed college.
The First Pivotal Influence
At his father’s urging, he attended the Wharton School at the University of Pennsylvania for three years and then graduated from the University of Nebraska. Studying The Intelligent Investor
by Benjamin Graham was a pivotal influence on his own investment career. Graham teaches value investing, purchasing shares in companies that are significantly cheaper than the intrinsic value of the company.
Rejected by Harvard Business School
, Buffett enrolled at Columbia University, where the well-known securities analysts, Benjamin Graham and David Dodd, were on the faculty. Buffett went on to receive a Master's degree in economics in 1951. Legend has it that Buffett was the only student ever to receive an A+ from Benjamin Graham.
First Steps As an Investor
After his masters work, Buffett stayed at his father's brokerage Buffet-Falk as a salesman, until his mentor, Benjamin Graham, offered him a position at Graham-Newman as a securities analyst in 1954. When Graham retired two years later, Buffett returned to Omaha
Buffett established his first investment partnership, Buffett Associates, Ltd., in 1956. It was financed by $100 from Buffett, the general partner, and $105,000 from seven limited partners who were Buffett's family and friends. He ran his group of limited partnerships out of his bedroom. Using the investment principles of Benjamin Graham, the partnership investments returned about 30% annually, compounded between 1956 and 1969.
Discovering Berkshire Hathaway
The second turning point in his career was Berkshire Hathaway, a large textile company in a depressed industry, whose shares were selling for less than its working capital. He began purchasing its shares in 1962, and eventually dissolved his partnerships to run Berkshire Hathaway. He used the Berkshire cash flow to purchase private businesses and the stock of public companies. Eventually, he sold off the failing textile operations and converted Berkshire Hathaway to an investment holding company. His early focus was on acquiring insurance companies, which invest large cash reserves to pay future claims.
Over the course of the next 45 years
, Buffett acquired significant positions in many companies. As of 2007 Berkshire Hathaway holds more than 60 companies, both public and private, in such diverse industries as railroads, retailers, insurers, ice-cream stands, insurance, clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jets. Buffett buys them because are dominant players in their respective industries, specialize in various niche markets, or possess other unique characteristics to separate them from their competitors.
Berkshire Hathaway Class A common stock
is currently trading at $129,050 per share. Berkshire Hathaway Class B stock was created for the convenience of entry-level shareholders, and trades at $4,300.
Warren Buffett's Stock Investments
Through Berkshire Hathaway he holds a substantial piece of 38 publicly traded companies, most of them famous brands:
|1. Coca-Cola KO||2. American Express AXP||3. Wells Fargo WFC|
|4. Procter & Gamble PG||5. Moody's MCO||6. Wesco Financial WSC|
|7. Anheuser-Busch BUD||8. Washington Post WPO||9. ConocoPhillips COP|
|10. Ameriprise Financial AMP||11. Wal-Mart WMT||12. M&T Bank MTB|
|13. USG Corporation USG||14. American Standard ASD||15. First Data FDC|
|16. H&R Block HRB||17. Comcast CMCSA||18. Costco COST|
|19. General Electric GE||20. Tyco International TYC||21. SunTrust Banks STI|
|22. Nike NKE||23. Gannett GCI||24. Gap GPS|
|25. Home Depot HD||26. Torchmark TMK||27. Iron Mountain IRM|
|28. Lexmark International LXK||29. United Parcel Service UPS||30. Outback Steakhouse OSI|
|31. PetroChina PTR||32. ServiceMaster SVM||33. Sealed Air SEE|
|34. Pier 1 Imports PIR||35. Lowe's Companies LOW||36. Comdisco Holdings CDCO|
|37. Tesco PLC||38. Kingfisher KGFHY|| |
Investing Like a Billionaire
Warren Buffett searches out high-quality businesses with long-term competitive advantages, what he describes as "a moat" that keeps rivals at a safe distance. Coca-Cola is an example of a “wide moat” because consumers are willing to pay more for a Coke than for a generic cola with a similar taste. Salt is the opposite of a “wide moat.” It is a commodity business selling undifferentiated products and facing direct competition. Consumers do not prefer one brand of salt to another. Investing in “wide-moat” businesses has become a trademark of Warren Buffet.
He stays away from businesses
he doesn't understand, such as technology. Perhaps most important, Buffett is looking for a well-run company with a solid management team that will stay on to run it. Unlike most investors, once he buys a company he wants to own it for the long haul.
Buffett also waits for the right moment to buy at a reasonable price, after market corrections or downturns have created buying opportunities.
He is known for being conservative
when everyone else is speculating and for being aggressive when others are worried about losing their capital. This contrarian strategy is what led Buffett's company through the Internet boom and bust without significant damage, although critics say that Berkshire missed out on potential opportunities because of it.
Warren Buffett views himself
as a capital allocator above anything else. His primary responsibility is to allocate capital to businesses with good economics and keep their existing management to lead the company.When Buffett acquires a controlling interest in a business, he does not usually interfere with the running of the company, except to hire the top executive. He expects the company to earn a return on equity above his target rate. If the company cannot invest its earnings profitably, Buffett finds new opportunies to uses them
When asked what is the most powerful force
on earth, Albert Einstein answered, “Compound Interest.” Warren Buffett would probably agree.
How to Find a Good Investment with the Buffett Model
- Is the company in an industry with good economics, rather than in an industry that competies on price.
- Does the company have a consumer monopoly or brand name that commands loyalty?
- Can any other company with an abundance of resources compete successfully with it?
- Are the earnings on an upward trend with good and consistent margins?
- Is the debt-to-equity ratio low or is the earnings-to-debt ratio high? This means that the company can repay its debt even in years when earnings are lower than average.
- Does the company have a high and consistent return on invested capital?
- Does the company retain earnings for growth?
- Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
- Is the company free to adjust prices for inflation?
- He also asks at what price is the business a bargain. The answer is when it provides a higher rate of compounded return relative to other available investment opportunities.
Buffett married a singer, Susan Thompson, in 1952. They lived in Omaha and had three children, Susie, a homemaker, Howard, a photographer, and Peter, a musician. All of the children are active in Berkshire Hathaway and have charitable foundations. Warren and Susan began living separately in 1977. Susan moved to San Francisco, while Buffett and Asrid Menks, a former waitress, lived together in Omaha. Susan stayed active in the company and the arrangement was so amicable that their Christmas cards were signed “Warren, Susie and Astrid.” On his 76th birthday, two years after Susan’s death from cancer, Buffett married Astrid Menks.
Buffett is an enthusiastic bridge player
and often plays with Bill Gates, the world’s richest person. Golf is his favorite sport.
While other CEOs plunder their companies
, Buffett lives simply on a salary of $100,000 in Omaha. He lives in the same gray stucco house he bought in 1958, Happy Hollow House. Recently he bought a 2006 Cadillac to replace his Lincoln Town Car, which was famous for its Thrifty license plate. He drives himself to work and travels without an entourage. Only recently he began using a cell phone, but he doesn’t use email and doesn’t have a computer on his desk. He enjoys steak, hash browns and Cherry Coke.
Buffett does not intend for his family to inherit the bulk of his fortune. Buffett once commented, "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing"
Instead, he has selected charitable organizations
to distribute his money with the purpose of alleviating pain and suffering in the world. He is giving the largest charitable donation in history, more than $30 billion dollars in 10 million Berkshire Hathaway Class B shares, to the Bill & Melinda Gates Foundation over a period of 20 years. Buffett is also on the board of the Gates Foundation. Other family foundations will also receive endowments.
Economic Outlook and Forecast
Buffett believes that the U.S. dollar will lose value in the long run. He views the United States expanding trade deficit as an alarming trend that will devalue the U.S. dollar and U.S. assets. As a result of devaluation, many U.S. assets are owned by foreigners. The weak dollar convinced Buffett to enter the foreign currency market for the first time in 2002. However, he substantially reduced his stake in 2005 as changing interest rates increased the costs of holding currency contracts. In 2007, Buffett has been buying the Brazilian real, noting that it has doubled in the last five years against the dollar.
Buffett continues to be bearish on the dollar
, and is buying companies outside the United States. In 2003, Buffett invested in PetroChina Company Limited, a Chinese oil conglomerate with ties to Sudan. He liquidated his PetroChina holdings in October, 2007, making about $3.5 billion on a $500 million investment, which is a return of 700%.
Buffett emphasized the non-productive aspect of gold
in a 1998 speech at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Buffett favors the inheritance tax
, saying that repealing it would be like "choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."
He actively supported FASB 123(r)
, a change in the accounting rules for Stock Option Expensing. It requires public companies to report and disclose the stock options they issue to executives as an income statement expense.
His original methods
have brought him financial success. Furthermore, he is an outspoken advocate of corporate integrity who practices what he preaches. The lesson he teaches, his legendary investment strategy, is that patience pays, so buy them and hold them.
I hope life brings you much success. I wish you a very happy day.
----- Surfer Sam