Notes from a Warren Buffett The
Warren Buffett (Trades, Portfolio) is a legendary value investor who enjoys teaching his philosophy to others. One of Buffett’s most iconic lectures was a 2001 lecture at the Terry School of Business, part of the University of Georgia. I came across this conference recently and learned many valuable lessons; here are my main takeaways.
Invest in what you understand
warren buffet (Trades, Portfolio) says he has an “old-fashioned” belief that he expects to make money by investing in what he understands. It aims to understand the economics of the business and how it may change (or not change) in 10 years.
The goal of investing is to understand your circle of competence. No matter how big your skill circle is, it’s more important to know the limits of your knowledge.
An example of this is Wringley’s chewing gum, which is a simple company to understand. Back in 2001, Buffett said, “The Internet isn’t going to change the way people chew gum,” and he was right.
Despite being longtime friends with
Bill Gates (Trades, Portfolio), Buffett doesn’t invest in tech companies meanwhile, it’s hard to pick winners. He uses the example of automakers and how their numbers have changed over the decades. There were 2,000 automakers at the start of the 20th ventury, but by the end of that era, only three major players survived. Picking the three winners would have been incredibly difficult, and ironically even they didn’t fare very well. It was actually easier to pick the losers in this sector. Indeed, as Buffett said, “the economic characteristics were not easy to define”.
Buffett also applied similar reasoning to the airline industry. There used to be over 400 airlines in Ohama alone, but they’ve all disappeared. The number of passengers was increasing every year, but the combined revenue of all the companies was below zero. As we now know, airlines would continue to mostly consolidate into a few giants.
We can apply this to television manufacturers as well, because the number of televisions rose from 6,000 in 1946 to 12 million in 1951, but the majority of television manufacturers in the United States all went out of business when Japanese companies took over. industry leadership.
In the tech bubble of 1999, even though you knew the internet was going to change the world, picking winners wasn’t easy. However, if we think of Coca-Cola (KO, Financial), which had a winning soft drink product that competitors couldn’t replicate, we see one of Buffett’s favorite examples of an easy-to-understand company. Founded in 1892, the company was selling 1 billion 8oz servings a day by 2000.
How to Calculate Intrinsic Value
The purpose of investing is to put money in now, with the plan to get more money back in the future. Intrinsic value is the value of all future cash flows, discounted to today. The challenge is to forecast cash flows and their potential growth.
Buffett suggests thinking about the entire market capitalization of the company and whether you would buy the entire company at the price. The same goes for any financial asset, from apartments to oil.
In 600 BC. J.-C., Aesop declared: “A bird in the hand is worth two in the bush. Buffett extends this proverb to “how many birds are there in the bush and when can you get them out?” Humorously, Buffett adds, “In the case of many internet companies, there were no birds in the bush,” referring to the tech bubble and crash of 2002.
The discount rate depends on interest rates or the risk-free rate, which is usually the rate for 10-year Treasury bills. When interest rates are low, the valuation multiple increases, and vice versa. This is why in 2022, with rising interest rates, we are seeing a compression of valuation multiples.
Buffett is incredibly humble and admits to many failures in the past. Ironically, he says his worst investment was buying the Berkshire Hathaway textile mill, which he has since turned into a successful conglomerate. Berkshire’s original business was purchased using the deep value or cigarette butt approach to investing. It was selling below net working capital per share and therefore looked cheap. But the business produced low returns on capital and was therefore not a good long-term investment.
Buffett said his biggest mistakes were perhaps “acts of omission, not commission.” There were big companies he knew enough about but didn’t decide to invest in. Buffett suggests being very disciplined and then “grabbing the big opportunities.”
Charlie Munger (Trades, Portfolio), Buffett has evolved his investing style to focus more on buying “wonderful companies at fair prices.” These are companies with characteristics such as high return on capital and a long trail of future growth. As Buffett said, “Time is the friend of wonderful business.”
Buffett thinks investors should imagine they have a “punched card” with 20 investment decisions they can make throughout their lifetime. This way, investors will ensure that they do enough thought and research on the companies they decide to invest in.
When to sell a stock
When Buffett started, he had “more ideas than money”. So he had to sell what he liked least to buy something better. But now Berkshire Hathaway is a global conglomerate, and Buffett’s preferred holding period is “forever,” so there’s not as much need to sell when better opportunities arise. However, he still suggests selling if “the economic characteristics have changed significantly”.
Don’t follow market mood swings
People tend to be very emotional when it comes to investing. They want to invest when stocks go up and become more expensive. Additionally, they tend to sell when stocks go down and get cheaper. Buffett suggests detaching from your emotions in order to be a successful investor.
Develop good habits
As a thought experiment, Buffett asked his class to identify someone in the lecture hall who they thought would perform best so they could give them 10% of their earning power forever. Next, he suggests identifying the main habits that the person should imitate. He says the key traits of successful people are not just “they have the highest grades,” but are more likely to be character traits.
Buffett suggests three key traits to look for and emulate in others: intelligence, energy, and integrity. It’s easier to develop good habits early in life. Conversely, Buffett thinks it makes sense to highlight the people you think won’t succeed and the traits they have, then you can aim to downplay them. “The chains of habit are too light to feel until they are too heavy to break.”
Buffett admires his great friend
Bill Gates (Jobs, Portfolio) in its approach to philanthropy. Gates approaches investing as a way to help people the same way as any other business strategy.
warren buffet (Trades, Portfolio) is an amazing investor and one of the wisest people in history. He has the incredible ability to communicate complex topics in an engaging way to inspire millions. I highly recommend reading this Buffett talk in its entirety for those interested in learning more about this excellent investor’s advice.