If you want to learn how to invest like pro, who would be a better teacher than Warren Buffett, the Oracle of Omaha?
Every time Warren Buffett says something, I feel like a kid in search of light and I know he holds it!
Fortunately for you Mr Buffett has been kind enough to publish all his letters to shareholders of Berkshire-Hathaway on his website. That way, everybody with an internet access can easily download and read all theses letters to get some advice from the greatest investor of all times!
But, and there’s a but, this means you would have to go through all the technical stuff about the performance of company X (some of them don’t even exist anymore), you would also have to read about great CEOs who have left this world by now and also about accounting principles that might be outdated as of today. There is more than 800 pages of small characters reading to do if you wanna read them all!!!
I, for myself, found it very instructive and I had a lot of fun going through all these letters. Warren Buffett could have been a stand up comedians if he had wanted to. But, I have to take the bus to go to my job, which gives me at least 2 hours per day of lost time. So, I have a lot of time to read!!! Maybe that’s not your case.
Here I come handy! Since I’ve already been through all of them with my yellow marker, I thought “hey, why not share my work with the community of investors out there?!”
So I did!
You will find here the best quotes of all the letters to shareholders of Berkshire-Hathaway plus my own interpretation of these quotes. These letters were written since 1977 by Warren Buffet!
Since it’s a huge job, I’ll start by 1977 and add to the post frequently until I’m done!
Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.
Warren Buffett has emphasized the true importance of investing companies who have a strong economic moat over their competitors. This advantage can generally be measured by the return on equity capital that the business to able to achieve. If the company has a wide moat, it should be a lot higher than it’s competitors. This advantage should also be consistent historically. When picking a stock, it is suggested that one should consider picking the strongest in its industry. Pick stocks like if you would pick a player to win a championship! Take only the bests!
One of the lessons your management (read – the management team of Berkshire-Hathaway) has learned – and, unfortunately, sometimes re-learned – is the importance of being in a business where tailwinds prevail rather than headwinds.
It is widely know that Berkshire-Hathaway was a textile industry at first. Warren Buffett made it evolve into a holding over time. He had a hard time managing his manufactures with a great return on equity, but conscious that most employees of his companies were at the end of their career and would have had a lot of difficulties finding a job elsewhere since their competencies were not transferable, he had worked with them to keep the companies afloat until he had no other choice than to sell or dismantle them. With the growing competition from abroad, it has been a hard time for him to manage a sinking industry profitably.
Insurance companies offer standardized policies which can be copied by anyone. Their products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition… But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance.
There are two important things to learn from this quote.
First, Warren Buffett was a disciple of Benjamin Graham, know as the father of value investing. Based on his theory, an investor should always pick stocks whose price is undervalued based on its intrinsic value. This gives the investor a “margin of safety”. But, over time, Mr Buffett realized that some stocks should be bought even if they don’t seem overvalued because they are simply cash cows! These stocks usually have a “wide moat” (strong competitive advantage) over their competitors and are able to generate strong and consistent cash-flow year after year. That’s one of the reason why he invested in Coke (KO), one of the strongest cash-cow the world has known!
Second, and he said it a lot of time, the people are most important! Warren is known as an investors whose interested in picking the best CEOs, buying their business while keeping them in place. He knows that great CEOs are, like great baseball players, a very rare natural resource! In today’s world, where CEOs are used to get ridiculously high paycheck, plus stock options that usually aren’t to the benefit of the shareholders, it’s more clear than ever that this assumption is true! What’s incredible, is that Warren said it in 1977! There are so many crooks in this world. If you think that the CEO of the company you want to invest in passes his own interest before yours, than avoid investing in that company!
Just at it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e. marketable common stocks.
For Warren, investing means long-term. Short term means speculation. People often tend to rely on news who will have a short-term impact on a business to make a purchase decision. For Warren, this is unsound. He repeated very often all throughout these letters that you have to put to same effort to buy a single share of a company that you would put into buying to whole company. A share is not a lottery ticket! It’s part ownership of a corporation with products, employees and managers. If people would apply these simple and sound principles, how many cool stocks would be out of favor?!
We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short-term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.
What else could I say about that? It’s pretty self-explanatory! While Warren has never given any well-defined and precise checklist about how he picks stocks, he’s given enough to make us understand his logic. These 4 criteria are the core principles of his investing decisions. And I honestly think it should be criteria that every investor should consider.
When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long-term into correspondingly excellent market value and dividend results for owners, minority as well as majority.
It’s a widely known fact that Warren Buffett likes dividends. They give you hard cash in hands to invest in other great opportunities. They are a testimony that the company really makes money, because it can be so easy to be creative in accounting.
Warren has made a lot of money with dividends and capital gain by taking huge stakes in a couple of great companies at the right time. The “big four” are at the core of his holding. It’s composed of American Express (AXP), Coca-Cola (KO), IBM (IBM) and Wells Fargo (WFC). Why invest so big in only a couple of companies? Simply because they are cash-cows! And when cash-cows are on sale, you have to be ready to invest a lot!!! This goes against the principle of diversification and Warren knows it. But, hey! He’s Warren Buffett, the Oracle of Omaha! Don’t forget that you are not!
[author] [author_image timthumb='on']http://quityourdayjob101.com/wp-content/uploads/2014/03/ID-10050051.jpg[/author_image] [author_info]Hi, my name is Allan. I'm the masked blogger. Like you I'm a modern slave, prisoner of a 9@5 job in Corporate America. They told us when we were young that we would live in a society of leisure and that technology would permit us to work only a couple of hours per day. But we live in a society of stress and uncertainty. My situation could be a lot worse and I know it. So many humans are suffering on this planet. But a golden cage remains a cage anyway. At least, I have an escape plan. I will retire before 45 years old over my passive income. This is a dream that is so powerful that I will make sure it happens. To build my wealth, I mainly invest in undervalued dividend growth stocks. [/author_info] [/author]
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