Valuing a business and applying a margin of safety
How to get better and better at doing this.
1.20
Ben Graham taught him about a certain types of businesses.
Charlie taught him about durable competitive advantage and first class businesses.
Over time, he learned more about other types of businesses.
Not important to know every businesses.
Important to know where your circle of competence is.
You don't have to be an expert on 90% of the businesses but you do have to know the ones that you put your money into, and that is a very small part of the universe.
2.30
Think about the businesses you would pay in your own hometown.
Which would you like to buy into, which do you understand their economics, which do you think will be around in the next 10 or 20 years from now, which do you think will be very tough to compete with.
Just keep asking yourself questions about businesses, talk about this with other people about them, and you will extend your knowledge over time.
Always remember that margin of safety and I think you basically have the right attitude because you recognise your own limitations and that is enormously important in this business you will find things to do.
3.17
6 to 7 years ago, Buffett invested into Korean stocks. He invested into 20 stocks which he felt had margin of safety. Why 20 stocks? Because he cannot anticipate which counter might be problematic (due to crooked managers or due to competition). They were so cheap and this form of investing was based on Ben Graham approach.
4.00
If you wish to be good at something, you have to think about it a lot and learn a lot and practice doing it a lot, and in this field you have to keep learning because the world keep changing and your competitors keep learning. Try to wake up each morning a bit wiser than when you went to bed the night before. When you keep doing that for a long time, and accumulate experience (good and bad), as you try and master what you are trying to do; people who do that never fail utterly. They may have a bad period when luck goes against them or something, but very few people have ever failed with that. If you have the right temperament, you may rise slowly but you are sure to rise.
5.15
Charlie, did you take any business course in school? No, I took some accounting. A gentleman in Omaha Club seemed so prosperous and Charlie wondered how he achieved this. Well this man enjoys practically no competition in his business. He gathers up and renders dead horses. That was avoiding competition by one strategem.. By asking such questions from a young age, you eventually learn the same thing. A lot of businesses gone broke, a lot of businesses sold out under distress, and some of the people who rose from small beginnings which nobody thought of as the great glories of that early time and that is the kind of the way life is. It is hard to get anywhere near the top and it is hard to hold any position once you have attained it. But I think it was likely to predict that this man is likely to win because he cared more about doing it right, they cared more about avoiding trouble, they are more discipline on themselves. I was automatically doing it, what was working, what was failing, why was it failing, and if you have that temperament, you are gradually going to learn and if you don't have the temperament, I cannot help you.
8.20
It is avoiding the dumb things. You don't really have to be brilliant.
9.10
Charlie was incapable of looking at a business without thinking the economic fundamentals of it.
10.00
What businesses have the best return on capital on earth?
Capital necessary to run the business versus the capital we might have to pay for the business.
If you run the Coca Cola company excluding the bottling business, you can run it without any capital. On the other hand, when you buy it for $100 million. you can look at this as the base capital.
When we define what is a good business, we look at the capital actually needed in the business and
whether it is a good investment or not depends on how much we pay for it in the end.
There are a number of businesses that operate on negative capital. Any of the great magazines operate with negative capital (eg. Fortune). Subscribers pay in advance, and there is no fixed assets and the receivables are not that much and the inventories are nothing. There are many great businesses that operate needing very little capital, eg. Apple. The best ones are those who can get very large while needing no capital. See's Candy requires very little capital. Generally, the great consumer businesses need relatively very little capital. The businesses where the people pay you in advance, eg. magazines, insurance, you are using your customers capital. Of course, many other people like them too, so this can become very competitive and buying them. Many of the service types businesses and consumer businesses require very little capital; and when they get to be successful, they really can be something.
13.18
Charlie: The formula never changes. If you were to own only one business in the world, what would it be? If you name some businesses with incredible pricing power, you are talking about businesses that is a monopoly or a near monopoly.
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