Want to invest like Warren Buffett?

It's about quality investing

Ask Buffett, who he thinks is the greatest investor in the world, and he will probably tell you his teacher: Benjamin Graham.

Having studied economics at Columbia Business School, Warren Buffett was taught by Benjamin Graham, and if that was not enough of a head start in his investment career, Buffett was fortunate enough to work with Graham, too. Both are seen as value investors – buying companies that trade less than their intrinsic values.

However, there is a school of thought that sees value as a bit of a misnomer. Clyde Rossouw, manager of the Investec Global Franchise Fund, argues that while Graham is known as the father of value investing, in truth he should probably be known as the father of quality investing, as most of the characteristics he speaks about in terms of the companies he looks for references 'quality' attributes, rather than value.

Value investing by definition involves buying bargains.

However, given the choice between buying a good-quality company rated on a higher price, or a lower-quality company attractively priced, Buffett, like Graham will opt for the former. 
That's because investors are more inclined to pay up for quality companies. In turn this offers potential for the share prices of good-quality companies to recover to (and above) their long-term average earnings multiple.

The "challenge" of too much cash

Besides gearing up for 'Investor Woodstock', what is the Sage of Omaha doing now? Sitting on a lot of cash – according to media reports Berkshire currently has around $25 billion in excess cash.

This 'challenge' of too much cash, some argue, is changing Buffett's investment approach.

Rossouw points to Buffett's investment in Burlington Northern Santa Fe Railroad operator, as an example of the investor trying to shed some of this cash. 'Yes, this investment has a strong 'moat' but it is highly capital intensive – keeping a railway maintained requires you to spend a lot of money consistently over time. It helps Buffett deal with a key problem which is the largess of excess cash generated by his insurance businesses each year.'

Buffett's cash pile could mean many things. 

• It could be, as some believe, a problem of too much money, and not enough investment opportunities. 
• It could be a precautionary measure to make sure his company is well positioned to cope in an increasingly uncertain environment. 
• It could be that Buffett is positioning himself to make another big deal.

Or it could be all of the above. But then we can't know everything about the most glorified and respected investor of our time.

Read more: http://www.thisismoney.co.uk/money/diyinvesting/article-2957271/Four-things-not-know-Warren-Buffett-probably-should.html#ixzz3XeBaAw4y

Seven surprising things you may not know about Warren Buffett

by THE INVESTOR on DECEMBER 4, 2008

Ihave just finished the The Snowball, the first biography Warren Buffett has cooperated with. It’s full of surprises, such as how Buffett had three leading ladies for two decades, and how his 1960s home was an accidental outpost of the counterculture.

But I’m more interested in how Buffett made his money. And while there’s few new facts about Buffett’s deals in The Snowball, the biographical format does put them into context. You get to see what makes him tick.

Here are seven interesting things I learned about Warren Buffettfrom The Snowball, and some ideas on how they can help your investing:

1. Buffett set goals young. (He really started, really young)

Buffet began obsessing over numbers as a child. He raced marbles with a stopwatch and calculated the lifespan of hymn composers when six-years old. He sold chewing gum at seven and Coca Cola when he was eight: the same year he began wearing a money-changer on his belt.

• His dad was a stockbroker. This gave him an early view of the markets
• At ten he was chalking stock prices at a local broker’s office
• The same year he visited the New York Stock Exchange, and was asked for a tip by senior Goldman Sachs partner Sidney Weinberg – an experience he never forgot
• His favourite childhood book was One Thousand Ways to Make $1,000
• At 11 he announced he was going to be a millionaire at 35, a seemingly crazy goal in 1941 (when a million really was a million)
• He filed his first tax return aged 14, having already made $1,000 (equivalent to around $12,500 in today’s money)

The takeaway: The power of compound interest takes years to work its magic. None of us has a time machine, so the main lesson is not to delay a day when investing for the future.

2. Buffett bought his first stock when he was 12-years old

Warren put everything his schemes had earned him into a stock, Cities Service Preferred, when he was 12. He also enrolled his sister, Doris.

Buffet was already learning how to hold shares through a slump

He paid $114.75 dollars for three shares, and watched the stock price fall from $38.25 to $27 a share. His sister Doris was not happy. When Cities Service went back up to $40, he sold. He made $5 a share profit, and got Doris off his back. After he sold, the stock rose to $202 a share.

Takeaway: We all learn the same lessons. Buffett’s business partner Charlie Munger says that because Warren started thinking about odds, stocks, and goals before he was a teenager, he’s years ahead of the rest of us.

I used to watch share prices rise and fall on the Teletext TV service when I was 11 or 12. At the same age Buffett was learning real-world lessons on holding shares through a slump and selling too soon.

You’ll only discover whether you have the stomach to invest through a bear market or whether you’ll be sucked up by the next property bubble by being an active investor. Start with small sums, sure, but don’t delay that start.

3. Buffet lied, shoplifted, and played truant as a kid

This one was a real surprise. As a teenager Buffett revealed a wild streak. He says:

“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.

“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

Takeaway: Even Buffett had to learn to be Buffett. I don’t know about you, but I found this heartening to read. Together with discovering that Buffett was a shy child who enrolled himself in Dale Carnegie’s public speaking course, it made him seem more human.

It’s easy to feel you haven’t got what it takes to make money. Some are born special, you might conclude. But Buffett’s history shows that even the world’s richest and most admired investor had to iron out his kinks.

Buffett’s history also makes me proud to be an outsider. Many of my college classmates entered the city or became management consultants, and have earned six-figure salaries for a decade. When property prices were booming, I’d sometimes wonder if I’d made the wrong decision by deciding to go it alone – even though I know that working a nine-to-five in an office and answering to some buffoon of a manager would kill me.

Discovering Buffett made being his own boss a top priority puts me in good company. I also suspect the unusual structure of Berkshire Hathaway grew out of Buffett’s non-confirming mentality.

4. Buffett is a businessman first, investor second

You’ll often read that Buffett evaluates stocks as if he’s buying the whole business. What I realised after reading The Snowball was Buffett doesn’t do this because he’s an investor who thinks like a businessman. Buffett is a businessman who is also an investor.

• Buffett ran multiple businesses while still a student: He sold refurbished golf balls, peddled stamps to collectors, ran a network of pinball machines when he was 17, owned a tenanted farm, and managed a 50-strong paperboy route
• He dealt hands-on with strikes and turf wars at newspapers from The Washington Post to the Omaha Sun
• Buffett didn’t just buy, hold and drink Coca-Cola – he engineered the replacement of its CEO
• With all the new businesses, from See’s Candies to GEICO, he added everything from their stock level reports to weekly sales projections to his endless daily reading
• Berkshire Hathaway is far from a simple holding pen for Buffett’s investments. He’s used his business acumen to produce an intricate money-making machine which takes cash from its subsidiaries and the float from its insurance businesses and reinvests it at higher rates of return, multiplying his returns

Takeway: Buffett’s success will never boil down to filters or ratios. Investors who try to ape him simply by reducing his methods to dubious cashflow projections or buying any old listed household name when its stock price falls 20 per cent will never replicate Buffett’s success. (Okay, rounding down roughly nobody is ever going to replicate Buffett’s success, but you know what I mean).

Buffett’s record suggests investors should spend as much time reading about business and management as they do calculating P/E ratios. The trouble is, all manner of financial ratios are available at a touch of a button. Buffett’s sense of business value is far harder to emulate.

5. Buffet makes mistakes

He really does! I was even more heartened by Buffett’s stinkers than by his golf ball robbery.

Some classic Buffett cock-ups include:

• Him and his friends spending $25,000 in 1957 on four-cent Blue Eagle stamps that the US government was about to take out of circulation. By securing and controlling the supply, they destroyed any chance of the stamps becoming valuable. His partners in the caper were still mailing him with postage paid for by sheets of the stamps decades later.
• He bought The Buffalo Evening News in 1977 and had lost $10 million within three years by becoming embroiled in a price war and a fight with the unions (though it later became very profitable)
• Buffett’s firm Berkshire Hathaway is living testament to his biggest mistake – spending millions to gain control of a doomed textile manufacturer
• Buying into Salomon Brothers in 1987 for $700 million eventually plunged him neck-deep into the Wall Street culture he so despised, when its rogue traders and poor management threatened his reputation and fortune

Takeaway: Mistakes happen even to the best of us. Sadly, having read The Snowball cover-to-cover I haven’t found a Buffett blunder to rank with my own worst investment (an iffy company called Homebuy that went bust overnight). But I saw plenty of examples where Buffett dusted himself down after an investment misfired and tried to learn from what went wrong.

Virtually all Buffett’s purchases of major insurance companies seem to have gone awry in the early years, for instance, and yet it’s by reinvesting all the cash thrown off by these companies that Buffett has maintained Berkshire Hathaway’s incredible growth rate.

The moral is to not despair when an investment turns out badly, but try to figure out what you can takeaway from it, as well as what you can salvage the situation.

6. Buffett considered quitting investing in his early 30s

In 1969 Buffett wrote to his investors that he was going to close their partnerships:

“I know I don’t want to be totally occupied with outpacing an investment rabbit all my life. The only way to slow down is to stop. I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.

“I do know that when I am sixty, I should be attempting to achieve different personals goals than those which had priority at twenty.”

Takeaway: What can anyone learn from this but humility? I already knew before reading The Snowball that Buffett wound down his partnerships in 1970 because he thought the market too over-valued to deliver an adequate return for his investors. That move alone would seal Buffett’s place in history among value investors, even if he had retired.

Of course, Buffett didn’t retire. He is still compounding his investments at an average rate of over 20% a year, nearly four decades later.

7. Buffett treats becoming the world’s richest man as a game

I couldn’t even begin to quote examples from The Snowball showing how Warren Buffett is in it for the scorecard, not for the payday: the entire biography is a testament to it.

No sports cars or private islands for Warren Buffett – even when he eventually bought a corporate jet he called it ‘The Indefensible’. For decades he bought suits from the everyman outfitter nearest his office, and his biography frequently mentions (and has photographic evidence of) his favourite threadbare jumper. And famously, his main residence is the first house he bought in 1961.

From setting that goal aged 11 of becoming a millionaire by 35, Buffett seems to treat investing as an intellectual challenge. He probably learned this from his great mentor Benjaman Graham, who seemed more bothered by being right than being rich, and for whom investing was just one of several high-end hobbies.

Buffett’s ‘inner scorecard’ helped him save and reinvest his money early on

Unlike Graham, however, Buffett really cares about every penny. From ‘Buffetting’ a few cents off the price he paid for stocks to demanding his friends sell him shares they’d bought in companies he was interested in, right up to his close personal friendship with his rival for the title of world’s richest man, Bill Gates, Buffett really wants to have the biggest snowball.

If you were to say there’s something rather peculiar about chasing money as a means to an end, I could certainly see your point. But when the recipient chooses to leave virtually all $62 billion of his winnings to charity, it’s hard to complain. I’d rather have Buffett as the world’s richest man than the Salomon traders who almost destroyed his reputation.

Takeaway: Spend less than you earn and reinvest the difference in the stock market. Buffett may have lived a remarkable life, but that central practice is something we can all aspire to.

Beyond that, I don’t want to get too moral. I’m happy to live below my means, but can I honestly say I’d be happy with Cherry Coke and a steak from the local shop if my means were sufficient to buy up The Maldives or launch me into space? Unfortunately I’m not qualified to comment.

I do think my attitude is closer to Buffett’s than to the more visible of the cityboys I’ve seen in London over the past few years, for whom cash is flash. Also, Buffett’s self-containment from materialism – he calls it his ‘inner scorecard’– undoubtedly helped him save and reinvest his money early on, and got his investing career off to a flying start in his 20s. You have to accumulate before you can speculate. Good luck rolling your own snowball.

I can’t recommend The Snowball enough for anyone interested in business and investing. Obviously, anyone interested in Warren Buffett should buy it too, but I imagine you’ve all got two copies already (one for your library and one for your bathroom). The book is seemingly always discounted at Amazon (click through for the latest price at Amazon US or at Amazon UK) so there’s no excuse. Except, perhaps, it weighs a tonne, so you might put your back out while reading it.

Analysing the substance and character of a business is the holy grail of investing. Guessing a price that someone else is willing to pay, is not.

By 1969, the stock market had reached new highs, and the Buffett Partnership continued to beat its returns.  As the market continued to climb even higher, Buffett announced that he would close his partnerships.  He told the partners that the speculation-driven stock market didn't make sense; he wanted no part of the folly.

Buffett sold everything in the portfolio except for shares in Diversified Retailing, Blue Chip Stamps, and Berkshire Hathaway, which now included insurance and banking businesses as well as equity investments.  Avoiding the speculative market, Buffett continued to hunt for attractive underated businesses.  In 1971, he bought a controlling interest in See's Candies.

By early January 1973, the Dow had climbed to an all time high of 1,051 points.  But only $17 million of Berkshire's $101 million insurance portfolio was invested in stocks; the rest was in bonds.  Not long after this high, the market swooned.  The it racheted down further.  By October 1974, it hit a low of 580 points.  Investors panicked but Buffett rejoiced.  He was in his elements once again.

Over the following years, Buffett bagged big game at  bargain prices, adding Wesco Financial and buying large blocks of stocks in The Washington Post and Geico.  In 1977, Buffett bought The Buffalo News. 

Buffett's belief that analysing the substance and character of a business was the holy grail of investing.  Guessing a price that someone else was willing to pay - irrespective of fundamentals - was not.

In a financial crisis, when banks cannot lend, cash is particularly valuable.

Buffett is a balance sheet guy.  That's where the cash is reported.  Cash is the fuel that drives economic value.

Most CEOs, however, focus on growth in corporate profits more than on cash and balance sheet growth.  The source of the problem is:  some of the reported expenses in these income statements are cash, and some are determined by accounting rules.  As a result, earnings include both cash and noncash (i.e., "accounting") numbers.  Buffett cares most about the cash part.

Cash is real.  Noncash earnings are subject to accounting interpretations.  They can be adjusted to inflate earnings and boost the stock price.  But it is harder to fiddle with the cash numbers.

Buffett's long-term cash obsession creates unique opportunities that others miss.  Buffett keeps a lot of cash on hand in order to be ready for unique crisis-born opportunities.  "Do we panic when the price of filet mignon drops?  No, we rejoice.  Who wouldn't want to buy the highest-quality steaks at chopped meat prices?"

At the end of June 2008, cash represented just over 11 percent of Buffett's balance sheet.  He used some of it to provide high-cost financing for then top-credit-rated companies Goldman Sachs and GE, both desperately in need of cash.  He announced his biggest acquisition to date - buying the Burlington Northern Santa Fe Railway for $34 billion.  At $100 a share, he paid a reasonable, but not a cheap, price.

Why Buffett decides not to pay out dividends in 45 years in Berkshire Hathaway?

He has been able to reinvest Berkshire's profits at rates considerably higher than Berkshire's investors could have earned y reinvesting them in the market. 

When the company can no longer meet the test of reinvesting $1.00 of EPS to create $1 of additional value, then, says Buffett, Berkshire will pay dividends, and let his owner-partners reinvest the cash.

Warren Buffett on The Dangers of Timing the Market

Warren Buffett Tells You How to Turn $40 Into $10 Million

By Patrick Morris 

Warren Buffett is perhaps the greatest investor of all time, and he has a simple solution that could help an individual turn $40 into $10 million.

A few years ago, Berkshire Hathaway CEO and Chairman Warren Buffett spoke about one of his favorite companies, Coca-Cola, and how after dividends, stock splits, and patient reinvestment, someone who bought just $40 worth of the company's stock when it went public in 1919 would now have more than $5 million.  

Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer, that figure was updated and the company noted that original $40 would now be worth $9.8 million. A little back-of-the-envelope math of the total return of Coke since May 2012 would mean that $9.8 million is now worth about $10.8 million.

The power of patience

I know that $40 in 1919 is very different from $40 today. However, even after factoring for inflation, it turns out to be $540 in today's money. Put differently, would you rather have an Xbox One, or almost $11 million?

But the thing is, it isn't even as though an investment in Coca-Cola was a no-brainer at that point, or in the near century since then. Sugar prices were rising. World War I had just ended a year prior. The Great Depression happened a few years later. World War II resulted in sugar rationing. And there have been countless other things over the past 100 years that would cause someone to question whether their money should be in stocks, much less one of a consumer-goods company like Coca-Cola.

The dangers of timing

Yet as Buffett has noted continually, it's terribly dangerous to attempt to time the market:

"With a wonderful business, you can figure out what will happen; you can't figure out when it will happen. You don't want to focus on when, you want to focus on what. If you're right about what, you don't have to worry about when" 

So often investors are told they must attempt to time the market, and begin investing when the market is on the rise, and sell when the market is falling.

This type of technical analysis of watching stock movements and buying based on how the prices fluctuate over 200-day moving averages or other seemingly arbitrary fluctuations often receives a lot of media attention, but it has been proved to simply be no better than random chance. 

Investing for the long term

Individuals need to see that investing is not like placing a wager on the 49ers to cover the spread against the Cowboys, but instead it's buying a tangible piece of a business.

It is absolutely important to understand the relative price you are paying for that business, but what isn't important is attempting to understand whether you're buying in at the "right time," as that is so often just an arbitrary imagination.

In Buffett's own words, "if you're right about the business, you'll make a lot of money," so don't bother about attempting to buy stocks based on how their stock charts have looked over the past 200 days. Instead always remember that "it's far better to buy a wonderful company at a fair price."

http://www.fool.com/ecap/the_motley_fool/homerun-warren-buffett-tells-you-how-to-turn-40-2/?paid=7283&psource=esatab7410860090&waid=7284&wsource=esatabwdg0860078&utm_source=taboola&utm_medium=referral

Charlie Munger: I have seen so many idiots getting rich on easy businesses. Don't buy cheap bargains, but look for very good companies.

Don't buy cheap bargains, but look for very good companies.
I have observed what would work and what would not.
I have seen so many idiots getting rich on easy businesses.
Surely, I am interested in the easy businesses.

Alice Schroeder on How Buffett Values a Business and Invests

On November 20, 2008, Alice Schrooder, author of “The Snowball: Warren Buffett and the Business of Life”, spoke at the Value Investing Conference at the Darden School of Business. She gave some fascinating insights into how Buffett invests that are not in the book. I hope you find them useful.

1. Much of Buffett’s success has come from training himself to practice good habits. His first and most important habit is to work hard. He dug up SEC documents long before they were online. He went to the state insurance commission to dig up facts. He was visiting companies long before he was known and persisting in the face of rejection.
2. He was always thinking what more he could do to get an edge on the other guy.
3. Schroeder rejects those who argue that working harder will not give you an edge today because so much is available online.
4. Buffett is a “learning machine”. This learning has been cumulative over his entire life covering thousands of businesses and many different industries. This storehouse of knowledge allows Buffett to make decisions quickly.
5. Schroeder uses a case study on Mid-Continent Tab Card Company in which Buffett invested privately to illustrate how Buffett invests.
6. In the 1950′s, IBM was forced to divest itself of the computer tab card business as part of an anti-trust settlement with the Justice Department. The computer tab card business was IBM’s most profitable business with profit margins of 50%.
7. Buffett was approached by some friends to invest in Mid-Continent Tab Card Company which was a start-up setup to compete in the tab card business. Buffett declined because of the real risk that the start-up could fail.
8. This illustrates a fundamental principle of how Buffett invests: first focus on what you can lose and then, and only then, think about return. Once Buffett concluded he could lose money, he quit thinking and said “no”. This is his first filter.
9. Schroder argues that most investors do just the opposite: they first focus on the upside and then give passing thought to risk.
10. Later, after the start-up was successfully established and competing, Buffett was again approached to invest capital to grow the business. The company needed money to purchase additional machines to make the tab cards. The business now had 40% profit margins and was making enough that a new machine could pay for itself in a year.
11. Schroeder points out that already in 1959, long before Buffett had established himself as an expert stock picker, people were coming to him with special deals, just like they do now with Goldman Sachs and GE. The reason is that having started so young in business he already had both capital and business knowledge/acumen.
12. Unlike most investors, Buffett did not create a model of the business. In fact, based on going through pretty much all of Buffett’s files, Schroder never saw that Buffett had created a model of a business.
13. Instead, Buffett thought like a horse handicapper. He isolated the one or two factors upon which the success of Mid American hinged. In this case, sales growth and cost advantage.
14. He then laid out the quarterly data for these factors for all of Mid Continent’s factories and those of its competitors, as best he could determine it, on sheets of a legal pad and intently studied the data.
15. He established his hurdle of a 15% return and asked himself if he could get it based on the company’s 36% profit margins and 70% growth. It was a simple yes or no decision and he determined that he could get the 15% return so he invested.
16. According to Schroder, 15% is what Buffett wants from day 1 on an investment and then for it to compound from there.
17. This is how Buffett does a discounted cash flow. There are no discounted cash flow models. Buffett simply looks at detailed long-term historical data and determines, based on the price he has to pay, if he can get at least a 15% return. (This is why Charlie Munger has said he has never seen Buffett do a discounted cash flow model.)
18. There was a big margin of safety in the numbers of Mid Continent.
19. Buffett invested $60,000 of personal money or about 20% of his net worth. It was an easy decision for him. No projections – only historical data.
20. He held the investment for 18 years and put another $1 million into the business over time. The investment earned 33% over the 18 years.
21. It was a vivid example of a Phil Fisher investment at a Ben Graham price.
22. Buffett is very risk averse and follows Firestone’s Law of forecasting: “Chicken Little only has to be right once.” This is why Berkshire Hathaway is not dealing with a lot of the problems other companies are dealing with because he avoids the risk of catastrophe.
23. He is very realistic and never tries to talk himself out of a decision if he sees that it has cat risk.
24. Buffett said he thought the market was attractive in the fall of 2008 because it was at 70%-80% of GDP. This gave him a margin of safety based on historical data. He is handicapping. He doesn’t care if it goes up or down in the short term. Buying at these levels stacks the odds in his favor over time.
25. Buffett has never advocated the concept of dollar cost averaging because it involves buying the market at regular intervals – regardless of how overvalued the market may be. This is something Buffett would never support.

Here is a link to the video: http://www.youtube.com/watch?v=PnTm2F6kiRQ

http://www.valueinvestingfundamentals.com/?p=96

The only 2 classes that an investment student needs to take

Buffett believes that investment students need only two well-taught classes:

1.  How to Value a Business?

2.  How to Think about Market Prices?

Return on Equity (ROE) - the financial metric that investors should use to judge a company's annual performance

Buffett considers earning per share a smoke screen.

Most companies will retain a portion of their previous year's earnings as a way to increase their equity base.

Warren Buffett believes there is nothing spectacular about a company that increases earning per share by 10% if, at the same time, the company is growing its equity base by 10%.

He says this is no different than putting money in a savings account and letting the interest accumulate and compound.

Buffett prefers return on equity to earnings per share when analyzing a company.

He will make appropriate adjustments to the reported earnings to give a clear picture of how returns were generated as a return on business operations.

Buffett believes a business should achieve good return on equity while employing little or no debt.

Most investors judge annual performance by focusing on earnings per share.

According to Buffett, the proper way to judge a company's performance is though focusing on return on equity.

Return on equity is a better measure of annual performance because it takes into consideration a company's growing capital base.

Buffett uses ROE as his preferred financial metric to judge a company's annual performance; investors should do likewise.

Buffett Vs. Soros: Investment Strategies

In the short run, investment success can be accomplished in a myriad of ways. Speculators and day traders often deliver extraordinary high rates of return, sometimes within a few hours. Generating a superior rate of return consistently over a further time horizon, however, requires a masterful understanding of the market mechanisms and a definitive investment strategy. Two such market players fit the bill: Warren Buffett and George Soros.

Warren Buffett
Known as "the Oracle of Omaha," Warren Buffett made his first investment at the tender age of 11. In his early 20s, the young prodigy would study at Columbia University, under the father of value investing and his personal mentor, Benjamin Graham. Graham argued that every security had anintrinsic value that was independent of its market price, instilling in Buffett the knowledge with which he would build his conglomerate empire. Shortly after graduating he formed "Buffett Partnership" and never looked back. Over time, the firm evolved into "Berkshire Hathaway," with a market capitalization over $200 billion. Each stock share is valued at near $130,000, as Buffett refuses to perform a stock split on his company's ownership shares.

Warren Buffett is a value investor. He is constantly on the lookout for investment opportunities where he can exploit price imbalances over an extended time horizon.

Buffett is an arbitrageur who is known to instruct his followers to "be fearful when others are greedy, and be greedy when others are fearful." Much of his success can be attributed to Graham's three cardinal rules: invest with a margin of safety, profit from volatility and know yourself. As such, Warren Buffett has the ability to suppress his emotion and execute these rules in the face of economic fluctuations.

George Soros
Another 21st century financial titan, George Soros was born in Budapest in 1930, fleeing the country after WWII to escape communism. Fittingly, Soros subscribes to the concept of "reflexivity" social theory, adopting a "a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value assets on that market." 

Graduating from the London School of Economics some years later, Soros would go on to create the Quantum Fund. Managing this fund from 1973 to 2011, Soros returned roughly 20% to investors annually. The Quantum Fund decided to shut down based on "new financial regulations requiring hedge funds to register with the Securities and Exchange Commission." Soros continues to take an active role in the administration of Soros Fund Management, another hedge fund he founded.

Where Buffett seeks out a firm's intrinsic value and waits for the market to adjust accordingly over time, Soros relies on short-term volatility and highly leveraged transactions. In short, Soros is a speculator. The fundamentals of a prospective investment, while important at times, play a minor role in his decision-making.

In fact, in the early 1990s, Soros made a multi-billion dollar bet that the British pound would significantly depreciate in value over the course of a single day of trading. In essence, he was directly battling the British central banking system in its attempt to keep the pound artificially competitive in foreign exchange markets. Soros, of course, made a tidy $1 billion off the deal. As a result, we know him today as the man "who broke the bank of England."

The Bottom Line
Warren Buffett and George Soros are contemporary examples of the some of the most brilliant minds in the history of investing. While they employ markedly different investing strategies, both men have achieved great success. Investors can learn much from even a basic understanding of their investment strategies and techniques. 

http://www.investopedia.com/financial-edge/0912/buffet-vs.-soros-investment-strategies.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-7/18/2013

Berkshire Hathaway's Acquisition Criteria: Telling it like it is.

Berkshire Hathaway's Acquisition Criteria: Telling it like it is

Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.

ACQUISITION CRITERIA

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

1. Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units).
2. Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations).
3. Businesses earning good returns on equity while employing little or no debt.
4. Management in place (we can't supply it).
5. Simple businesses (if there's lots of technology, we won't understand it).
6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminary, about a transaction when price is unknown).

The larger the company, the greater will be our interest. We would like to make an acquisition in the $5-20 billion range. We are not interested, however, in receiving suggestions about purchases we may make in the general stock market.

We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don't participate in auctions.

5 Investing Styles dominate today. Value Investing is fashionable again.

FIVE investing styles dominate today:

1.  Value Investors
They rely on fundamental analysis of companies' financial performance to identify stocks priced below intrinsic value (the present value of a company's future cash flows.)
Benjamin Graham and David Dodd in the 1930s.
Warren Buffett in the 1970s and 1980s.

2.  Growth Investors
They seek companies whose earnings gains promise to boost intrinsic value rapidly.
Philip Fisher late 1950s.
Peter Lynch in the 1980s.

3.  Index Investors
They buy shares that replicate a large market segment such as the S&P 500.
Endorsed by Graham for defensive investors.
John Bogle in the 1980s.

4.  Technical Investors
They use charts to glean market behaviour indiccating whether expectations are rising or falling, market trends, and other "momentum" indicators.
William O'Neill in the late 1990s.

5.  Portfolio Investors
Tney ascertain their appetite for investment risk and assemble a diversified securities protfolio bearing the risk level.
Burton G. Malkiel in early 1970s.

Buffett: The time to buy stocks is when nobody else wants them

In the recession of 20087 - 2009 we had the opportunity, and for those of us who did venture into that abyss, the rewards were tremendous.

Here is a quote from Warren Buffett during the 1990-1991 recession in the U.S.:

"Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990.  Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new panic prices.

Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall."

Invest like Buffett - Hold on to your Winners Forever

Best holding period is holding forever.
Sell your losers, hold on to your winners.

SELL THE LOSERS, LET THE WINNERS RUN.
Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

< I suggest this video: http://www.youtube.com/watch?v=WVqyCRYBieI >
Newbie
on 4/7/13

Thanks to Newbie for highlighting this video to me.

Warren Buffett - How to Identify a Good Investment

Buffett: 'Business is coming back' (How to write an Annual Report)

@25 min: How to write an annual report.

Buffett And Goldman Sachs Do Sweetheart Deal

Buffett And Goldman Sachs Do Sweetheart Deal

Tickers in this Article » BRKB, GS, WFC, IBM, KO, AXP, SPY

Goldman Sachs (NYSE:GS) announced March 26 that in October it will issue to Berkshire Hathaway (NYSE:BRK.B) exactly the number of shares equal to Warren Buffett's profit from the 2008 warrants he got as part of his $5 billion investment in the investment bank. The deal is a win/win for both companies. What does it mean for stockholders?

Deal History
Think back to September 23, 2008, when the two parties made their original deal. Goldman Sach's stock was trading at $125.05, 24% less than just three weeks earlier. Its reputation in question after the collapse of Bear Stearns and Lehman Brothers, investors were skeptical about most investment banks. Warren Buffett rode in on his big white horse providing Goldman Sachs with the reputational shot in the arm it needed. Berkshire Hathaway bought $5 billion in perpetual preferred shares that paid a 10% dividend.

As part of the deal it received warrants giving it the right to purchase 43.5 million shares of Goldman stock at $115 each anytime up to October 1, 2013.

Goldman was paying $500 million in dividends annually on the preferred shares--an untenable amount--so it bought back the shares for $5.5 billion plus a special, one-time dividend of $1.64 billion. What happens next depends on what Goldman's stock does between now and October 1. For example, should the 10 trading days prior to October 1 average $150 per share, Berkshire Hathaway's profit would be $1.52 billion, meaning it would receive 10.15 million shares of Goldman Sachs. Buffett ends up with approximately 2% of the investment bank and a $2.14 billion profit while Goldman reduces its potential dilution by 77%.

Shareholders
Regardless of what happens to Goldman's stock price over the next six months you have to consider Berkshire Hathaway shareholders are the big winners. Its annualized total return from the deal over the last five years is 11.6%. That's 180 basis points higher than the SPDR S&P 500 (ARCA:SPY). But of course that's not the final tally. Should Buffett hang on to its stock perhaps even building a larger position, then it could become the gift that keeps on giving. Time will tell how enthusiastic he is about owning Goldman but clearly it's not red hot because if it were he'd force the issue and buy the 43.5 million shares outright at $115 each. If I had to guess I'd say it will become one of the billion-dollar holdings we read about in every Berkshire Hathaway annual report but not one of his big four - Wells Fargo (NYSE:WFC), IBM (NYSE:IBM), Coca-Cola (NYSE:KO) and American Express (NYSE:AXP).

As for Goldman Sachs, it gains a partner and loses a quasi-lender. It was an expensive deal for the company but one that probably needed to be done. By coming up with a creative solution, Goldman Sachs reduces its dilution by 33 million shares and Berkshire Hathaway reduces its cash outlay by $5 billion, which it can now put toward one of those "elephant" deals Buffett always speaks of. If Berkshire had to buy all 43.5 million shares in order to crystalize its profit, it's very possible the company could have sold its entire investment. This way Buffett stays in the game which is good news for Goldman Sachs shareholders.

Bottom Line
Warren Buffett didn't get to where he is by being stupid. In Goldman, he's acquired a piece of one of banking's biggest and well known firms. Even better, Berkshire Hathaway was paid $2.15 billion over five years to do so. Anytime someone offers to pay you to acquire something they own, especially when it has real value, the answer should always be yes.

If you're a Berkshire Hathaway shareholder this is just another example why you already own its stock. If you're a Goldman Sachs shareholder, and have been for some time, this is the end of a very difficult time in the company's history. Would I own either stock? I'd have no problem owning Berkshire Hathaway. As for Goldman Sachs, I'd consider its stock but only if Buffett remains a shareholder.

http://www.investopedia.com/stock-analysis/032713/buffett-and-goldman-sachs-do-sweetheart-deal-brkb-gs-wfc-ibm-ko-axp-spy.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-03/28/2013

Words of Wisdom on Dividend Policy From Big Tesco Backer Warren Buffett

By G. A. Chester 

March 7, 2013 

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If you're a U.K. investor just starting out, U.S. investing legend Buffett may be new to you -- perhaps your interest in the man has been piqued by reading about how he's taken a big stake in Tesco  (LSE: TSCO  ) (NASDAQOTH:TSCDY  ) .LONDON -- Last week, Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) boss Warren Buffett released his annual letter to shareholders.

I can tell you that Buffett's annual letters never fail to educate, amuse, and enrich. You'll find abundant pearls of wisdom in his witty, colourful, and incisive commentaries -- as, indeed, will old hands.

586,817% and countingLet's start with why Buffett has captured the attention of millions of investors around the world. The bottom line is, his Berkshire Hathaway group has an outstanding record of increasing shareholder value over the best part of five decades.

Between 1965 and 2012, Berkshire's book value per share has increased by a mind-boggling 586,817%, representing a compound annual growth rate of close to 20%. Such gains over such a long period are unparalleled.

Successful businessesBuffett's strategy of wealth creation for Berkshire is something ordinary investors like us can learn from in weighing up companies we may want to invest in.

Successful businesses generate cash. Buffett is clear about what a company should do with that cash, in the following order of priority:

• First, examine reinvestment possibilities offered by its current business for increasing the competitive advantage over rivals.
• Second, look at acquisitions that are likely to make shareholders wealthier on a per-share basis than they were prior to the acquisition.
• Third, consider repurchasing the company's own shares to enhance each investor's share of future earnings.
• Fourth, by default, pay dividends to shareholders.

Reinvestment and acquisitionsBy reinvestment in the business, Buffett is referring to spending on projects "to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors."

When we, ourselves, are considering companies to invest in, we can check how intelligently management is reinvesting in the business by looking at such things as whether market share is being maintained/increased, and whether margins are being maintained/grown relative to rivals.

Buffett considers small bolt-on acquisitions that can easily be integrated into existing operations as part of the reinvestment in the business. The acquisitions referred to in stage two of his four steps are those that add something new to the company -- some form of diversification.

When we are considering companies to invest in, we can check whether management has a good track record of adding shareholder value through making such acquisitions.

Repurchasing sharesBuffett is strict about when it's right for a company to repurchase its own shares. Again and again over the years, he has stressed that the only time to do share buybacks is when the shares are available "far below," "well below," or "at a meaningful discount from" intrinsic value -- and "conservatively calculated" intrinsic value at that.

Last year, Berkshire spent $1.3bn repurchasing its own shares. At the moment, Buffett is prepared to pay up to 120% of Berkshire's book value for the shares.

So, if you're interested in buying shares in Berkshire yourself, you have it from the horse's mouth that 120% of book value represents a meaningful discount to conservatively calculated intrinsic value at the present time.

DividendsBerkshire doesn't pay dividends, but not because Buffett is against them per se. It's simply that he has always seen opportunities in steps one to three for employing Berkshire's cash flows more fruitfully for shareholders.

At the moment, the discount to intrinsic value is such that share buybacks are an efficient way for Berkshire to employ excess cash, but Buffett says that if things change materially "we will re-examine our actions."

Buffett is perfectly happy for the quoted companies in Berkshire's portfolio -- American Express, Coca-Cola, IBM, and Wells Fargo are his "Big Four" -- to use excess cash to make share repurchases "at appropriate prices," or to otherwise pay him dividends. He says: "We applaud their actions and hope they continue on their present paths."

Buffett no doubt feels the same about his big U.K. investment in Tesco, whose shares -- at 380p -- are currently trading on an historically low earnings multiple, and offer investors a healthy 4% dividend yield.

Berkshire's 415,510,889 shareholding in Tesco (5.2% of the company) should net Buffett a dividend payout of something over £60m this year alone.

http://www.fool.com/investing/international/2013/03/07/words-of-wisdom-from-big-tesco-backer-warren-buffe.aspx