Tuesday, January 2, 2007

A Message From Warren E. Buffett, CEO of Berkshire Hathaway Inc.

Dear Reader,

You probably know that I don't make stock recommendations. However, I have three thoughts regarding your personal expenditures that can save you real money. I'm suggesting that you call on the services of three subsidiaries of Berkshire: GEICO, Borsheim's and Berkshire Hathaway Life Insurance Company of Nebraska (BHLN).

I estimate that about 40% of all auto drivers in the country can save money by insuring with GEICO. The figure is not 100% because insurers differ in their underwriting judgments, with some favoring drivers who live in certain geographical areas and work in certain occupations more than GEICO does. I believe, however, that GEICO more frequently offers the low price than does any other national carrier selling insurance to all comers. You can quickly find out whether you can save money by going to www.geico.com or by calling 800-555-2756.

Fine jewelry, watches and giftware will almost certainly cost you less at Borsheim's. I've looked at the figures for all publicly-owned jewelry companies and the contrast with Borsheim's is startling. Our one-store operation, with its huge volume, enables us to operate with costs that are fully 15-20 percentage points below those incurred by our competitors. We pass the benefits of this low-cost structure along to our customers.

Every year Borsheim's sends out thousands of selections to customers who want a long-distance opportunity to inspect what it offers and decide which, if any, item they'd like to purchase. We do a huge amount of business in this low-key way, which allows the shopper to conveniently see the exceptional values that we offer. Call Scot Caniglia or Susan Jacques at Borsheim's (800-642-4438) and save substantial money on your next purchase of jewelry.

Finally, BHLN sells annuity products directly over the internet at its website www.brkdirect.com. Like GEICO and Borsheim's, BHLN maintains a low cost structure and, thus, can offer savings to many customers. By visiting the web-site, you can evaluate the specific products, get quotes and actually make a purchase. Check to see whether one or more of the products meet your financial planning needs.


Sincerely,



Warren E. Buffett

Profile

Warren Buffett 2
74 , self made
Source: Berkshire Hathaway

Net Worth: $44 bil up

Country of citizenship: United States
Residence: Omaha, NE, United States
Industry: Investments
Marital Status: widowed , 3 children
University of Nebraska Lincoln, Bachelor of Arts / Science
Columbia University, Master of Science

Newspaper delivery boy filed first 1040 at age 13; claimed $35 deduction for bicycle. Studied under Benjamin Graham at Columbia. Applied value-investing principles to build Berkshire Hathaway to $133 billion (market cap) holding company: insurance, energy, carpets, jewelry, furniture, paint (Benjamin Moore), apparel (Fruit of the Loom). Also big stakes in American Express, Coca-Cola, Gillette (now set to merge with Procter & Gamble). Admits Berkshire's $30 billion-plus cash hoard is underutilized: "It's a painful condition to be in, but not as painful as doing something stupid—[Vice Chairman] Charlie [Munger] and I detest taking even small risks." Recent bets include Pier One Imports, Comcast, food distributor McLane. Bought mobile-home maker Clayton Homes after reading autobiography by company founder. "If we fail, we will have no excuses." Since taking control of Berkshire has delivered compound annual return of 24%. Outspoken opponent of Bush tax cuts, courted as adviser to pols Arnold Schwarzenegger and John Kerry. Critic of lax corporate governance, became target of failed campaign to vote him off Coca-Cola board. Fanatical supporters still far outnumber critics: Berkshire's folksy annual meeting crowds routinely top 15,000.

Warren Buffett’s determination and creativity have made him who he is now: the chairman of a long-term investment company which has more than $2 billion in holdings. As a child, Buffett was already ambitious. He was an enthusiastic and industrious paper boy for the Washington Post, and tried to cover more than one route at the same time. He also made money by collecting and selling lost golf balls. Buffett’s interest in finance was clear extremely early on in his life. He started playing the stock market with one of his sisters when he was eleven. At twelve, he was betting on horses, and by high school he had started a business (pinball machines) with a friend, which earned him fifty dollars a week. Not only did he own a business by graduation, but he also had bought himself forty acres of Nebraskan farm land with his profit. Graduate school was a formative time for Buffett. It was there that he met Benjamin Graham, an economic scholar whose work Buffett had begun studying in college. Buffett believed strongly in Graham’s theory that it is wise to look for stocks of companies which are undervalued, which will most probably prosper with a little time. Thus began Buffett’s untraditional approach to portfolio management. After working for his father’s investment banking company for the three years after business school, Buffett returned to Graham and worked as a security analyst at Graham’s company for two years until 1956. In that year, at the age of twenty-five, Buffett started his own investment company, the Buffett Partnership, using $5,000 of his own funds and collecting $100,000 from interested friends and family. One of the smartest moves made by Buffet’s company at that time was to invest in American Express. In 1963, a scandal surrounded AmEx, and Wall Street believed the company was near the end. But Buffett, always with his wits about him and his thinking cap on, noticed when in restaurants and shops that customers were still using the card to buy. He went ahead and bought 5 percent of the stock, which by 1961 had risen from 35 to 189 market points. Buffett is now chairman of Berkshire Hathaway Inc., which makes the long-term investments which Buffett is so adept at choosing.


Style Of Investment

MOST people would know that Warren Buffett is one of the world's richest men. Most would also know that he is easily the most successful investor the world has ever witnessed.
As a result, many of us would like to know his secret in investing and what makes him so successful. Many of us would like to emulate him, if not in terms of investment performance, then, at least in terms of investing style.
Many have the impression that Buffett must be very smart to have done so well. To have succeeded over such a long period, he is certainly smart. And yet in another sense, he is not that smart. Buffett has said that you do not need to have the IQ of Einstein or understand complex mathematical formulae in order to invest successfully. Compared with his mentor Benjamin Graham, or vice-chairman of his company Charlie Munger, he did not invent a new investment approach nor was he a founder of an investment theory.
Buffett is not smart in that sense. It was Graham, with his famous investment text “Security Analysis”, written in 1934, who created fundamental analysis. Buffett read it and has gained immensely from it. It was from another of Graham's books, “The Intelligent Investor”, written in 1949, that Buffett learned the central investment concept of “margin of safety”. It was Graham who started value investing. By following Graham’s investment philosophy, Buffett became very successful. But as time went by, Buffett was smart enough to recognise the inadequacies of what Graham had taught him. This realisation did not come easily nor did it dawn on him out of the blue.

Warren BuffettGraham focused on investing in a stock that has an intrinsic value of RM1.00 and selling at 50 sen per share. It is this difference between the intrinsic value and the market price that determines the margin of safety that an investor looks for when investing in a stock. To Graham, the asset value of a company is important in calculating a company’s intrinsic value. To him, the balance sheet strength of a company is vital. This can be simply explained by the fact that he was writing “Security Analysis” in the depths of the Great Depression during which individual and corporate bankruptcies were the norm rather than the exception. Graham’s value investing was rather mechanical and essentially quantitative in approach. It was Munger, whom Buffett met in 1959, who helped transform Buffett from a strict Grahamite to what he is today.
Munger convinced Buffett that there is more to investing than just buying a share at 50 sen against its intrinsic value of RM1.00. While both Munger and Graham would start with the accounting figures, Munger would go beyond that. As he advised: “We’ve got to understand the accounting and the implications of the accounting and understand it thoroughly.” Besides assessing the direction of the general business climate of a particular business, Munger would also assess the quality of management and how a company is run.
One of the most important investment concepts that Buffett learned from Munger was to be able to identify a good business and invest in such a business at a reasonable price.
A good business is one which has a strong franchise, above average returns on equity or capital employed, a relatively small need for capital investment and a business that throws off cash. Munger advised that “the difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.” Munger taught Buffett the value of great franchises and the benefit of qualitative analysis, as opposed to Graham’s strictly quantitative style focusing exclusively on tangible assets. With Munger’s coaching, Buffett realised that “when you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough; it’s worth a pretty good price.” Hence his huge investments in stocks like Coca-Cola in 1988 although Coca-Cola was not cheap by conventional standards.
Although there are significant differences between the two, it was Graham and Munger who introduced Buffett to the central concepts of value investing. But it is to Buffett’s credit that he was able to move away from a strictly Grahamite style while the other value investors have remained in the traditional Graham mindset. It is to Buffett’s credit that he was convinced by Graham and Munger’s investment logic and rational instead of charting the modern portfolio theory mumbo-jumbo. He was smart enough to know that he had much to benefit from Graham and offered to work for him free of charge and pestered Graham for three years until he was employed. In the run-up to the technology bubble, Buffett had the genius to recognise his circle of competence, stayed within that boundary and avoided the technology stocks even though Bill Gates is his buddy. Graham stressed a diversified portfolio and would sell when a stock reaches its intrinsic value. Buffett, like Munger, has a very focused portfolio and would hold the stocks for a long time. At the end, Buffett was smart enough to pick up the right things from the right people.
Can we apply the Buffett-Graham-Munger approach to Bursa Malaysia? Yes, except that one has to be very patient, disciplined and do the necessary homework. For whatever reasons, many claim to be a follower or non-follower of Buffett without really knowing his philosophy and methodology.
Many investors have blamed the Bursa Malaysia for losses or poor returns. Many have said that the Buffett-Graham-Munger investing style cannot be successfully applied to Bursa. Many investors do not realise that the real culprit of their losses or poor performance is themselves. Do not get us wrong. i Capital is not saying that Bursa and the listed companies are perfect. There is an endless list of things that can be improved and there are plenty of companies (probably the majority of them) that do not deserve an inch of support from genuine investors. But part of the fault also lies with the investing style of investors. Have they ever asked how they would perform if they had used the same method and invested in Tokyo, London or New York? Would they have the patience or the discipline?
i Capital hopes this week’s article would be beneficial to those who are or who want to be serious investors. By sharing these insight, i Capital hopes that everyone would have some of the early advantages that Buffett had. MOST people would know that Warren Buffett is one of the world's richest men. Most would also know that he is easily the most successful investor the world has ever witnessed.
As a result, many of us would like to know his secret in investing and what makes him so successful. Many of us would like to emulate him, if not in terms of investment performance, then, at least in terms of investing style.
Many have the impression that Buffett must be very smart to have done so well. To have succeeded over such a long period, he is certainly smart. And yet in another sense, he is not that smart. Buffett has said that you do not need to have the IQ of Einstein or understand complex mathematical formulae in order to invest successfully. Compared with his mentor Benjamin Graham, or vice-chairman of his company Charlie Munger, he did not invent a new investment approach nor was he a founder of an investment theory.
Buffett is not smart in that sense. It was Graham, with his famous investment text “Security Analysis”, written in 1934, who created fundamental analysis. Buffett read it and has gained immensely from it. It was from another of Graham's books, “The Intelligent Investor”, written in 1949, that Buffett learned the central investment concept of “margin of safety”. It was Graham who started value investing. By following Graham’s investment philosophy, Buffett became very successful. But as time went by, Buffett was smart enough to recognise the inadequacies of what Graham had taught him. This realisation did not come easily nor did it dawn on him out of the blue.

Warren BuffettGraham focused on investing in a stock that has an intrinsic value of RM1.00 and selling at 50 sen per share. It is this difference between the intrinsic value and the market price that determines the margin of safety that an investor looks for when investing in a stock. To Graham, the asset value of a company is important in calculating a company’s intrinsic value. To him, the balance sheet strength of a company is vital. This can be simply explained by the fact that he was writing “Security Analysis” in the depths of the Great Depression during which individual and corporate bankruptcies were the norm rather than the exception. Graham’s value investing was rather mechanical and essentially quantitative in approach. It was Munger, whom Buffett met in 1959, who helped transform Buffett from a strict Grahamite to what he is today.
Munger convinced Buffett that there is more to investing than just buying a share at 50 sen against its intrinsic value of RM1.00. While both Munger and Graham would start with the accounting figures, Munger would go beyond that. As he advised: “We’ve got to understand the accounting and the implications of the accounting and understand it thoroughly.” Besides assessing the direction of the general business climate of a particular business, Munger would also assess the quality of management and how a company is run.
One of the most important investment concepts that Buffett learned from Munger was to be able to identify a good business and invest in such a business at a reasonable price.
A good business is one which has a strong franchise, above average returns on equity or capital employed, a relatively small need for capital investment and a business that throws off cash. Munger advised that “the difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.” Munger taught Buffett the value of great franchises and the benefit of qualitative analysis, as opposed to Graham’s strictly quantitative style focusing exclusively on tangible assets. With Munger’s coaching, Buffett realised that “when you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough; it’s worth a pretty good price.” Hence his huge investments in stocks like Coca-Cola in 1988 although Coca-Cola was not cheap by conventional standards.
Although there are significant differences between the two, it was Graham and Munger who introduced Buffett to the central concepts of value investing. But it is to Buffett’s credit that he was able to move away from a strictly Grahamite style while the other value investors have remained in the traditional Graham mindset. It is to Buffett’s credit that he was convinced by Graham and Munger’s investment logic and rational instead of charting the modern portfolio theory mumbo-jumbo. He was smart enough to know that he had much to benefit from Graham and offered to work for him free of charge and pestered Graham for three years until he was employed. In the run-up to the technology bubble, Buffett had the genius to recognise his circle of competence, stayed within that boundary and avoided the technology stocks even though Bill Gates is his buddy. Graham stressed a diversified portfolio and would sell when a stock reaches its intrinsic value. Buffett, like Munger, has a very focused portfolio and would hold the stocks for a long time. At the end, Buffett was smart enough to pick up the right things from the right people.
Can we apply the Buffett-Graham-Munger approach to Bursa Malaysia? Yes, except that one has to be very patient, disciplined and do the necessary homework. For whatever reasons, many claim to be a follower or non-follower of Buffett without really knowing his philosophy and methodology.
Many investors have blamed the Bursa Malaysia for losses or poor returns. Many have said that the Buffett-Graham-Munger investing style cannot be successfully applied to Bursa. Many investors do not realise that the real culprit of their losses or poor performance is themselves. Do not get us wrong. i Capital is not saying that Bursa and the listed companies are perfect. There is an endless list of things that can be improved and there are plenty of companies (probably the majority of them) that do not deserve an inch of support from genuine investors. But part of the fault also lies with the investing style of investors. Have they ever asked how they would perform if they had used the same method and invested in Tokyo, London or New York? Would they have the patience or the discipline?