Warren Buffett - Group 8

8/4/2019 Warren Buffett - Group 8

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Warren Buffett- “the Sage of Omaha”

Ping HuMatt Neeve

Olena Olenchuk

Rachel Caldie



Agenda

Bio

Management style

Investment approach Methodology



Biography/History

Bought first stock at age 11

Invested savings into farmland

Had pinball machine business andsold for a profit

Attended Columbia University

where Ben Graham was a professor atthe time

Worked for Ben Graham for $12,000a year



Biography/History

Opened his own partnership in Omaha

By 1961, he had 5 partnerships

In 1962, he merged partnerships to makeBuffett Partnerships, Ltd.

Bought stock for Berkshire Hathaway at $8

Bought Amex stock after fraud scandal

Took control of Berkshire in 1965



Biography/History

Buffett worth $44 billion today Berkshire has $248 billion in assets CEO Charles Munger, vice-chairman

Met in 1959 Goal to increase 15% a year



philanthropy

85% of wealth given to philanthropy

Bill and Melinda Gates Foundation

Health and learning $1.5 billion annually

The rest to foundations run by hischildren and founded by late wife



Management Tenets

Buffett‟s three management tenets concern theevaluation of management quality

Is management rational?

Is management candid?

Does management resist the institutional imperative?



Rationality

If a company generates high returns on equity, theduty of management is to reinvest those earningsback into the company, for the benefit ofshareholders

If the earnings cannot be reinvested at high rates,management has three options:

ignore the problem and continue to reinvest at below-average rates buy growth

return the money to the shareholders, who then might have achance to reinvest the money elsewhere at higher rates

In Buffett‟s mind, only one choice is rational, that isoption 3



Candor

Buffett believes that a manager whoconfesses mistakes publicly is more likely tocorrect them

Managers who discusses the failures of thecompany with shareholders are admirable



Resisting the Institutional Imperative

What is the institutional imperative? the lemming-like tendency of corporate management

to imitate the behavior of other managers, no matterhow irrational it may be

Buffett points out that thinking independently andcharting a course based on rationality and logic are

more likely to maximize the profits of the companythan a strategy that can best be described as “followthe leader”



Management Style

He will not interfere with the running of thecompany.

He will be responsible for hiring and setting thecompensation of the top executive.

Capital allocated to the business will have a price

tag (a hurdle rate) attached.



Some Management Tips

Review annual reports from a few years back, paying specialattention to what management said then about strategies forthe future.

Compare those plans to today‟s results: How fully were theyrealized?

Compare the strategies of a few years ago to this year‟sstrategies and ideas: How has the thinking changed?

Compare the annual reports of the company you areinterested in with reports from similar companies in thesame industry. It is not always easy to find exact duplicates,but even relative performance comparison can yield insights



What type of investor is Buffett?

Value Investor

What is a value investor,and what makes Warren“the best” ?

Amex



The Buffett Way

“Economic moat”

Intrinsic value

Do what is the best for you, not

what people think you shouldbe doing.

So you say I can

make greatreturns here?



Buffet’s famous statements

Rule No.1: Never lose money. Rule No.2: Never

forget rule No.1.”

“The stock market is designed to transfermoney from the active to the patient.”

“The most important quality for an investor is

temperament, not intellect.”

"Risk comes from not knowing what you're

doing."



His Portfolio



performance

Berkshire Hathaway’s

Class A shares vs. S&P 500

Berkshire Hathaway’s

Class A & B shares vs. S&P 500



Methodology

1. Has the company consistently performed well? ROE for 5-10 years

2. Has the company avoided access debt? Small amount of debt indicating that earnings growth is being

generated from equity as opposed to borrowed money

3. Are profit margins high? Are they increasing? Look back at least 5 years



Methodology

4. How long has the company been public? At least 10 years

Recent IPO is not a target

5. Do the company‟s product rely on commodity?

Characteristics must be hard to replicate –

competitive advantage, or “economic moat” Product must be distinguishable

Must not rely solely on commodity



Methodology

W. Buffett’s most important skill!!!

6. Is the stock selling at 25% discount or at its real value?

Determine intrinsic value by analyzing businessfundamentals:

Include analysis of earnings, revenues and assets

Usually higher than its liquidation value

Compare company‟s intrinsic value to its currentmarket capitalization

If intrinsic value is at least 25% higher – companyhas value



conclusion

Complete understanding of the industry

Value investing (based on fundamental analysis)

Longevity (in established businesses, for long-term)



Questions?

Great Buffet Quotes:

"Someone's sitting in the shade today because someone planted atree a long time ago."

"Wall Street is the only place that people ride to in a Rolls Royceto get advice from those who take the subway."



Sources:http://www.investopedia.com/university/greatest/warrenbuffett.asp

http://www.investopedia.com/articles/01/071801.asp

http://www.investopedia.com/articles/06/threewisemen.asp

http://en.wikipedia.org/wiki/Warren_Buffett

http://finance.yahoo.com/

Warren Buffett - Group 8

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