WB has accumulated and created a great amount of wealth for himself and for his investors, respectively. Oddly, he hasn't done much except for being patient, strong-willed and resourceful. He has changed his method of functioning as the years have passed him by. He has been one of the longest serving chairmen of a company ever. I wonder if that is correct English. Doesn't matter really.
Luckily for us, he has learnt so much over the years, a lot of which he has been willing to share with his patient viewers, listeners and readers.
1. Goodwill is an intangible asset, but it is far from worthless. In fact, it can be grown over a period of time and still remain intangible yet amazingly resourceful to the company.
2. Understand motivations of each party, because everyone tends to fend for him/herself. This simple observation can give answers to why fund managers - hedge, mutual, private equity - behave the way they do and why they can almost never be true value investors. Therein lies the key, most investors tend to want to get out at various points of time; simultaneously, there are always buyers. Amazing ! Which means that one of them is wrong; but often, the seller got out with a profit and the buyer goes on to make a profit... so who is wrong?
One answer is that the eventual seller makes a loss, or along the way one speculator/ investor or caped crusader will lose money. But the real answer lies in the power of compounding. The one who gives up on it, loses. The original seller, sold and went somewhere else. Did he make money there? For how long? How much? To whom do the profits belong? Where does the fund manager's interests lie?
The simple observations are of course that brokers tend to give it buy calls, brokers don't believe in investments for more than 6 months or 1 year... because that is where their business lies - the churn. Investment bankers are in it for the fee, the reputation and the following, which helps them garner the next 1.5%.
3. Fear and Greed. Don't be afraid just because the share price is falling. Ask yourself why it is falling and ask yourself if you have made a mistake. With a sufficient time horizon, volatility is just a blip.
4. The real risk is not in the volatility. It is in the risk of losing money. Absolutely. If you sold out because prices fell and you got scared, you are a moron. You didn't deserve to be there. The real risk lies in bad analysis, bad pricing, and fraud.
5. You are correct because your analysis is correct and not because the market says you are correct. The correctness of a decision cannot be judged from its outcome.
6. He bought into KO when it was one of the largest companies in the US and when it was widely followed by most analysts. Yet, he is the one who had the guts to buy in and stay put for the last, what, 24 years. And he has made in excess of 16% compounded if I am not mistaken. How? Everybody knew the company, everybody had supposedly valued the company and everybody had access to the same type of information.
What WB saw was, here is a product that cannot be replaced. Here is a product that is so cheap and still so profitable per bottle. Here is a product that has no boundaries to its marketability. What if it sells 10% per capita that of the US, in China or in the rest of Asia, to 10% of that population? Can anybody compete with it? He basically, created a rough business model showing the sustainability and evolutionary capability of the business. It is quite simple really.
7. Stay away from bad management, bad governance and thumb-suckers. This is the most difficult to evaluate, but with enough work, one will get it.
8. A simple yes or no decision. Investment decisions have two alternatives. Yes and No. By becoming a person who is hell bent on getting out at a certain time in the future, one becomes greedy and narrow-minded. With that, decisions become complicated.
9. Short term gains cannot be ruled out when it comes to investing. But understand that the beginning has to be on the premise of undervaluation relative to intrinsic value. With that in place, one saves his/ her ass if things go bad. Furthermore, in case of over-valuation in the short term, its perfectly alright to sell out.
Do look up his PetroChina investment.
There are exceptions to the undervaluation rule. And that is in case of extraordinary competitive advantages which justify overpaying.
10. One should never 'invest' with the hope that some moron will pay 15x or 50x of book earnings in the future. What the market decides to offer is the market's prerogative. The value of a company should be ascertained within a range based on competitive advantages, business potential and a reasonable prediction of cash flow potential. RoC and RoE are figures more important than profit margins.
11. Debt is dangerous. Leverage is dangerous. Derivatives are dangerous. In short, liabilities are dangerous. Sadly, the lure of money and excitement causes sensible people to do irrational things.
12. Reputation, family and a good night's sleep are possibly more important than most things money could buy.
13. Sloth is under-rated. It is more important to be patient and lazy while ascertaining an investment decision than it is to be active. It surprises me that investors are always invested. MFs are. PE funds ache to be deployed within 3 years of closing; weird because regardless of the quantum involved, their objective is only to be deployed. Therefore, during high valuations, they can't opt out and say 'we will invest when the euphoria has died down'. And while exiting, they don't have the luxury to wait for the market to appropriately value their investments. If a fund manager decides to sit on 50% cash and does not make a single investment in a year, the investors will be gnawing at him based on the activity that the rest of the investment world is busy with - but why should a manager overpay for an asset or pay for a sub-standard asset or better yet, overpay for a substandard asset? The answer is based on what the competition is doing. Odd world we live in.
Thinking is a painful game and saying no one investment after another is even more painful when one sees prices becoming richer and good companies becoming more expensive. But it is the thinkers who win in the end, because euphoria will always find a way into the markets and so will gloom.
I have written a lot. Tired.
Luckily for us, he has learnt so much over the years, a lot of which he has been willing to share with his patient viewers, listeners and readers.
1. Goodwill is an intangible asset, but it is far from worthless. In fact, it can be grown over a period of time and still remain intangible yet amazingly resourceful to the company.
2. Understand motivations of each party, because everyone tends to fend for him/herself. This simple observation can give answers to why fund managers - hedge, mutual, private equity - behave the way they do and why they can almost never be true value investors. Therein lies the key, most investors tend to want to get out at various points of time; simultaneously, there are always buyers. Amazing ! Which means that one of them is wrong; but often, the seller got out with a profit and the buyer goes on to make a profit... so who is wrong?
One answer is that the eventual seller makes a loss, or along the way one speculator/ investor or caped crusader will lose money. But the real answer lies in the power of compounding. The one who gives up on it, loses. The original seller, sold and went somewhere else. Did he make money there? For how long? How much? To whom do the profits belong? Where does the fund manager's interests lie?
The simple observations are of course that brokers tend to give it buy calls, brokers don't believe in investments for more than 6 months or 1 year... because that is where their business lies - the churn. Investment bankers are in it for the fee, the reputation and the following, which helps them garner the next 1.5%.
3. Fear and Greed. Don't be afraid just because the share price is falling. Ask yourself why it is falling and ask yourself if you have made a mistake. With a sufficient time horizon, volatility is just a blip.
4. The real risk is not in the volatility. It is in the risk of losing money. Absolutely. If you sold out because prices fell and you got scared, you are a moron. You didn't deserve to be there. The real risk lies in bad analysis, bad pricing, and fraud.
5. You are correct because your analysis is correct and not because the market says you are correct. The correctness of a decision cannot be judged from its outcome.
6. He bought into KO when it was one of the largest companies in the US and when it was widely followed by most analysts. Yet, he is the one who had the guts to buy in and stay put for the last, what, 24 years. And he has made in excess of 16% compounded if I am not mistaken. How? Everybody knew the company, everybody had supposedly valued the company and everybody had access to the same type of information.
What WB saw was, here is a product that cannot be replaced. Here is a product that is so cheap and still so profitable per bottle. Here is a product that has no boundaries to its marketability. What if it sells 10% per capita that of the US, in China or in the rest of Asia, to 10% of that population? Can anybody compete with it? He basically, created a rough business model showing the sustainability and evolutionary capability of the business. It is quite simple really.
7. Stay away from bad management, bad governance and thumb-suckers. This is the most difficult to evaluate, but with enough work, one will get it.
8. A simple yes or no decision. Investment decisions have two alternatives. Yes and No. By becoming a person who is hell bent on getting out at a certain time in the future, one becomes greedy and narrow-minded. With that, decisions become complicated.
9. Short term gains cannot be ruled out when it comes to investing. But understand that the beginning has to be on the premise of undervaluation relative to intrinsic value. With that in place, one saves his/ her ass if things go bad. Furthermore, in case of over-valuation in the short term, its perfectly alright to sell out.
Do look up his PetroChina investment.
There are exceptions to the undervaluation rule. And that is in case of extraordinary competitive advantages which justify overpaying.
10. One should never 'invest' with the hope that some moron will pay 15x or 50x of book earnings in the future. What the market decides to offer is the market's prerogative. The value of a company should be ascertained within a range based on competitive advantages, business potential and a reasonable prediction of cash flow potential. RoC and RoE are figures more important than profit margins.
11. Debt is dangerous. Leverage is dangerous. Derivatives are dangerous. In short, liabilities are dangerous. Sadly, the lure of money and excitement causes sensible people to do irrational things.
12. Reputation, family and a good night's sleep are possibly more important than most things money could buy.
13. Sloth is under-rated. It is more important to be patient and lazy while ascertaining an investment decision than it is to be active. It surprises me that investors are always invested. MFs are. PE funds ache to be deployed within 3 years of closing; weird because regardless of the quantum involved, their objective is only to be deployed. Therefore, during high valuations, they can't opt out and say 'we will invest when the euphoria has died down'. And while exiting, they don't have the luxury to wait for the market to appropriately value their investments. If a fund manager decides to sit on 50% cash and does not make a single investment in a year, the investors will be gnawing at him based on the activity that the rest of the investment world is busy with - but why should a manager overpay for an asset or pay for a sub-standard asset or better yet, overpay for a substandard asset? The answer is based on what the competition is doing. Odd world we live in.
Thinking is a painful game and saying no one investment after another is even more painful when one sees prices becoming richer and good companies becoming more expensive. But it is the thinkers who win in the end, because euphoria will always find a way into the markets and so will gloom.
I have written a lot. Tired.
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