A while back I finished reading this book and since I keep notes as I read books now I thought I’d share what I thought were noteworthy passages from the book. I haven’t included all my notes here to keep the book still interesting for those of you who choose to read it. The book itself was a long read but had many insightful details into his life and his investing philosophy. It’s a great introduction to anyone interested in value investing or who would like to be persuaded.
ISBN 0-385-48491-7
Then he offered the terms. The Davises, as limited partners, would get all of the profits that Buffet could earn up to 4 percent. They would share any remaining profits – 75 percent to the Davises and 25 percent to Buffet. Thus, Buffet was not asking the Davises to gamble alone; Buffet’s money would be on the same horse. If his results were mediocre or worse, Buffet would get zilch – no salary, no fee, nada. According to Lee Seemann, the doctor’s son-in-law, “The whole thing was laid right out. We liked that. You knew where you stood with him.” (pg 62)
He said he was thinking of making money before his feet hit the ground. (pg 63)
His talent lay not in his range-which was narrowly focused on investing-but in his intensity. His entire soul was focused on that one splendid outlet, as it had been when he was a boy delivering papers. Company after company he analyzed and committed to memory. And when one became cheap, he pounced. (pg 65)
Like his teacher, Buffet ruled out any and all high-technology companies as speculative. (Didn’t have much technical expertise) (pg 68)
What distinguished Buffet was the way he zoned in. He would stare at the cards and calculate the odds like a machine. “He was not emotional…it was just mathematics to him.” (pg 70)
Buffet was so consistently analytical – unusually so. On form, his emotional pendulum did not swing as far as other people. There was no pushing him to an expression of say, anger, despondency, recklessness, or other feeling outside of his customary Pepsi-drenched high spirits. He was always logical and even-tempered, always in the same, circumscribed arc. (pg 70)
This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. (pg 77)
But Buffet saw a type of asset that eluded Graham: the franchise value of American Express’s name. For franchise, think: a market lock. (pg 81)
My perhaps jaundiced view is that it is close to impossible for outstanding investment management to come from a group of any size… (pg 85)
Like most pros, Buffet built a position in a stock gradually, to avoid driving up the price while he was buying. (pg 98)
Fred Carr investor and head of the Enterprise Fund: His strategy was simple: “We fall in love with nothing. Every morning everything is for sale-every stock in the portfolio, and my suit and my tie.” (pg 99)
We will not go into businesses where technology is away over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as a I do about the mating habits of the chrzaszez. (pg 100)
Written by John Maynard Keynes in 1936 “It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probably yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence. (pg 103)
“Price is what you pay, value is what you get.” (pg 114)
Jack asked, “How do you do it?” Buffet said he read “ a couple of thousand” financial statements a year. (pg 130)
Buffet opposed options for the reason that most CEOs were enamored of them. Options conferred potential –sometimes vast- rewards, but spared the recipients of any risk, thus giving executives a free ride on the shareholders’ capital. (pg 131)
“I’d rather have a $10 million business making 15 percent than a $100 million business making 5 percent,” Buffet said. “I have other places I can put the money.” (pg 132)
Whereas textiles, which required reinvestment in plant and equipment, were cash-consuming, insurance was cash-generating. Premiums were collected up-front; claims were paid out only later. In the interim, an insurance company could invest the funds, known in the trade as the “float”. (pg 135)
Traditionally, insurers had managed their float conservatively, keeping far more capital than needed. But Buffett, who had thought long and hard about insurance since his early fling with GEICO, thought that float from insurance could be as dynamic as rocket fuel. Float was merely money, and an insurance firm was, in effect, a conduit for investable cash. (pg 135)
Most older entrepreneurs such as Abegg are eager to retire when they sell out, and the new owners (while praising their storied careers) usually are anxious to show them the door. Buffet was different. Running a bank, a claims office, or a retail chain was out of his arc, and he had no desire to try. Indeed, he felt, if he didn’t like the way the business was run, why buy it? (pg 136)
He looked for a type: the self-starter with a proven record. What is interesting is that they stuck with him. Abegg, who was seventy-one when he sold to Buffet, continued to manage under Buffett’s ownership…None of these multimillionaires needed to work, but Buffet understood that most people, regardless of what they say, are looking for appreciation as much as they are for money. He made it clear that he was depending on them, and he underlined this by showing admiration for their work and by trusting them to run their own operations. (pg 136)
Buffet suddenly wanted to learn all there was to know about newspapers. He began to study the economics of newspapers, and of other media properties, in great detail. As once, after discovering GEICO, he had immersed himself in insurance, now he wouldn’t sleep until he knew the newspaper business from the bottom up. And the more he learned, the more he knew that the Sun, as a secondary paper, was hopeless. (pg 146)
Buffet’s reaction was instinctive: Be greedy when others are fearful. (pg 150)
The Post, run by Katherine Graham, also owned four television stations, Newsweek magazine, and newsprint mills. Such assets often traded in private sales, and were not hard to value. Buffet figured that they were worth $400 million. But the stock market was valuing the entire company at $100 million. The people selling-professional fund managers- would not have disputed those numbers. Why, then, were they selling? Quite simply, they were afraid that the shares would drop further. They were afraid that other people might sell. (pg 152)
It’s a lot different going out to Kalamazoo and telling whoever owns the television station out there that because the Down is down 20 points that day he ought to sell the station to you a lot cheaper. You get the real world when you deal with a business. But in stocks everyone is thinking about relative price. When we bought 8 percent or 9 percent of the Washington Post in one month not one person who was selling to us was thinking that he was selling us $400 million [worth] for $80 million. They were selling to us because communication stocks were going down, or other people were selling, or whatever reason. They had non-sensical reasons. (pg 152)
Buffet was as fearful of inflation as anyone. His response was to hunt for stocks, such as newspapers, that would be able to raise rates in step. Similarly, he avoided companies with big capital costs. (In an inflationary world, capital-intensive firms need more dollars to replenish equipment and inventory.) (pg 158)
Because of the energy crisis: “Already supermarkets are noticing a trend for shoppers to make fewer trips while buying more per trip. Shoppers may be increasingly unwilling to load up on the relatively bulky soft drinks.” (pg 159)
One recalls Graham’s response to Senator Fulbright, who had asked him two decades back: Why would stock prices, even if cheap, necessarily go up? That is one of the mysteries of our business. In September, Graham emerged from retirement to speak to security analysts, urging them to awake to what he termed a “renaissance of value.” Investing, he reminded them, did not require a genius. What it needs is first, reasonably good intelligence; second, sound principles of operation; third, and most important, firmness of character. (pg 160)
I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. (pg 161)
The secret of its appeal was that Blue Chip gathered in cash upfront, but disgorged its funds only over time, as shoppers brought in stamp books. Often the stamps were stuffed into drawers and forgotten. In the interim, Blue Chip had free use of the float. To Buffet, Blue Chip was simply an insurance company that wasn’t regulated. Its “premiums”-that is, the stamps sold to retailers-amounted to $120 million a year. This gave Buffet a hefty bankroll, in addition to the one he had at Berkshire. He and Munger went to the Blue Chip’s board, took over the investment committee, and began to put the float to work. (pg 163)
Investors often assume that book value approximates, or at least is suggestive of, what a company is “worth”. In fact, the two express quite different concepts. Book value is equal to the capital that has gone into a business, plus whatever profits have been retained. An investor is concerned with how much can be taken out in the future; that is what determines a company’s “worth” (or its “intrinsic value,” as Buffet would say). (pg 165)
Maybe grapes from a little eight-acre vineyard in France a really the best in the world, but I have always had a suspicion that about 99% of it is in the telling and about 1% is in the drinking. (pg 165)
Book value is a useful gauge for most banks. Since a bank’s assets consist of loans and other financial assets, intangibles such as brand name are usually insignificant. (pg 166)
Opportunities were missed, but he saved the Post from the business error that is truly a tragic error-throwing the profits from a good business into a bad one. (pg 193)
One time, Buffet said an investor should approach the stock market as if he had a lifetime punch card. Every time he bought a stock he punched a hole. When the card had twenty holes he was done-no more investing for life. Obviously, the investor would filter out every idea but the best. Lou Simpson, who was managing GEICO’s portfolio, said this parable had a profound impact on him. (pg 200)
Much later, when Buffet was speaking to the author about Buffet’s own career, he remarked with unmistakable affection: “The best thing I did was to choose the right heroes. It all comes from Graham.” (pg 202)
One was Buffet’s dread fear of inflation, inherited from his father. He seemed to have taken to heart Lenin’s dictum that the way to ruin capitalism was to ruin its money, and he doubted that politicians had the willpower to slow the printing press. Thus, Buffet saw inflation-as it turned out, erroneously-as a permanent affliction. “Like virginity, a stable price level seems capable of maintenance, but not of restoration.” (pg 236)
The best that he could do was to invest in companies that might resist inflation’s ravages, such as General Foods and R.J. Reynolds Industries. Buffet figured that well-known consumer brands, such as Post cereals and Winston cigarettes, would be able to raise prices at a pace with inflation. (pg 237)
One question Buffet always asked himself in appraising a business is how comfortable he would feel having to compete against it, assuming that he had ample capital, personnel, experience in the same industry and so forth. (pg 246)
His approach seems strange in a modern context, but it was in accord with the notion of J.P. Morgan, Sr., that the principal judgments in business are those concerning character. In Buffet’s terms, if he couldn’t trust the Blumkins, why become their partner? (pg 250)
When the Omaha World-Herald inquired as to her favourite movie, Mrs. B replied, “Too busy.” Her favourite cocktail? “None. Drinkers go broke.” Her hobby, then? Driving around and spying on competitors. (pg 251)
This devastating outcome for the shareholders, indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson’s horse. “A horse that can count to ten is a remarkable horse-not a remarkable mathematician.” (pg 256)
He launched in a tale about a stranger in a small town. The fellow wanted to get acquainted with folks, so he went over to the village square and saw an old-timer with “kind of a mean-looking German shepherd.” Buffet continued: He looked at the dog a little tentatively and he said, “Does your dog bite?” The old-timer said, “Nope.” So the stranger reached down to pet him and the dog lunged at him and practically took his arm off, and the stranger as he was repairing his shredded coat turned to the old-timer and said, “I thought you said your dog doesn’t bite.” The guy says, “Ain’t my dog.” (pg 281)
A year earlier, he had disdainfully written that if a graduating M.B.A. had asked him how to get rich in a hurry, he would have held his nose with one hand and pointed to Wall Street with the other. (pg 300)
But a bull market is a bit like falling in love. When you are in one, it has never happened to anyone before. (pg 301)
Buffet was not making a forecast; he was merely obeying two cherished rules. Rule no. 1: “Never lose money.” Rule no. 2: “Never forget Rule no. 1”. (pg 303)
Now manic , now depressive, Mr. Market’s next quotation was anybody’s guess. The trick for the investor was to ignore his unpredictable mood changes. (pg 306)
He was often asked, how did he determine the “value” of a stock? Conceptually, Buffet likened it to that of a bond. A bond’s value was equal to the cash flow from future interest payments, discounted back to the present. A stock’s value was figured the same way; it equalled the anticipated cash flow per share (Buffet defined cash flow as reported earnings plus depreciation, depletion, amortization, and certain other noncash charges, less the average annual capital expenditures required for a company to maintain its unit volume and competitive position), except that the invest had to fill in the crucial detail: “If you buy a bond, you know exactly what’s going to happen, assuming it’s a good bond, a U.S. Government bond. If it says 9 percent, you know what the coupons are going to be for maybe thirty years… Now, when you buy a business, you’re buying something with coupons on it, too, except, the only problem is, they don’t print in the amount. And it’s my job to print in [to figure out’ the amount on the coupon.” (pg 324)
Buffet’s guides to finding such a stock could be summarized quickly:
- Pay no attention to macroeconomic trends or forecasts, or to people’s predictions about the future course of stock prices. Focus on long-term business value- on the size of the coupons down the road.
- Stick to stocks within one’s “circle of competence.” For Buffet, that was often a company with a consumer franchise. But the general rule was true for all: if you didn’t understand the business-be it a newspaper or a software firm-you couldn’t value the stock.
- Look for managers who treated the shareholders’ capital with ownerlike care and thoughtfulness.
- Study prospect-and their competitors-in great detail. Look at raw data, not analysts’ summaries. Trust your own eyes, Buffet said. But one needn’t value a business too precisely. A basketball coach doesn’t check to see if a prospect is six foot one or six foot two; he looks for seven-footers.
- The vast majority of stocks would not be compelling either way-so ignore them. Merill Lynch had an opinion on every stock; Buffet did not. But when an investor had conviction about a stock, he or she should also show courage-and buy a ton of it. (pg 325)
During World War II, the company (Coca-Cola) persuaded the U.S. government to ferry fifty-night bottling plants overseas, theoretically to boost troop morale and not incidentally to spread the soda. (pg 326)
If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done. (pg 330)
Munger on Buffet’s style of investing: “Don’t misunderstand. I don’t think that tens of thousands of people can perform as well. But hundreds of thousands can perform quite well-materially-better-than they otherwise might. There is a duality there.” (pg 332)
Indeed, before he invested in a stock, Buffet wanted to feel sufficiently comfortable so that if the market were to close for a period of years and leave him with no quoted price at all, he would still be happy owning it. This sounds extraordinary, but one’s house is not quoted day-by-day, and most people do not lose sleep over its value. That is how Buffet looked at Coca-Cola. (pg 333)
Buffet said it did not require a formal education, nor even a high IQ. What mattered was temperament. He would illustrate this with a little game at business schools. Suppose, he would tell a class, each student could be guaranteed 10 percent of one of their classmates’ future earnings. Who would they choose? The students would start to scrutinize one another intently. There weren’t looking for the smartest, necessarily, Buffet would observe, but for someone with the intangibles: energy, discipline, integrity, instinct. (pg 333)
Buffet was asked how he would rewrite the tax code. “If I really could do it, it would shock you,” he said. He’d tax the hell out of personal consumption-at progressively higher rates-and impose and “enormous” inheritance tax. “If I want to run around in a jet, which I do, fine, I have the claim checks to pay for it, but that should be taxed heavily, because I am withdrawing people, fuel and so on-resources-from society. (pg 349)
Whitemail – Greenmail – Blackmail (Wiki there meanings! I wasn’t aware of the first two!)
Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future (pg 411)
Over thirty-one years, his stock as appreciated at a rate of 27.68 percent a year, compounded. Over the same span, the Dow Jones Industrial Average, including dividends, has a growth rate of 10.31 percent a year, and the Standard & Poor’s 500 of 10.7 percent. Put differently, if in 1965 one had put $10,000 into Berkshire and like amounts into the S&P 500 and crude oil, the Berkshire at year-end 1995 would have been worth $17.8 million, the S&P portfolio $224,000 and the crude oil $72,000. (pg 413)
Among history’s great capitalists, Buffet stands out for his sheet skill at evaluating businesses. What John D. Rockefeller, the oil cartelist, Andrew Carnegie, the philanthropic steel baron, Sam Walton the humble retailer, and Bill Gates, the software nerd, have in common is that each owes his fortune to a single product or innovation. Buffet made his money as a pure investor: picking diverse businesses and stocks. (pg 413)
