threatened by the 'ups and downs' in the market or the volatility of the global economy.

Transcription

1 Wang Chaunfu He was born in a family of poor farmers. His parents died when he was young. In response to a question from Mr. Buffett: He said, We will never, never rest. 4 Why Study Exception Like Buffett? (a) To Learn (b) It is Interesting How About Steve Jobs? EXCEPTIONAL INNOVATOR He was born to a teenage mother. He was adopted. Spent one summer in an apple orchard - He was so happy there that he later named his business "Apple." How Successful is Buffett? 35 Growth of $1 After 25 or Intermediate s at Different Rates of Return % 1% 15% s from initial investment Facts: Annualized return over 45 years: 2%+ (off the chart) Buffett is the CEO of Berkshire Hathaway 2 5 EXCEPTIONAL SALESMAN Li-Ka-shing Quit school at age 15 to take care of family after his father died He says: Seeking growth while maintaining stability has always been my motto I [am] vigilant about maintaining a healthy debt to equity ratio. I am therefore less threatened by the 'ups and downs' in the market or the volatility of the global economy. First Principle Buffett uses VALUE INVESTING Benjamin Graham Invest only in Large, Prominent and Conservatively Financed Companies. PRICE Vs. VALUE In other words: Be conservative. Use P/E ratio and other metrics. Need to Learn: ACCOUNTING, FINANCE, etc. NO NEED TO LEARN COMPLICATED FORMULAS about Derivatives. Does This Strategy Work? Dollars

2 5 PricetoRatioFrom1881to Price totenyearaverage 25 2 Average Table Evidence that Value Investing Works Returns on portfolios of stocks based on P/E ratios Portfolio number Return (% per year) Returns on portfolios of stocks based on market-to-book (M/B) ratios Portfolio number Return (% per year) Highest P/E stocks Highest M/B stocks Lowest Lowest Buffett s Latest Purchase: BNSF P/E of 18 Not a value investment 8 Growth Investing You need to think about the future growth. Understand the business well and be good in forecasting. (Invest only in what you know.) Buffett: If you aren t willing to own a stock for ten years, don t even think about owning it for ten minutes Buffett Investing = Value Investing + Growth Investing Think about Stocks owned by Buffett: Coca Cola Proctor and Gamble American Express Wal-Mart Usually not cheap but they are also not expensive. Buffett: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Should you invest in companies like Apple, or Microsoft, etc. NO. Why? Berkshire s Growth over Last 4 s Table6.1 Berkshire'sPerformancevs.theS&P5 AnnualChange Book valueper share Berkshire's stock performance relativeto S&P5 1year Stock S&P5 periods price Returns (1) (2) (3) (2)(3) % 15.9% 3.1% 12.8% % 4.4% 16.2% 24.2% % 31.% 19.2% 11.8% % 3.3% 1.4% 4.7% 4years % 21.8% 8.9% 12.9% 11 Why Coca-Cola was purchased in 1988? Table Growth in Coca-Cola's (and Book Value Before Berkshire s Purchase Growth in earnings per share % year average 11.1% P/E at the time of purchase: 17 12

3 Table6.3 BYD'sSelectedFinancialData inmillionsofchineseyuan(rmb) exceptearningspershareandratios Revenues Totalassets Debt(interestbearing) Shareholders'equity Netincome pershare Debt/Totalassets Returnonequity 9.% 15.% 21.2% 12.% Some Berkshire Managers (CEOs) Charles Munger David Sokol Ajit Jain Tony Nicely Many Entrepreneurs (Furniture Stores, Jewelry Stores, etc.) Some Berkshire Businesses Insurance Railroad Electricity Companies Manufacturing Dairy Queen (similar to McDonald s) Where does growth come from? Buffett-style Investing: Simple but not Easy. Many Facets to Think About. Here are some: Let us discuss these briefly Who are you? Our goal is to acquire either part or all of businesses that we believe we understand, that have good, sustainable underlying economics, and that are run by managers whom we like, admire and trust. Use Other People s Money: (BUT ) Berkshire s Auto Insurance Table GEICO's Revenues, Float and Operating Profits (Dollar amounts in billions) Revenues Float Operating profits as a percentage of revenues % % % % % % 15 18

4 Invest for the long term FinalAmountwithandwithouttax defermentfrominitial$1, InvestmentinS&P5from1984to 28 9, 8, 7, 6, 5, 4, 3, 2, 1, AmoutwithTaxDeferment Amountwithouttaxdeferment One Advantage: Taxes And, You make better decisions. 19 Use Monopoly (Moat) M= Monopoly = Money Newspapers 4% Operating Profit as a Percentage of Sales 35% 3% Newspaper 25% 2% 15% 1% 5% % -5% All otherbusinessesexceptinsurance % 2 Dollars Operating Profit Think Profitability (Not Profits) Table 1.1 Profitability of Berkshire s Jewelry Business Compared to Tiffany s (Dollar amounts in millions) Berkshire's Jewelry Business Revenues $ Identifiable assets at year end $ Operating profits before taxes $ Operating Profits as a % of identifiable assets 2% 17% 15% 1% Tiffany and Co Revenues $1,461 1,169 1, Total assets $1,343 1, Operating Profits $ Operating Profits as a % of identifiable assets 19% 15% 16% 15% 22 Think Reliability of Profits in the Long Run Table Berkshire Hathaway Energy Sector (MidAmerican Energy Holdings) (Dollar amounts in millions) Property, plant, equipment, and other assets, net $36,29 33,917 3,942 16,37 15,597 14,862 14,177 8,987 8,8 Goodwill 528 5,591 5,548 4,156 4,37 4,36 4,258 3,639 3,673 Total assets: $41,57 39,58 36,49 2,193 19,94 19,168 18,435 12,626 11,681 Total revenues $13,971 12,628 1,644 7,279 6,727 6,145 4,968 4,973 4,13 before interest and taxes (EBIT) $2,23 2,86 1,737 1,698 1,331 1,591 1,253 1,4 616 EBIT/TA (%) 5.4% 5.5% 6.1% 8.5% 6.8% 8.5% 8.1% 8.3% 5.3% 23 Always Compute Intrinsic Value Berkshire Hathaway Table Data for Valuation Per-share Investments ( ) Pre-tax earnings per share (non-insurance businesses) 2 $5.6 $ compounded growth rate 5.5% 23.1% Recall: Where do profits come from? (a) Managers If so, what should managers focus on? (b) ROE (or ROA) Table Scott Fetzer and dividends Scott Fetzer (Dollar in millions) 1986 $4.3 13% % % % % % % % % Average 2% Return to Berkshire as a percentage of initial investment 21 24

5 Profitability (Shaw Industries) Table Shaw Industries: profitability and growth after Berkshire's acquisition of Shaw Revenues (million dollars) before Taxes (million dollars) before Taxes as a % of revenues Identifiable assets at -end (million dollars) before Taxes as a % of identifiable assets at year end 21 $4,9 $ % $1, % 22 4, % 1, % 23 4, % 1, % 24 5, % 2, % 25 5, % 2, % 26 5, % 2, % Average 9.% 2.5% Dividends: Berkshire does not pay any dividends. Why? Dividends versus Repurchases? P.P.E. (Property, Plant and Equipment) Is it good to have a lot of assets? Table Berkshire Holdings and their capital intensities Berkshire's common stock investments as of 12/31/28 market value Total Assets of the comp (TA) Property, plant and equip-ment (PPE) PPE as a percentage of TA (capital intensity) Company (Dollar amounts in billions) American Express $2.8 $126.1 $ % Burlington Northern Santa Fe % Coca-Cola % Conoco Phillips % Johnson and Johnson % Kraft % Procter & Gamble % Tesco % U.S. Bancorp % Wells Fargo & Co % Buffett Likes Companies Buying Their Own Shares Name of the company Net income Repurchases Repurchases as a percentage of net income (Dollar amounts in millions) Coca-Cola $26,587 $9,164 34% American Express 17,597 13,314 76% Anheuser- Busch 9,97 6,518 66% Burlington Northern Santa Fe 8,153 4,317 53% Kraft 13,848 7,62 55% Use Formulas Intelligently: Table Berkshire's Manufacturing, Service and Retailing Operations Balance Sheet 12/31/8 (in millions) Liabilities and Assets Equity Cash and equivalents $2,497 Notes payable $2,212 Accounts and notes Other current receivable 5,47 liabilities 8,87 Inventory 7,5 liabilities 8,13 Total current Goodwill and other intangibles 16,515 Deferred taxes 2,786 Fixes assets 16,338 Term debt and other liabilities 6,33 Other assets 1,531 S. Equity 3,779 $49,897 $49,897 ROE: Net Income divided by Shareholders Equity = 2,283/3,779 = 7.4% Are you bored? 27 Psychology (i) When the stock market goes down, which one are you? or (ii) Why do people sell shares when the market goes down? What to do to avoid your biases? Write notes when you make decisions Always Compute Intrinsic Value Who Are You? Know Thyself. 3