Warren Buffett – A Financial Demigod | Trade Samaritan

Warren Buffett – A Financial Demigod

By the age of 13, Buffet was running his own businesses as a paperboy and selling his own horse-racing tip sheet. That same year, he filed his first tax return, claiming his bike as a $35 tax deduction.

Warren Buffett – A classic hyper analytic value seeker!

The unique characteristics of Buffett’s business are that he provided the barest minimum of information on the portfolio he held to his investors. He never reported any specifics about individual investments.

Buffett’s success lies in a unique talent set, ‘the rare ability to size up managements and companies, the capacity to gather and synthesize huge amounts of information and then laser in on a business heart.

As a kid, he kept notebooks full of passing license plates, memorized city population numbers, counted occurrences of letters in the text. During his first few weeks of his first job at Graham-Newman he sat in the company file room and read every page in every file.
Buffett’s investment strategy (explained): As we enter the fifth year of what the economists call, ‘The Great Recession’ we are once again seeing stock process at PE ratios (price earning’s ratio) that we haven’t seen in early eighties.

Company Present PE ratio PE ratio in 1999-2000
Coca Cola 16 47
Wal-Mart 12 38
Procter & Gamble 16 29

Warren Buffett Investments

What does this mean?

Because of the recession these companies are once again selling at prices that offer great long term growth prospects, Buffett calls this a ‘durable competitive advantage’

  • A company with a durable competitive advantage has the following characteristics:-
  • Is an industry with very little competition
  • Sell a unique product that does not change much
  • Provides a unique service that is difficult to replicate
  • Is the low cost buyer and seller of products the public constantly needs
  • Spends very little or none at all on research and development

Examples of companies representing most of the characteristics of durable competitive advantage are Coca-Cola, Wal-Mart and H & R Block.

As we read this article there are in all four people at Berkshire Hathaway who are picking stock for ‘Berkshire’s portfolio’. Warren Buffett even today makes 99% of the investment decisions for Berkshire – i.e. picking stock for Berkshire’s portfolio. Buffett’s net worth is linked to the stock of Berkshire Hathaway but his remuneration as the Chairman and the CEO of Berkshire is fixed at US$ 100000.00 per annum. Buffett even today with a net worth of US$ 58.5 billion lives in his 55 years old house in Omaha, Nebraska.

I look at businesses in which I think I can predict what they’re going to look like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.

To put it in simple words, Buffett’s strategy is counter intuitive to what the rest of the market is doing – when others are selling, he is buying. When others are celebrating their bull market riches, he is socking cash away so he has plenty of financial firepower when the next Bear market hits. In a Bear market or a panic, Buffett uses his superior knowledge of business to buy into the companies that have superior long term economic working in their favor.

When the whole world makes profit after buying into a bull market, Buffett sells out into the rising market, gathering a large cash position – in two or three years these stocks are on the top of bull market; Buffett chooses to miss out on this easy money. And when these markets finally crash and the masses are bailing out of stocks, we find Buffett at the bottom of investment barrel selectively picking up the cream of the crops; some of the greatest companies in the world at bargain price, only to sell as the market and their stock prices recover.

Yet another unique thing about Berkshire Hathaway is that it never pays dividend, profits are rolled back (retained earnings) in the company to make more investments. Of course, Berkshire benefits by receiving dividends from its sizable investments in public companies and dividend payers, including Coca-Cola, ConocoPhillips  and Wells Fargo. But when it comes to Berkshire’s balance sheet, Buffett prefers to keep the cash and make additional investments, including outright acquisitions and individual stocks. This trend will continue at least till the time Buffett and his partner Charlie Munger are running the show.

Key to Success: Having cash when others don’t and then he waits.

Model (explained): Let the cash pile up, identify the companies with durable competitive advantage, and then buy them in a down market-and hold them for the long term (30-35 years).

Conclusion

Buffett has repeated this cycle over and over and over again to the point that he has an enormous portfolio of some of the finest businesses that have ever existed, and in the process he has become the third richest person in the world.
Now in his eighties, Buffett had announced that he is battling prostate cancer some time ago. He is undergoing treatment since July 2012 and he is still expected to be able to fulfill his usual responsibilities at Berkshire Hathaway. Here’s what he had to say,

“I feel great . . . and my energy level is 100 percent.”

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