Buffett Speaks
When Warren Buffett Speaks, does everybody listen? That was the case a few years back, but to a lot of so-called investment experts, Buffett now has as much significance as a prostitute at an Eunuch’s convention.
For you folks that are new to the business or investment world. Warren Buffett, CEO of Berkshire Hathaway, is considered one of the most successful investors of all time. And it would also make sense that he is also one of the world’s richest men.
It is hard to describe the company that’s now Berkshire Hathaway (stock symbols-BRKA & BRKB). It’s part semi-mutual fund in that it owns a helluva lot of stock in other companies, but it also owns many huge companies out right.
Just last year it bought a railroad, Burlington Northern for $34 BILLION. It also owns utility companies, candy, furniture, carpet and shoe manufacturers…
Having read Mr Buffett’s annual letter to shareholders today, I wanted to share my thoughts.
Buffett and Gates at annual meeting
And yes a significant portion of my retirement money has been entrusted to Mr Buffett in shares of Berkshire stock so I do have skin in his game…
Criticism of Mr Buffett
The main criticisms of Mr Buffett and his company, Berkshire Hathaway tossed about are as follows:
- Time has passed him by. “He doesn’t even invest in technology companies!”
- His company is too big.”All big mutual funds have died a slow death!”
- He is old. “No-one can match his success, and who the hell is Todd Combs anyway?”
Mr Buffett just ignores the crows squawking in the field, and continues to play the investment game with his tools, his rules, and, of course, his money (and mine!).
I found several corollaries to personal finance in Mr Buffett’s letter that I wanted to share with you.
- Share Price of Berkshire-Hathaway-He doesn’t care what the stock market thinks of his company day to day. The share price, and any gain or loss of his stock value from a market’s perspective is not mentioned in the letter. He does emphasize book value, and gives his reasons for its use as a measure of his companies worth.
- Living within your means-(no explanation required!)
- Leverage (Borrowed Money)-He doesn’t believe in leverage-that would mean the use of borrowed money to make investments.
- Emergency Funds-He strongly believes in money invested in liquid assets put aside for the unknown.
Let’s analyze each of these points separately.
Stock value:
He believes the valuation of his company by the stock market will be accurate in the long haul, but not necessarily in the short term.
This shows up by the lagging stock price in the late 90′s when tech stocks were everyone’s darling, and Berkshire shares lagged the market.
He points out Berkshire’s valuation by the market eventually catches up to it’s true value-but sometimes in dog years….
Living within your means:
We all know what this means. Mr Buffett lives it in ways that are unbelievable to most billionaires.
His office, home, and salary are all unassuming. He expects the managers of the many companies owned and controlled by Berkshire to keep expenses low.
To Quote Mr Buffett in the shareholder letter, “Imperial corporate palaces induce imperious behavior.” (Saddam, Mubarak, and Qaddafi have taken this to a new level in government-all with similar outcomes!)
Use of leverage:
His cash holdings are an extraordinary 38 billion dollars.
Many brokerage firms allow their more stable customers to leverage their stock holdings. This means they can buy 50% more than they have cash in the account. Hedge funds and other investments can be leveraged 10-100/1.
This is great when the value of the investment goes up, but can be devastating when the price drops.
Buffett’s refusal to use leverage limits his risk.
Emergency money:
He purposely keeps a minimum of 10, and currently 20 billion in readily available cash for emergencies. This has enabled his company to buy stocks, and whole businesses at distress sale prices.
This also keeps the company safe during economic downturns and even natural disasters.
One of his insurance companies had a 5 billion dollar payoff during hurricane Katrina. It was just a blip at Berkshire, well maybe more than a blip, but certainly not a danger to the company.
What if the company didn’t have the cash to pay that loss? Ask the former employees of Shearson, Merrill Lynch, and Bear Stearns, just to name a few. Those companies basically disappeared overnight from both lack of cash and the overuse of leverage.
Personal Emergency Funds:
Buffett also shares a letter from his grandfather to his grandfathers children extolling the virtues of having emergency money in a safe place and in cash!
Summary
I am going to stick with this old, behind the times, chicken-hearted investor with my money!
Reader Questions: What are your thoughts regarding Mr Buffett’s track record and plans?
Would you be a buyer or seller?
(photo credit-Ethan Bloch c.c.)
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