An oil prospector, moving to his heavenly reward, was met by St.Peter with bad news.

�You�re qualified for residence,� said St. Peter, �but, as you can see, the compound reserved for oil men is packed. There�s no way to squeeze you in.�

After thinking for a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hand and yelled, �Oil discovered in hell.�

Immediately the gates to the compound opened and all the oil menmarched out to head for the nether regions. Impressed, St. Peterinvited the prospector to move in and make himself comfortable.

The prospector paused. �No.�, he said, �I think I�ll go along with the rest of the boys. There might be some truth to that rumour after all.

2

Warren Buffett

The Greatest Investor of All Time?

3

Outline of Presentation

� Introduction

� Buffet's Investment Style

� Buffet�s Success

� Value Investing for the Lay Investor

� Conclusion

4

Introduction

� Warren Edward Buffett

� Born August 30, 1930, Omaha.

� Son of Howard and Leila Buffett

5

Background

� Born during the Great Depression

� Father was a stockbroker

� Emerged with strong drive to get very rich

6

� Age 6 - Peddled Coke� Age 9 - Carrying golf clubs for $3 per day� Age 11- Bought his first stock� Age 11-13 - Sold used golf balls.� Age 13 - Carrier for Washington Post and 4 other

newspapers.� Age 14 - Bought 40 acres of farmland and leased

it out.� Age 16 - Rented out used pinball machines

making up to $50 a week.

Money-Making Schemes

7

Employment

� Worked for Buffett-Falk & Co., as an investment salesman after graduating with a Masters in Economics. (1951-1954)

� Worked for Graham-Newman Corp, as a securities analyst (1954-1956)

� Formed Buffett Partnership, Ltd and appointed himself General Partner. (1956-1969)

� Bought over Berkshire Hathaway Inc in 1962 and became Chairman and CEO in 1970

8

� $25,000 each from a group of investors

� 1st year - 5 small partnerships, totalling range of $500,000

� 2nd year - Partnerships soared 41% (Dow 39%)

� 3rd year - Original partnership money doubled

� 1969 - Investment ballooned at compound rate of 29.5% (Dow 7.4%)

Buffett Partnership, Ltd

9

� A textile mill purchased in 1962. Suffering a $2.2m loss at time of purchase. Priced at $8/share though it had $16.50/share of working capital.

� Buffett currently holds 38% of shares, valued at total of $36bn

� Has stakes in Coca-Cola (2nd largest shareholder), Gillette, American Express, Disney, McDonalds, Dairy Queen

� Currently valued at $57.8bn book value. Intrinsic value unknown. Class A stock priced between $61,900 and $81,100 in 1999

Berkshire Hathaway

10

Holdings of Berkshire Hathaway, Inc.

� Capital deployed into other fields� underwriting of property and casualty

insurance,

� newspaper publishing,

� retailing of home furnishings,

� retail jewellery,

� manufacture, import and distribution of footwear

11

Business Activities

� All operating decisions for the different Berkshire businesses are made by the respective managers of those business units

� All investment decisions and other capital allocation decisions are made for Berkshire and its subsidiaries, by Warren Buffett, in consultation with Charles E Munger

� Main business of Berkshire Hathaway is involved in property and casualty insurance.

12

Warren Buffett�s Lifestyle

� Salary of $100000 a year.

� Lived in the same house for 40 years.

� Eats burgers and drinks Coke

� Only extravagance: A Gulfstream IV-SP jet called �The Indefensible�.

13

Buffet�sBuffet�sInvestment StyleInvestment Style

14

Buffett�s Investment Style

� Strong business fundamentals

� Buy low, sell high

� Traits of a good investor

� Intrinsic value vs stock price

� Invest for the long term

� Circle of Competence

� Minimize risks

15

Strong Business Fundamentals

� stable company

� strong management team

� certainty of future cash flows

16

Buy Low, Sell High

� Stocks ↓� Investors get cold feet => sell

� Stocks ↑� Herd instinct => buy

� In effect, buying high, selling low!

17

Buy Low, Sell High

� Stocks ↓� Buffett buys

� Stocks ↑� Buffett sells

� Buy low, sell high� Short-term market volatility does not

concern him� Day-to-day stock quotes are meaningless

18

Traits of a Good Investor

� difference between investors and speculators

→ attitudes toward stock pricing

� master their emotions

� not get caught up in the market momentum

� discipline, patience, flexibility, courage, confidence, decisiveness

19

Intrinsic Value vs Stock Price

Critical Investment Factor

determining the intrinsic value of a business and paying a fair or bargain price for it

Intrinsic Value

� discounted value of cash that can be taken out of a business during its remaining life

20

Intrinsic Value

Buffett values a company based on:

� Return on beginning shareholder�s equity

� Change in operating margins, debt levels, & capital expenditure needs

� Company�s cash generating ability

21

Invest for the Long Term

� Market is for buying & selling

� Fluctuations do not bother him

� Investors overreact� Stock prices too high or low

� Do not reflect true value of company

� In long run, price ≈ true value

22

Circle of Competence

� Draw a circle only around businesses that he understands

� does not bother about those outside this circle

� Never invests in businesses he cannot understand

� Tech stocks � do they possess a durable competitive advantage?

23

Buffet � on tech stocks

�We're perfectly willing to trade away a big payoff for a certain payoff.�

24

Minimize Risks

� searches for investments in which risk is eliminated or minimized

� only take risks where the chances of total loss are low and gains are substantial

� reduced greatly by concentrating on only a few holdings (opp. of diversification)

� invest over long term & in stable companies

25

Rule-of-Thumb

� Think of owning stock as being an owner of the company,

� Study that company and its competition thoroughly,

� Invest in it for the long haul (> 5 years),

� Do not use leverage, and

� Do not be led by the market's moves or by what other investors do.

26

Buffett�sBuffett�sSuccessSuccess

27

Buffett�s Success

Perception

Discipline

Folly / Wise

Patience Rationality

Oppose Herd Instinct

Stocks = Business

Long-term

Little Diversification

+

28

Views Stocks as Business

� Buffett�s Point of View� �When investing, we

view ourselves as business analysts��

� Holistic view of business.

� Investors� Point of View� Mostly do not view

buying shares as buying a business.

� Seldom looks into the management aspect of a business.

29

Views Stocks as Business

� Thus, investors buy stocks because of superficial notions.

� While, Buffett buys stocks based on business fundamentals.

� Implication is that investors will pull out of the investment once they see signs of trouble, & this is where they will lose money.

�I am a better investor because I am a businessman, and a better businessman because I am an investor.�

30

Views Stocks as Business

� Example:� Wells Fargo

� Money-centre bank, financially strong

� Nationwide recession in 1990, set aside $1.3 billion for potential loan losses

� Stock price dropped from $86 to $41.30

� Actual losses less than expected.

� Bank remained very solvent & even had profit of $21 million in 1991.

31

Views Stocks as Long-term Investment

� Buffett�s Point of View� �If the business does

well, the stock eventually follows.�

� Short-term: investors� sentiments

� Long-term: intrinsic value

� Investors� Point of View� Tempted to buy short-

term for large quick profits.

� Stock market is the final arbiter.

32

Views Stocks as Long-term Investment

� Example:� Buffet managed to own Borsheims, See�s

Candy Shops, The Coca-Cola Company, The Washington Post, Capital Cities/ ABC� all without looking at daily price quotes.

� �He would not care if the stock market closed for 10 years.�

33

Good Business Judgement + Ignoring Market Sentiments

� Buffett�s Point of View� As long as the stock is

attractive & at reasonable prices, he will buy boldly, no matter how pessimistic the market sentiments are, or how high the market level is.

� Investors� Point of View� Difficult to ignore

market sentiments

� Require confidence and courage

� Easily influenced

34

Good Business Judgement + Ignoring Market Sentiments

� Examples:� General Foods Company

� In 1980s, perceived as stodgy food co. by investors� In 1985, price went up 3-fold after Buffett�s purchase.

� The Coca-Cola Company� Safe co. but unappealing to investors.� Buffett bought in 1988-1989, stock price has quadrupled.

� The Washington Post Company� Buffett bought it even during height of 1973-1974 bear

market.

� GEICO Corporation� Buffett bought it when others thought GEICO was going

bankrupt.

35

Resists Inactivity + Holds Few Stocks

� Buffett�s Point of View� Willing to say �no�.

� Willing to wait until a good stock comes by.

� To hold a few good stocks than many mediocre stocks.

� Investors� Point of View� Hard to say �no�.

� Often felt the need to buy many stocks.

� Hard to stay inactive

36

Resists Inactivity + Holds Few Stocks

� Examples:� In 1986

� 3 major stocks: Capital Cities/ ABC, GEICO & The Washington Post Co. made up 93% of Berkshire�s portfolio. (worth $1.7 billion)

� Could not find stocks that met his requirements.

� In 1987� Market crashed, but Buffett didn�t invest.

� 3 major stocks now worth more than $2 billion.

37

Resists Conformity

� Buffett�s Point of View� To wait for stock

prices to go down

� To add stock more cheaply to portfolio

� Investors� Point of View� To wait for stock

prices to go up

� Tendency to follow herd instinct.

38

Resists Conformity

� Example� GEICO Corporation

� Made net loss of $126 million, on the brink of insolvency.

� Many investors pulled out. Buffett bought GEICO stocks instead.

� American Express� Loss of $60 million.

� Stock prices fell. Buffett invested.

39

Value InvestingValue Investingfor thefor the

Lay InvestorLay Investor

40

Value Investingfor the Lay Investor

Analyse Buffett�s strategy in terms of :� the period (old economy vs. new) and

circumstances,� available resources (capital, company and

market information),� general soundness of strategy (avoiding

risk, maximising returns)� objectives and goals

41

Starting Out

� Buffet started out early

� � more capital, experience

� An ordinary investor would most probably start out in the early / late twenties onwards

� Not much capital, limited funds

42

Starting Out

� Buffet�s peak

� � market boom, fortunate times

� Such circumstances no longer present

� Emergence of new economy, volatile technology stocks

43

Resources

Buffet has phenomenal resourcesa) capitalb) information networks, friends in high placesc) years of experience, streetwise

The ordinary investor hasa) limited capitalb) have to rely on advice, fund managersc) low experience, tendency to follow market trends

44

General Soundness of Strategy

a) Looking for bargain companies, with good management

b) Invest for the long termc) Ignore stock marketd) Holding on to a falling companye) Buying businesses with �strong histories of

profitability and with a dominant business franchise�

f) Focusing on only a few holdings

45

Objectives

Objectives and Goals

� Buffett� Build, develop and sustain a company/ empire

� Ordinary Investor� Increase and accumulate personal wealth, for

comfortable retirement, upgrading status in life, affording luxuries etc.

47

Commentary

� 1999 saw one of the worst absolute performances since Berkshire Hathaway was formed, and also one of the worst relative performance compared to the S& P 500. Reason? One of the insurance subsidiaries, General Re, suffered a huge underwriting loss.

� Other factors: Less attractive prices of businesses now, larger capital base now, rising media rates, diminishing returns.

48

� If you had put $10000 into Berkshire Hathaway in 1965, you would have more than $50 million today.

� But what will happen when Warren Buffettdies? Is his personal worth tied to the balance sheet of Berkshire Hathaway, or will it continue to run smoothly even after he leaves?

Summary

�Fools give you reasons, wise men never try.�

� Warren Buffett

Q&A Session

50

Proudly Presented By:

Chua Woon Leng

Gerard Koh

Rachel Chong Ee Ping

Hashikin Maraican bin Mohd Latiff

Online resources available at:

http://www.comp.nus.edu.sg/~kohjoohe/wb