Views on Life & on Equity Investing

Wonder, Wealth & Abundance

Learnings from Buffett – Find companies "way off the map" if you are not a billionaire yet

with 10 comments

  • Benefits of not being tuned to television or terminal

What is the benefit of being an out-of-towner as opposed to being on Wall Street?

I worked on Wall Street for a couple of years and I have my best friends on both coasts. I like seeing them. I get ideas when I go there. But the best way to think about investments is to be in a room with no one else and just think. And if that doesn’t work, nothing else is going to work. The disadvantage of being in any type of market environment like Wall Street in the extreme is that you get over-stimulated. You think you have to do something every day. The Chandler family paid $2,000 for this company (Coke). You don’t have to do much else if you pick one of those. And the trick then is not to do anything else. Even not to sell at 1919, which the family did later on. So what you are looking for is some way to get one good idea a year. And then ride it to its full potential and that is very hard to do in an environment where people are shouting prices back and forth every five minutes and shoving reports in front of your nose and all that. Wall Street makes its money on activity. You make your money on inactivity.
If everyone in this room trades their portfolio around every day with every other person, you will all end up broke. And the intermediary will end up with all the money. If you all own stock in a group of average businesses and just sit here for the next 50 years, you will end up with a fair amount of money and your broker will be broke. He is like the Doctor who gets paid on how often to get you to change pills. If he gave you one pill that cures you the rest of your life, he would make one sale, one transaction and that is it. But if he can convince you that changing pills every day is the way to great health, it will be great for him and the prescriptionists. You won’t be any healthier and you will be a lot worse off financially. You want to stay away from any environment that stimulates activity. And Wall Street would have the effective of doing that.
When I went back to Omaha, I would go back with a whole list of companies I wanted to check out and I would get my money’s worth out of those trips, but then I would go back to Omaha and think about it.

Source: Lecture at the University of Florida Business School

  • Berkshire will not be compounding over 20% anymore

Do you ever change your investing standards?

Did we change our standards? You know, I don’t think so, but you can’t be 100% sure. If you haven’t had a date for a month, you might say you wouldn’t have dated that girl on the first day – but I think we would have.
It does not reflect our giving up on finding an elephant of a business to acquire. We have plenty of cash and could sell stocks if we really needed to. We’re well prepared to acquire a very large business.
We acquired TTI in the first quarter, which is a terrific business. We wish it were five times bigger, but maybe some day it will be.
Munger: The one thing I think we can promise you is that we won’t make the kinds of returns buying the things we are now that we earned on the stuff we bought 10-15 years ago. There’s just too much money floating around.
Buffett: We won’t come close.
Munger: It’s a different world with more modest expectations.
Buffett: We hope you share them.

Source: BRK Annual Meeting 2007 Tilson Notes

  • Reflects confidence at a very early age

When did you know you were rich?

I really knew I was rich when I had $10,000. I knew along time ago that I was going to be doing something I loved doing with people that I loved doing it with. In 1958, I had my dad take me out of the will, as I knew I would be rich anyway. I let my two sisters have all the estate.
I bet we all in this room live about the same. We eat about the same and sleep about the same. We pretty much drive a car for 10 years. All this stuff doesn’t make it any different. I will watch the Super Bowl on a big screen television just like you. We are living the same life. I have two luxuries: I get to do what I want to do every day and I get to travel a lot faster than you.
You should do the job you love whether or not you are getting paid for it. Do the job you love. Know that the money will follow. I travel distances better than you do. The plane is nicer. But that is about the only thing that I do a whole lot different.
I didn’t know my salary when I went to work for Graham until I got his first paycheck. Do what you love and don’t even think about the money. I will take a trip on Paul Allen’s Octopus ($400M yacht), but wouldn’t want one for myself. A 60 man crew is needed. They could be stealing, sleeping with each other, etc. Professional sports teams are a hassle, especially when you have as much money as him. Fans would complain that you aren’t spending enough when the team loses.
If there is a place that is warm in the winter and cool in the summer, and you do what you love doing, you will do fine. You’re rich if you are working around people you like. You will make money if you are energetic and intelligent. This society lets smart people with drive earn a very good living. You will be no exception.

Source: Student Visit 2005
URL: http://boards.fool.com/buffettjayhawk-qa-22736469.aspx?sort=whole#22803680

  • How Buffett Would Invest with a Small Amount of Money    
    If I were working with a very small sum – you all should hope this doesn’t happen – I’d be doing almost entirely different things than I do. Your universe expands – there are thousands of times as many options if you’re investing $10,000 rather than $100 billion, other than buying entire businesses. You can earn very high returns with very small amounts of money. Everyone can’t do it, but if you know what you’re doing, you can do it. We cannot earn phenomenal returns putting $3, $4 or $5 billion in a stock. It won’t work – it’s not even close.
    If Charlie and I had $500,000 or $2 million to invest, we’d find little things we could do, not all of it in stocks.
    Munger: But there’s no point in our thinking about that now.

Source: BRK Annual Meeting 2007 Tilson Notes                             

According to a business week report published in 1999, you were quoted as saying “it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access.
You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible.
The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn’t have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.
I know more about business and investing today, but my returns have continued to decline since the 50’s. Money gets to be an anchor on performance. At Berkshire’s size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.

Do you believe that we’ll have significant mispricings again? And if you were 26 today how would you generate the 50% returns that you said you might do with smaller amounts of capital?

Attractive opportunities come from observing human behavior. In 1998, people behaved like frightened cavemen (referring to the Long Term Capital Management meltdown). People make their own opportunities. They will be frozen by fear, excited by greed and it doesn’t matter what their IQ, degrees etc is. Growth of 50% per year is with small capitalization, not large cap. The point is I got rich looking for stock with strong earnings.
The last 50 years weren’t unique. It’s just capitalizing on human behavior. It’s people that make opportunities when others are frozen by fear or excited by greed. Human behavior allows for success if you are able to detach yourself emotionally.
In 1951, I got out of school at 20 years old. At the time there were two publishers of stock information, Moody’s and Standards and Poor’s. I used Moody’s and went through every manual. I recently bought a copy of the 1951 Moody off of Amazon. On page 1433, there’s a stock you could have made some money on. The EPS was $29 and the Price Range was from $3-$21/share. On another page, there is a company that had an EPS of $29.5 and the price range was $27-28, 1x earnings. You can get rich finding things like this, things that aren’t written about.
 =============================================================
Essentially the gist of Buffett’s knowledge is to invest/partner in business you know about, if you don’t know then develop an understanding. Find one great company, get rich. There don’t have to be more than 20 purchases in your entire life. One per year is more than enough.

Written by amitdipsite

October 28, 2010 at 9:40 am

Posted in Uncategorized

10 Responses

Subscribe to comments with RSS.

  1. I have just one word to say – ULTIMATE

    BlueHorizon

    October 28, 2010 at 11:51 am

  2. Nice Post.

    kudva

    October 28, 2010 at 5:02 pm

  3. Hi Amit,

    Excellent article man…..

    Regards,
    Vikas

    Vikas

    October 28, 2010 at 11:42 pm

  4. While it is good to learn from the “greats”, there are 99 failures for each success.

    So, when investing, like working for a company, was for a life-time, long term these days is one year. Just like Bollywood and stars who survive from friday to friday, companies have an attention span of a quarter.

    Having said so, investing in a Tata or Infosys for a long term does pay. But then, whoever knew of Infy in 1994?? For every Reliance, there's an Orkay or a CRB, which sank alongwith investor's money.

    doctorgeeta

    October 29, 2010 at 3:22 am

  5. @doctorgeeta,

    Traders can make as much money as long term value investors.

    Personally speaking, it possibly cannot be told how much I have learnt from others' in investing and more so in other fields.

    I would like to disagree with one quarter or one year horizon if 20% is satisfactory return. BANKEX in India will with high probability return you that over next 10+ years ! Buffett is suggesting buy Dabur, Asian Paints and their ilk which have had 20%+ kinds of growth rates for decades in past and likely in future.

    Multibagger

    October 29, 2010 at 6:35 am

  6. Hi Amit,
    Good Article. I've taken two points from this article:

    (“Growth of 50% per year is with small capitalization, not large cap”)

    and

    (“So what you are looking for is some way to get one good idea a year. And then ride it to its full potential”)

    So shall we all share this comment section to share one or two such small cap idea which could be 10 or 20 bagger in next 3 to 5 years?

    I will post my ideas once i finish my stock research.

    Requesting you all to post your ideas.

    Thanks and Regards,
    Rohit
    aveo999@gmail.com

    Rohit

    October 29, 2010 at 9:18 am

  7. At the cost of being argumentative, in hind-sight, we are all visionaries.

    But, for every BHL or L&T, we all have lost money on dud shares which seemed at that time as stars.

    “BANKEX in India will with high probability return you that over next 10+ years !”

    Likewise, For every SBI, there is a Global Trust Bank.

    With high NPAs, don't be too sure of Bankex — for they (Bank figures)hide more mess than they show.

    Till it happened, Goldma Sachs…

    doctorgeeta

    November 2, 2010 at 2:41 pm

  8. @doctorgeeta,

    I attract argumentative and stubborn people, its perfectly fine.

    Personally I would prefer FMCGs companies that have their factories insured, so that nothing short of WW3 or Yellow Mountain catastrophe can wipe out. I don't worry that much.

    SBI's and Public Sector Banks and the likes used to have 10%+ NPAs in 1980s, times have changed now and they are well around 2% or lower with seasoned loan books. I would not buy any insurance/underwriting company in world including Berkshire. Thats why I am a million miles away also from any Micro Finance Institutions and Gold Loan companies.

    Multibagger

    November 2, 2010 at 7:58 pm

  9. Hi Multibagger,

    Really impressed with your site. But your last remark on gold loan company, I will disagree with. I come from gods own country , people who stash gold for crazy reasosn and I have seen the growth of manappuram finance and geojit. these guys have the best example of laon against gold. There are no risks involved. Pay the money or lose the gold. The rate of returns are fairly good. the only issue here is to check the genuineness of the gold. As long as that is done , it is great going….

    versatile

    December 21, 2010 at 11:19 pm

  10. Hi versatile,

    Gold his highly risky. If we find huge quantity of Gold then all gold loan companies will go bankrupt.

    http://www.abc.net.au/news/newsitems/200606/s1664312.htm

    An Australian researcher says there is enough gold buried deep within the Earth's core to cover the entire land surface of the planet to a depth of half a metre.

    I can think of atleast three more scenario :

    – Propulsion system that will enable us to farm meteors/planets for resources
    – Energy conversion mechanism to transmute pure energy to element of any choice, or element to element
    – Earth hit by a meteor with plenty of gold/diamond

    Can vaguely recall, there is a star with about 4000km wide diamond inside it

    http://news.bbc.co.uk/2/hi/science/nature/3492919.stm

    A most valuable gemstone in 18th century, Amathyst became a cheap stone after discovery of mines

    http://en.wikipedia.org/wiki/Amethyst

    Multibagger

    December 22, 2010 at 1:18 am


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: