Warren Buffet is hands down one of the legends of investing. His insights are the most followed upon by other investors around the world. His annual letters to the shareholders of Berkshire Hathaway are one of the widely sought after materials to understand the nuances of investing.
In one of the lectures he has talked about how he would hire someone particularly at the top management level. He talks about an incident wherein he had to select a person to run the business during 1994. It was a curious case of Solomon brothers, a business with around 150 billion dollars in assets and liabilities. It was a business which had 4 billion dollars in equity and rest of the amount was owed to someone else (Liabilities).
He had to interview around 12 people and decide among them who would be a proper fit to run the business as complex and large as Solomon brothers. His metric to decide the person who can run the business was not based on IQ because the people he was interviewing already possessed a huge amount of it but something based on character. He said when he hired a person he never asked a salary even after one month and worked 18 hours a day every day and knew what to ask Buffet and what not to.
He gives an idea of a lottery ticket which allows you to get access to one of the very best businesses. A lottery ticket would comprise of an opportunity to gain access to 10% of the earnings of a particular business. It is your job to decide which management to bet on. He gives a lot of weight to the quality of management. If the management possesses character, integrity and commitment than it would really run the business very well.
One of the best parts of buffet is that even after so many years the clarity of thought and humbleness he possesses is a sight to watch. He keeps on working everyday for the benefit of shareholders and is still one of the top investors of the world. His and Berkshire Hathaway’s fortunes have always risen through every-day.
He gives the example of Nebraska Furniture Mart and Coca Cola. Nebraska Furniture Mart is a business run by a woman who was 100 years of age during 1994. She started the business with 500 dollars in hand and converted into a business which generated revenues of around 230 million dollars. Warren Buffet talks about a concept which is known as “Circle of Competence”; the concept is about how you should define the parameters that you think you have a edge on and based on that invest in particular businesses. He says he would only invest in businesses which are simple to understand and won’t invest in businesses which are very complicated to understand. He says Nebraska Furniture Mart is run by a woman who is not only strong in character but also strong in terms of knowing the business inside and out.
He also talks about a business like Coca Cola which was 110 years old already by the time of 1994 and already had a demonstrated history of generating humungous returns. He says during 1994 the share of soft drink industry was rising across the world and the economics was favouring the companies like Coca Cola. He says it was common sense for him to invest in a business like Coca Cola which had a 47% market share across the world in the soft drink industry during 1994. The second sign of a great business is that it was run by competent management.
Peter Lynch said that buy a business which is so easy to run that even an idiot can run it because eventually you will buy it. Warren Buffet says buy a business at a right price and with a right management. He says he won’t sell a business and replace it with other business because replacement of such businesses is not worth it.
He says that if you buy a great business you shouldn’t sell it like ever; if you buy a business which has a good long term economics; than you should not bother to sell. Buffet also says that he doesn’t understand technological companies and he would not buy one because valuing those companies is tremendously difficult.
One of the concepts that he stresses upon is predictable cash flows. He says that he should be able to determine where the cash is coming from and whether it is sustainable and if it is even if the price rises higher than expected you should keep on holding such business.
Warren buffet talks about how he would only work with people that he admires and likes. He says that don’t ever work with people who you don’t admire and like. Warren buffet gives the reasons for why he won’t split the stock of Berkshire Hathaway; he says we have the objective of partnering with people who share our vision and it is more like a partnership. He says that when a stock is listed publicly all kinds of people get into it. People like traders who don’t have anything to do with business are just here to mint money; Buffet won’t want to do business with them. The traders are who is fearful of and it is because of the crowd like that he doesn’t split the stock. He wants the shareholder to never sell the stock of Berkshire Hathaway.
He talks about he is more prone to mistakes when he has lot of cash in his hand. It is when you have lots of liquidity it is then you feel an urge to buy even more. He says people have the urge to borrow more when the stocks are rising and he said most of the mistakes happen during that time.
He was asked why he invested in an Airline business when it was more difficult to understand and essentially a very tough business to run. He answered by replying rather jokingly that it was a decision made out of temporary insanity. He now answers why it is a bad idea to invest in an airline business; he says airline business is very cut throat and even after putting in billions and billions of money essentially the business returns less than 0 percent. He says with all the comforts that an airline gives it has failed to generate returns.
He now talks about how there is essentially no difference between buying a small portion of the company and buying the company entirely. He says the mindset in both the cases is the same for him.
When he buys a business he doesn’t look at how the stock market is doing. He is solely concerned about how the business is going to do as a whole. When a business has a good long term economics and a good term management he won’t bother where the market is headed. He says great businesses grow no matter what the market situation is.
He also talks about how some managers would want to grow at any cost. If they are not able to grow by expanding their business organically they would take the route of Mergers and Acquisitions (they generally come under the spectre of inorganic growth). Mergers and acquisitions in a way allow you to grow by buying another business. Buffet says mostly the acquisitions fail because the companies end up paying more than the actual value of the company.
He also talks about a concept by the name of franchise value. The franchise value is essentially your perception of how good a particular product is. If a product is good enough and your experience of it is magnificent your psyche will again crave for that same product. If the psyche manages to look for that product across America, then the company will earn lot of money from it. He also talks about a concept by the name of economic moat. A moat is essentially a protection that a company has built over the years to keep competitors at bay. A moat can be economies of scale, Network effect, Brand, etc which shields the company from the clutches of competitors.
He says you just need 10 ideas in order to succeed in investing. If you get it keep it.