Warren Buffett

1. WARREN BUFFETT
“THE SAGE OF OMAHA”
AMAR RAVEENDRAN

2. Agenda
 Bio
 Management style
 Investment approach
 Methodology

3. Biography/History
 Bought first stock at age 11
 Invested savings into farmland
 Had pinball machine business and
sold for a profit
 Attended Columbia University
where Ben Graham was a professor
at the time
 Worked for Ben Graham for $12,000
a year

4. Biography/History
 Opened his own partnership in Omaha
 By 1961, he had 5 partnerships
 In 1962, he merged partnerships to make
Buffett Partnerships, Ltd.
 Bought stock for Berkshire Hathaway at $8
 Bought Amex stock after fraud scandal
 Took control of Berkshire in 1965

5. Biography/History
 Closed partnership in 1969 and
worth millions personally
 In 1974 lost over 50% of wealth
 In 1981 Buffett and Munger
create Berkshire Charitable
Contribution plan
 Crash of „87 lost $342 million
personally

6. Biography/History
 Buffett worth $44 billion today
 Berkshire has $248 billion in assets
 CEO
 Charles Munger, vice-chairman
 Met in 1959
 Goal to increase 15% a year

7. philanthropy
 85% of wealth given to philanthropy
 Bill and Melinda Gates Foundation
 Health and learning
 $1.5 billion annually
 The rest to foundations run by his
children and founded by late wife

8. Management Tenets
Buffett‟s three management tenets concern the
evaluation of management quality
 Is management rational?
 Is management candid?
 Does management resist the institutional imperative?

9. Rationality
 If a company generates high returns on equity, the
duty of management is to reinvest those earnings
back into the company, for the benefit of
shareholders
 If the earnings cannot be reinvested at high rates,
management has three options:
 ignore the problem and continue to reinvest at below-average rates
 buy growth
 return the money to the shareholders, who then might have a chance to
reinvest the money elsewhere at higher rates
 In Buffett‟s mind, only one choice is rational, that is
option 3

10. Candor
 Buffett believes that a manager who confesses
mistakes publicly is more likely to correct them
 Managers who discusses the failures of the
company with shareholders are admirable

11. Resisting the Institutional Imperative
 What is the institutional imperative?
 the lemming-like tendency of corporate management
to imitate the behavior of other managers, no matter
how irrational it may be
 Buffett points out that thinking independently and
charting a course based on rationality and logic are
more likely to maximize the profits of the company
than a strategy that can best be described as “follow
the leader”

12. Management Style
 He will not interfere with the running of the
company.
 He will be responsible for hiring and setting the
compensation of the top executive.
 Capital allocated to the business will have a
price tag (a hurdle rate) attached.

13. Some Management Tips
 Review annual reports from a few years back, paying
special attention to what management said then about
strategies for the future.
 Compare those plans to today‟s results: How fully were
they realized?
 Compare the strategies of a few years ago to this year‟s
strategies and ideas: How has the thinking changed?
 Compare the annual reports of the company you are
interested in with reports from similar companies in the
same industry. It is not always easy to find exact duplicates,
but even relative performance comparison can yield
insights

14. What type of investor is Buffett?
Value Investor
 What is a value investor,
and what makes Warren
“the best” ?
 Amex

15. Buffet’s famous statements
 Rule No.1: Never lose money. Rule No.2:
Never forget rule No.1.”
 “The stock market is designed to transfer
money from the active to the patient.”
 “The most important quality for an investor is
temperament, not intellect.”
 "Risk comes from not knowing what you're
doing."

16. His Portfolio

17. performance
Berkshire Hathaway’s
Class A shares vs. S&P 500
Berkshire Hathaway’s
Class A & B shares vs. S&P 500

18. Methodology
1. Has the company consistently performed well?
 ROE for 5-10 years
2. Has the company avoided access debt?
 Small amount of debt indicating that earnings growth is being
generated from equity as opposed to borrowed money
3. Are profit margins high? Are they increasing?
 Look back at least 5 years

19. Methodology
4. How long has the company been public?
 At least 10 years
 Recent IPO is not a target
5. Do the company‟s product rely on commodity?
 Characteristics must be hard to replicate –
competitive advantage, or “economic moat”
 Product must be distinguishable
 Must not rely solely on commodity

20. Methodology
W. Buffett’s most important skill!!!
6. Is the stock selling at 25% discount or at its real value?
 Determine intrinsic value by analyzing business
fundamentals:
 Include analysis of earnings, revenues and assets
 Usually higher than its liquidation value
 Compare company‟s intrinsic value to its current
market capitalization
 If intrinsic value is at least 25% higher – company
has value

21. conclusion
 Complete understanding of the industry
 Value investing (based on fundamental analysis)
 Longevity (in established businesses, for long-term)

22. Great Buffet Quotes:
"Someone's sitting in the shade today because someone planted a
tree a long time ago."
"Wall Street is the only place that people ride to in a Rolls Royce
to get advice from those who take the subway."

23.  THAK YOU