This document provides a summary of Warren Buffett's advice and Berkshire Hathaway news from 2015. It includes articles about Berkshire's acquisition spree that year, including purchases of Van Tuyl Group and Durecell Batteries. It also discusses Buffett becoming the third richest person as Berkshire shares hit a record high. Additional articles provide tips from Buffett for investing in oil stocks during a price rout, identifying "moats" around companies, and Buffett's view that Europe is a promising investment destination. The document outlines Buffett's philosophy of investing in "wonderful businesses at fair prices." It also summarizes Buffett's reflections on some of his biggest mistakes as an investor.
2. The Berkshire Letters Page 02
When we own portions
of outstanding businesses with
outstanding managements,
our favorite holding period
is forever.
“
3. The Berkshire Letters Page 03
CONTENTS
Page 04 Warren Buffett Becomes 3rd-Richest As
Berkshire Hits Record High
Page 07 2 Handy Warren Buffett Tips For The Current
Rout In Oil Stocks
Page 10 Identifying Moats Like Warren Buffett
Page 12 Warren Buffett: Europe’s The Next Great
Investment Destination
Page 15 Buffett: Invest In Wonderful Businesses At
Fair Prices
Page 16 Buffett’s 3 Biggest Mistakes; Takeaways for
Investors
Page 19 Buffett’s Cashing Out Of Oil For $3.7 Billion
Page 21 Buffett’s Intentionally Bad Advice?
4. The Berkshire Letters Page 04
Warren Buffett Becomes
3Rd-Richest As Berkshire
Hits Record High
The Oracle of Omaha, Warren Buffett had officially became the third richest person in the
world on Friday, 5 December 2014 as shares in Berkshire Hathaway hit a record high. Both
classes of Berkshire shares (Class A and B) have risen by close to 30 percent since the
beginning of this year.
Berkshire Acquisition Spree
In the second half of 2014, Berkshire Hathaway has been on an acquisition spree. In October, the
company announced that it would buy Van Tuyl Group, the largest closely held US automotive
dealer for an undisclosed amount. More recently, the company agreed to buy Durecell Batteries
from Procter & Gamble for US$4.7 billion. Earlier this year, Berkshire bought a US TV station
from Graham Holdings after holding shares in the company for more than 40 years.
5. The Berkshire Letters Page 05
Source: FactSet. Chart comparing the returns of Berkshire Class B shares (Blue) and the returns of
S&P 500 (Green)
Aside from pure acquisitions, Berkshire has plans to provide US$3 billion to Burger King
Worldwide Inc. as the fast food chain plans to take over Tim Hortons Inc. Berkshire is expected
to earn 9 percent annual interest on this financing deal should it go through.
A Fortress
In an email on Friday, Warren Buffett’s biographer, Andrew Kilpatrick said that “the all-time
closing high stock price today (Friday, 5 December 2014) is due to a widening appreciation of
what Berkshire really is, a fortress.” No doubt, shareholders’ appreciation of the company’s
investment philosophy has widened.
A recent case study made by Berkshire’s US$26.5 billion purchase of railroad BNSF attests to
this same philosophy. The investment was made during the height of the Great Recession of
2008/2009. It is now on track to pay itself by the end of this year. The railroad business has been
buoyed by an onshore oil boom as it paid more than US$15 billion in dividends to Berkshire
as at 30 September 2014.
6. The Berkshire Letters Page 06
Expansion In Singapore
Separately, Berkshire’s business insurance unit has received a license to sell insurance in
Singapore. This is part of the company’s push into the Asian insurance space. The company has
been hiring higher-level executives from AIG and others to help it expand in the commercial
insurance space in Asia. Warren Buffett was quoted as saying that Berkshire intends to “build
a very, very significant commercial insurance operation over time. That operation will operate
with better underwriting results than competitors”.
According to a statement from Berkshire Hathaway Specialty Insurance, the unit will offer
commercial property, casualty, financial lines, marine, energy and construction coverage in
Singapore. The business unit intends to distinguish itself from other insurance providers with
higher coverage limits as well as the backing of one of the strongest balance sheets in the
world.
If a business does
well, the stock
eventually follows.
”“
7. The Berkshire Letters Page 07
The oil and gas industry has been rife with uncertainty in the last six months with oil prices
looking like this:
Handy Warren Buffett
Tips For The Current
Rout In Oil Stocks
It is in these episodes of uncertainty that the timeless principles of investing maestro Warren
Buffett might stand out.
A couple of his tips in particular could come in handy as the impact of falling oil prices
has been felt within the shores of Singapore. Share prices of companies such as jack-up
rig provider Ezion, and rig builders Keppel Corporation Limited and SembCorp Marine Ltd,
have fallen in excess of 27 percent since the start of 2014.
Source: Nasdaq
8. The Berkshire Letters Page 08
With that in mind, here are a couple of Buffett’s tips to note, starting with:
Buffett first penned the words “so if you wait for the robins, spring will be over” during the
depths of the Great Financial Crisis of 2008-09. Much like the crisis before, the deep uncertainty
in oil prices now would likely test the courage of investors who are interested in oil and gas
stocks.
Some investors may be tempted to “wait and see”. Others may be waiting for “oil prices to
stabilize”. But remember Buffett’s words: If uncertainty is the one thing that is holding you
back from studying oil and gas companies – well, maybe it shouldn’t be.
Instead of waiting for the cloud of uncertainty to clear on the oil and gas sector, this might be
the right moment to actually start sifting through the rubble of fallen share prices in search of
a bargain priced company.
As always, we might want to start with the strongest oil and gas companies around, and work
our way from there.
But HOLD ON there, partner! Before you dip your toes into the uncertain waters, keep another
Buffett quote in mind:
“Never test the depth of the water with both feet”
The cloud of uncertainty around oil prices alone is not enough reason to go “all-in” into oil
and gas companies. As Buffett quips, jumping into unknown waters with both feet could leave
you, the private investor, sinking deeper into uncertain waters.
That is especially true if we are new to the industry and may not know the ins and outs of the
business of oil and gas. History has shown that oil prices can remain low for long periods of
time, therefore deciding on a strict allocation of your own cash for oil and gas stocks may be
the more prudent move.
9. The Berkshire Letters Page 09
Furthermore, as my colleague Stanley wrote, it is much more important to pick good companies
with prudent management teams than it is to bet on the direction of oil prices alone.
The bottom line is, pick good companies first.
Foolish take away
With uncertainty, often comes opportunity. The overlying investing theme would be for the
Foolish investor to recognize uncertain scenarios, and act with discipline in deploying funds.
If we can do that, we might find ourselves owning winning companies at bargain prices.
Do you have another Warren Buffett quote which you think is apt for the current rout in oil
stocks and oil prices? Sound off below, and Fool on!
It’s far better to buy a wonderful
company at a fair price than a
fair company at a wonderful
price.
”
“
10. The Berkshire Letters Page 10
The legend behind value investing is well-known for identifying great companies from
mediocre ones.
This, is done through the identification of moats when you analyse companies.
A moat is essentially something that endorses a value standpoint of a company that is so
strong, that you don’t have to worry about it not being able to generate economic returns
for the forseeable future.
This something is also essentially a deterrence from competitors to copy, emulate and
unintentionally creates a barrier to competiton from other companies.
There are basically a heavy fistful of moats that we look at day in day out at Shares Investment
whenever stocks are discussed in the office, pantries, and even over drinks.
Let’s kick this moat-tion (pun intended) off with the first one that we see around us, but not
able to touch physically.
The Power Of Brands As A Moat
A brand is a powerful intangible asset if it creates the effect of continued recognition, in the form
of repeat customers, and even warrant a certain range of pricing for the company’s products.
It is even more powerful, if it’s weaved into a habitual behaviour.
A classic example would be Coca Cola, where the merits of the product creates consumer loyalty.
Coca Cola essentially makes you more thirsty than before you drank it.
However, it is the ability of it to couple a brand association to a certain image and perceived
value of its brand, and create lasting repeat customer purchases.
Coca Cola easily competes with more than a dozen cheaper, generic equivalents out there in
the market, but still manages to charge 20 – 30 percent more than such brands.
Identifying Moats
Like Warren Buffett
11. The Berkshire Letters Page 11
Why is that? That’s because consumers identify with the value that they associate Coca Cola
with, and continues to purchase their favourite brand.
When A Brand Does Not Add Value; No Moat To Talk About
Just to be clear, a brand, by itself, does not confer competitive advantages of any sort.
Brands only create a value if they increase the willingness of a customer to pay for that
particular product.
Essentially, Brands only add value and can be seen as a moat if it stems the willingness of
consumers to pay for a brand in the habit of using the product, have an emotional connection
(perceived association) to it, or believes that it confers a certain level of social status.
SI Takeaway
It is quite easy to identify a brand.
The tougher part is when you are looking at a company with this trait, you’ve got to ask yourself
the question if it warrants a real classification of a moat, like what was discussed above.
12. The Berkshire Letters Page 12
Following billionaire investor Warren Buffett’s exclusive interview with Fox Business News,
the 84-year-old philanthropist acquired a controlling stake in Detlev Louis Motorrad-Vertriebs
(DLMV) for a little more than 400 million Euros (US$456 million).
The investment looks to be a continuance of Berkshire’s long-touted growth philosophy, that
is, to make a modest number of substantial investments in firms it believes will generate
great returns.
DLMV Acquisition A Door Opener?
DLMV is a motorcycle accessories retailer. The company is a family-owned business and adds
on to Buffett’s automotive portfolio. Although the motorcycle apparel retailer might not be a
large business, Buffett explained that the current regulatory and legal protection for overseas
investors is favourable in Germany and Europe in general.
Warren Buffett:
Europe’s The Next Great
Investment Destination
13. The Berkshire Letters Page 13
In addition, Buffet told Handelsblatt newspaper in an interview earlier this week that the market
in Germany now looks very attractive largely because of its population dynamics as well as
an increasing purchasing power amongst its population. Perhaps importantly, the stronger US
dollar has allowed for the acquisition to proceed for a substantially lower price tag.
Exuding confidence over the latest acquisition, Buffett said, “There is nothing like a deal to get
people’s attention. This is smaller than (we) would normally do, but it is a door opener. I like
the fact that we have cracked the code in Germany”.
Extension of Berkshire’s Automotive Push
It should be noted that the DLMV acquisition appears to be an expansion of Buffett’s romance
with the automotive industry. Back in October 2014, Buffett’s Berkshire Hathaway acquired the
Van Tuyl group’s dealerships for an estimated US$4 billion. The acquisition then was touted as
the biggest acquisition by far in automotive retail history.
Source: FactSet Fundamentals, chart comparing Berkshire Hathaway Class B shares (Blue) with the
S&P 500 index (Green)
We note that in the aftermath of the Van Tuyl acquisition, Berkshire Hathaway’s Class B shares
has grown over 8.5 percent to its recent close of about US$148 (1 October 2014 close of $136.62).
The stock is currently still outperforming its oft-used benchmark, the S&P 500 as can be seen
in the chart above. It is little wonder that analysts have given Berkshire BUY calls even though
the stock is currently near multi-year highs.
14. The Berkshire Letters Page 14
Source: FactSet Fundamentals
The addition of DLMV to Buffett’s portfolio thus seems like a logical one and could mark the
next step in Buffett’s push into Europe and the automotive industry as a whole.
Big Money Flowing Into Europe? Should You Too?
Apart from Warren Buffett, George Soros and Robert Shiller are also successful investors that
are moving their funds from the US to parts of Europe. This comes at a time when the Euro
has fallen more than against the Dollar over the past year.
Should retail investors follow big money? Certainly, retail investors will find it hard to fork out
400 million Euros for a company. Perhaps what retail investors can do is to invest in European
ETFs. In a separate article written by Zacks Research, the research house recommends three
specific ETFs that are likely to “continue leading the European space in the months ahead.”
These three ETFs are:
WisdomTree Europe Hedged Equity Index Fund
iShares MSCI EMU Index Fund
iShares Currency Hedged MSCI Germany ETF
15. The Berkshire Letters Page 15
Buffett: Invest In
Wonderful Businesses
At Fair Prices
In Buffett’s latest letter to the shareholders of his prized company, Berkshire Hathaway, the
billionaire legend revealed his mistakes-filled journey as an investor.
However, he explained that those mistakes are what made him realise short-term bargains
were attractive investments but the “wrong foundation” to “build a large and enduring
enterprise.”
The billionaire magnate used his own company’s acquisition holdings as concrete examples of
successful long-term investments. Buffett always has strong interest in simple but wonderful
businesses that are priced fairly. These are normally the companies that will guarantee unceasing
and increasing profits over a long span of time.
A clear example is See’s Candy, known for
its boxed chocolates and most importantly
for Buffett, a “broad and durable competitive
advantage that gave it significant pricing
power.”
Buffett expected See’s Candy to “gush cash for
decades to come.” True enough, See’s Candy
earned Berkshire Hathaway almost $1.9 billion
since the acquisition, at a mere cost of $25
million and an extra $40 million over the years.
Buffett mentioned he owed most of his success to his vice-chairman, Charles Munger, a friend
and partner since 56 years ago. Munger gave his partner an important “architectural blueprint”
that was simple: Forget what you know about buying fair businesses at wonderful prices;
instead, buy wonderful businesses at fair prices.
16. The Berkshire Letters Page 16
In his most recent letter to Berkshire Hathaway shareholders, billionaire investor, Warren
Buffett revealed the three biggest setbacks that he had in his career when he started off
with Buffett Partnership Ltd. (BPL).
Here are those setbacks as well as key takeaways that we, as retail investors, can bring
home.
Berkshire Hathaway’s History
Casestudy:Hisfirst“monumentally
stupid decision” was holding
onto shares of Berkshire (then
owned by Seabury Stanton) when
he had the chance to sell for a
price 50 percent higher than what
he purchased for. Buffett offered
$11.50 per share (he bought his
initial stake at $7.50) to Stanton
when the latter approached to
buyback those shares. Stanton
agreed but when Buffett received
Stanton’s letter, it was lowered
to $11.375.
Buffett was “irritated” and “aggressively” bought more shares, probably in a fit of anger. Buffett
Partnership (BPL) owned 39 percent of the company and took over in May 1965, spending
“more than 25 percent of BPL’s capital invested in a terrible business.” He finally decided to
close the textile operations after 20 years of fruitless stubbornness.
Key takeaway: Evidently, the cause of his mistake was getting agitated at Stanton’s “chiseling”
Buffett’s 3 Biggest
Mistakes; Takeaways
for Investors
17. The Berkshire Letters Page 17
of the deal. “Through Seabury’s and my childish behavior - after all, what was an eighth of a
point to either of us?” Seems like the lesson cost Buffett quite a bit but taught us that emotions
should not get in the way of an investment opportunity, at least one that guarantees a 50
percent profit.
NICO Deal? Not So Much
Case study: Following his first mistake, Buffett went on to commit a second mistake and what
he deemed as a “colossal” mistake and the most costly in his career. A long-time friend and
the owner of National Indemnity Company (NICO), Jack Ringwalt wanted to sell Buffett an
excellent insurance business. However, instead of buying it under BPL, Berkshire became the
holding company.
This one bad decision caused BPL to lose over $100 billion to legacy shareholders of Berkshire,
which otherwise belonged to Buffett and his partners. In some sense, his second and biggest
mistake was the result of his first: not selling his Berkshire Hathaway shares to Stanton because
of a mere $0.125 less than promised.
But I’ve made lots of dumb
decisions. That’s part of
the game.
”“
18. The Berkshire Letters Page 18
Key takeaway: Arguably, the second mistake would not have occurred if the first did not happen
in the first place. However, it was on Buffett’s part that he decided to buy it under Berkshire,
though the legendary investor himself could not explain why. “I’ve had 48 years… and I’ve yet
to come up with a good answer. I simply made a colossal mistake.”
A key takeaway that we can bring home from this case study is how as investors we should
not let underserving parties into our investing profits. One such way investors tend to let
“people in” is through margin trading or “borrowing to invest”. Such methods actually lower
the yield of our returns.
Cash: Oxygen for Business
Case study: Buffett made another huge mistake in
1993 when he bought Dexter Shoe, what seemed
to be a lucrative deal because of its “terrific
record” and “competitive strengths.” However, it
seemed that the competitive strengths were soon
overwhelmed by even stronger foreign players.
Undoubtedly, mistakes are inevitable in the
investing world but Buffett’s mistake did not lie
in judging the wrong business; he bought Dexter
with Berkshire Class-A shares.
Buffett used 1.6 percent of his highly-valued Berkshire Class-A shares to buy a “so-so business”
for $433 million and that “irreparably destroys value.” The previous owner of Dexter Shoe
essentially earned over $5 billion (the price of 1.6 percent Berkshire Class-A shares at the time
of the 2014 letter) because of Buffett’s optimism in the shoe maker.
Key takeaway: Buffett gives a valuable advice: “The intrinsic value of the shares you give in
an acquisition must not be greater than the intrinsic value of the business you receive.” As
such, it is clear that the safest bet is to use cash to buy shares, especially if you are not sure
if you are clearly in the position of strength. In another note by Buffett, he uses the analogy
of oxygen to describe how important cash is to any business.
The quote directly from his most recent letter:
At a healthy business, cash is sometimes thought of as something to be minimized – as an
unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is
to a business as oxygen is to an individual: never thought about when it is present, the only
thing in mind when it is absent.
19. The Berkshire Letters Page 19
Billionaire investing extraordinaire, Warren Buffett appeared on CNBC earlier last week on
Monday after the release of his Berkshire letter. Buffett revealed that his company had
recently let go of all of their Exxon Mobil shares, giving Berkshire Hathaway a surge of
liquidity of approximately $3.7 billion.
Exxon Is Still Great
Berkshire first had a holding
of 41.1 million shares in Exxon
back in 2013 when the stocks
cost an average of $90.86. When
Buffett decided to sell their entire
holdings in September 2014,
Exxon was priced at about $93.27
per share. The sales generated
about $3.7 billion in liquidity for
Berkshire.
Despite Berkshire’s move, Buffett still thinks that Exxon is a “wonderful company.” However,
it was obvious that the entire oil industry had been hit by dipping oil prices for the past year.
Buffett also commented that company “might have other uses for the money,” hinting at
possible acquisitions, which is clear in his recent entrance into the European market.
IBM over Exxon?
Shortly after Berkshire’s sales of its Exxon holding,
there were reports that the former increased its stake
in International Business Machine (IBM). Berkshire now
has 77 million shares, 9.2 percent more than before
and maintains its position as the biggest holder in the
computer company. This surprised many because IBM
has not been doing very well recently.
Buffett’s Cashing Out
Of Oil For $3.7 Billion
20. The Berkshire Letters Page 20
Buffett explained his company’s decision with IBM’s steady price on the market right now, which
provides some convenience if they want to sell it any time. IBM released its forecast for 2015
earlier in January this year, predicting an increase in operating earnings per share. However, it
is not clear if Buffett thinks that IBM will perform better this year.
For retail investors who are highly influenced by Buffett, it might be a fairly good move to
sell any Exxon shares that you currently hold. While it is not very risky to keep your holding
because Exxon is still making money, the slumping oil prices do not seem to be hiking back
up any time soon. Is IBM really a good company to invest right now? At least the Berkshire
legend thinks so.
We believe that according the name
‘investors’ to institutions that trade
actively is like calling someone who
repeatedly engages in one-night
stands a ‘romantic.’
”
“
21. The Berkshire Letters Page 21
Warren Buffett, the “Oracle of Omaha” is indeed a ‘prophet’ among many investors,
professional and amateur alike. In particular, Buffett’s annual letter to Berkshire shareholders
have always been highly valued by the industry.
There were inherently good advice and insights into what investors can plan for in the
coming year in his 50th annual letter, but Dr Ian Dogan (PhD in Financial Economics) from
Insider Monkey spotted an intentional, bad advice from the legendary investor.
Buffett wrote in this year’s annual letter (page 19) that during the financial crisis in 2008 and
2009, many investors pulled their funds out of the market, thinking it was for the best.
This decision could have been based largely because of the “pundits who six years ago
bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates
of deposit.” Of course, the banks and treasury bills were ‘foolproof’ because they ensured
security and reliability during times of uncertainty and despair.
Index Funds Not Good Enough For Everyone
However, Buffett mentioned that the returns were so little that most of them could barely retire
pleasantly. This would not have been the case if these investors “assured themselves of a
Buffett’s
Intentionally
Bad Advice?
Source: Insider Monkey
22. The Berkshire Letters Page 22
good income for life by simply buying a very low-cost index fund.” According to Buffett, these
would give them a much more comfortable and worry-free flow of income.
Dogan dismissed this piece of advice and said that “simply buying a very low-cost index fund”
is a bad move, at least for most investors that have the discipline and knowledge required to
do much more. People that do not have knowledge and skills about investing should definitely
head that advice, though.
Essentially, Warren Buffett himself did not invest in “very low-cost index funds” simply because
the returns were way too little for someone who knows so much. Dogan said that many investors
might not be as ‘smart’ as Buffett, but they are definitely well-informed enough to make smart
decisions in selecting decent stock picks themselves.
Just by looking at Buffett’s portfolio of his top five picks in the US market, we will know that
the reason of Berkshire Hathaway’s market capitalisation of over US$355 billion is not because
of “very low-cost index funds.”
Buffett’s Prized Picks
1. Wells Fargo (NYSE:WFC)
More than US$25 billion invested, Wells Fargo takes up
Buffett’s largest portion of his US portfolio. The first reason
that one should look at is the nine other billionaires that
are on board too. The banking giant has “returned nearly
19 percent over the last 52 weeks,” and “its earnings per
share was US$1.02 for the fourth quarter.” With earnings
and value this robust, it is no wonder so many billionaires
have vested interest, including the Oracle of Omaha.
2. Coca-Cola (NYSE:KO)
Having vested interest since more than 25 years ago, Berkshire
boasts US$17 billion of Coca-Cola’s shares. Other than being a
huge fan of the sweetened soft drink, this is another business
that Buffett always thinks is so excellent that even idiots can run
it and be successful. According to Insider Monkey, Coca-Cola’s
returns was about 11 percent over the last 52 weeks.
Source: http://www.thestreet.com/
Source: http://upperpeninsulabreakingnews.com/
23. The Berkshire Letters Page 23
3. American Express (NYSE:AXP)
The next biggest piece of Buffett’s US portfolio is in American
Express, a financial services corporation but more known
for its credit card services. Berkshire’s holding, together
with Ken Fisher and Mario Gabelli are the top three in AMEX
(American Express). In the latest quarter, the earnings per
share for AMEX was US$1.39, one cent more than expected.
4. International Business Machines Corp (NYSE: IBM)
Berkshire’s holdings in IBM might seem questionable,
especially considering the share price’s ten percent decline
since late 2013. Furthermore, Buffett has been increasing his
stake in IBM and other notable Billionaires like Ken Griffin
and David Harding are on board too, albeit smaller stakes.
Another surprise is that Buffett is investing in technology,
something he do not understand much about. Since Berkshire
recently bought the shares, it is still early to judge its merit.
5. Wal-Mart (NYSE:WMT)
The two largest holders of the discount department stores
chain are Warren Buffett and Bill Gates, according to Insider
Monkey. It might just be a coincidence that two of the
world’s top investors of all time have a piece of Wal-Mart.
Or maybe, it is because of its impressive share price history.
Nevertheless, Berkshire just recently increased its stake by
17 percent last year, hinting at Buffett’s faith in the slow-
growing department giant.
Bad Advice, Good Intentions
So, what was the reason for this intentional bad advice from the Oracle of Omaha? Dogan
pointed out that Buffett did not think that many investors have the “discipline to stick to a
strategy.” More importantly, Buffett’s highly disciplined strategy is not for every investor and
he knew that very well. Essentially, Buffett “gave bad advice to disciplined investors”.
For investors who follow Buffett closely, it is clear that he does not intend to sell the stakes in
his top five picks, at least not until very much later. If you believe in Buffett’s judgement, then
you should definitely go through them and decide if investing in his top five picks or “very
low-cost index funds” is better.
Source: http://www.bornrich.com/
Source: http://99bitcoins.com/
Source: http://www.diyphotography.net/
24. The Berkshire Letters Page 24
Special Thanks
We would like to thank the following for
their contributions to this E-Book:
• Motley Fool Singapore - 2 Handy Warren
Buffett Tips For The Current Rout In Oil
Stocks
• Shares Investment - Identifying Moats
Like Warren Buffett