More on this book
Community
Kindle Notes & Highlights
Read between
November 10 - November 16, 2020
What can we do then to mitigate the effects of inflation? The same thing that Buffett and Munger would do if there were no inflation. We’d buy great businesses with excellent management at a fair to bargain price and leave them alone.
Inflation or not continue with same strategy of buying high quality companies at fair to bargain price.
In other words, rather than worry about economic projections, these brilliant investors focus on finding good businesses at bargain prices within our resilient economy.
He noted that Golden Arches and The Big Store offer great lessons on business.
Buffett said to determine the IBV of an asset, simply take the present value of the net cash flows from here to eternity, based on current bond rates. The hard part, of course, is predicting the future cash flows. Some businesses are easier to predict than others. Even then, you don’t cut it close.
Buffett noted that if he and Munger get a value of X to 3X for an asset, then they attempt to buy it at 1/2X.
“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If you are going to be a lifelong buyer of food, you welcome falling prices and deplore price increases. So should it be with investments.
When the same question was directed at Munger, he told the story of the World War II Air Force captain who was bored stiff in Panama. As the general reviewed the officers, he asked the captain what he did. The frustrated captain answered, “I don’t do one damn thing.” The general asked the same of his lieutenant. The lieutenant replied, “Well, sir, I help the captain.”
Value is the only concern for any economic commitment. To calculate your expected return, compute the discounted present value of the flow of all cash from the business between now and judgment day. To do so, you must A) determine the amounts and certainty of cash flows in and out and B) select a discount rate. Buffett noted that growth can enhance or detract from the calculated value. For example, electric utilities were forced to grow and to invest capital in the 1970s, which lowered their returns.
Buffett gave two criteria for evaluating the performance of management: 1) How well do they run the business? and 2) How well do they treat the owners?
In modern portfolio theory, beta is used as a measure of the volatility and, thus, the risk of an investment. However, Buffett sees the use of beta as nonsense, emphatically stating, “Volatility is no measure of risk to us.”
“In five years, we will be very happy with GEICO.”
The most brilliant investor of our time is selling stocks and long-term bonds, raising cash. This at a time when liquidity levels of public and private pension plans are the lowest in 15 and 40 years, respectively. Equity mutual fund cash levels are at a 22-year low of 4.6%. What does it mean?
As Buffett has often taught, the intrinsic value of an asset is the cash it will earn from here to eternity, discounted back to the present. However, if your estimated growth rate is greater than your discount rate, you get a value of infinity.
Buffett concluded with the story of the woman who turned 103 and was asked, “What do you like about being 103?” She responded, “No peer pressure.”
Buffett summed up, “Coke has been and will be a great business. We’ll own it 10 years from now.”
Asked how not to be an investment lemming, Buffett suggested reading his old standby, The Intelligent Investor by Benjamin Graham (especially chapters 8 and 20), which changed his life.
He sees Berkshire’s insurance and utility operations doing well for 2009 as they are not all that economically sensitive. The retail and manufacturing subsidiaries
have been hit hard by the recession.
He shared how Rose Blumkin, who never went to school, was a force of nature, turning a $500 investment into a $400 million business sitting on 78 acres called the Nebraska Furniture Mart. He remembered visiting Mrs. B at her home once, and she had green sales tags hanging on the furniture. Buffett quipped that he said to himself, “Forget Sophia Loren, this is my kind of woman!”
As he has in years past, Buffett asserted that The Intelligent Investor chapters 8 (Mr. Market) and 20 (Margin of Safety) give you all you need to know. Build into your system that stocks get mispriced.
There are essentially five things public corporations can do with a dollar earned: reinvest in the business, acquire other businesses or assets, pay down debt, pay dividends, and/or buy in shares.
Buffett observed that they do have filters. A key one is whether they have a good idea of how the business is going to do over the next five or 10 years. That filter eliminates many businesses from consideration.
