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Kindle Notes & Highlights
by
Mary Buffett
if the underlying business does well over a long period of time, the stock price will increase to reflect the underlying increase in the value of the company. Likewise, if the underlying business does not do well over a long period of time, the stock price will decrease to better reflect the underlying value of the company.
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Likewise, great companies that saw their stock prices plummet in the stock market crash saw them immediately recover once the market saw that their earning power had remained intact.
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“Managing your career is like investing—the degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.”
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One not only needs to learn what kind of business to invest in but what kind to work in. If one goes to work for a company with poor long-term economics, then he can never expect to do really well because the company doesn’t do well. Salaries will be below average and raises will be few and long between, and there is greater risk of losing your job because management will always be under pressure to cut costs.
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But if you go to work for a company that has great long-term economics working in its favor, then the company will be awash in cash.
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You want to work for a company that has high margins and makes lots of money. And you want to stay away from businesses that have low margins and lose money.
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“The reaction of weak management to weak operations is often weak accounting.” If the business has lousy economics working against it, and the management lacks integrity, it will support weak accounting, which manifests itself by creating earnings where there really aren’t any.
Conversely, good management faces brutal facts. What does strong accounting look like? One, proper accounting of costs. Two, proper accounting of income.
“There is a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn’t require capital.”
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If you buy and hold a business that requires lots of capital to grow, your stock is never going to grow in value. The reason is the constant drain of capital just to keep the business from sinking in the wake of competition.
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But a business that can grow without new infusions of capital can afford to spend its excess cash doing those things, all of which will increase the company’s per share earnings, which will, in turn, cause the company’s stock price to increase. This is why Warren prefers companies like Wrigley’s and Coca-Cola as opposed to GM or Intel.
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GM and Intel, on the other hand, have to constantly spend billions on new designs and retooling. If either one stopped spending billions on new designs or retooling, it would be put out of business by its competition.
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“In a difficult business, no sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen.”
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A business with poor economics is a slow boat to nowhere and makes a lousy long-term investment. The intensely competitive nature of the business means that it will suffer slim margins on sales and have a constant need to upgrade the plant to stay competitive. If its products have to constantly change to stay competitive, then there is the added problem of financing research and development.
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All of these things drain capital that could be spent to increase earnings, such as expanding operations, buying new businesses, or repurchasing stock. These constant crises of poor margins and poor earnings mean a constant battle with costs,
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In the game of long-term investing these are the kinds of businesses that you want to stay away from. Warren avoids them like the plague, even if the stock market is giving them away.
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“You can always juice sales by going down-market, but it’s hard to go back upmarket.” Certain products own a piece of your mind—they are the brand-name products that you think of when you have a particular need.
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Along with owning a piece of the consumer’s mind goes a set of consumer expectations regarding that product. And because these products all meet those expectations, their manufacturers can charge a higher price for fulfilling the consumer’s needs.
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However, if a manufacturer, in the name of increasing profits, decreases the quality of its products, it can run a huge risk of losing its ownership of the consumer’s mind. We have all seen this happen—a quality product we love to use, but then the manufacturer cheapens it and we stop using it.
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As Blaise Pascal, an influential French mathematician and philosopher, once said, “All man’s miseries derive from not being able to sit quietly in a room alone.” CEOs can’t sit quietly; they are predisposed to make deals, which are made easy to do by Wall Street, and create the illusion that they are doing something
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it is often easier to buy a new set of problems than it is to try to fix an old set. Warren’s solution to this raging appetite to grow through acquisitions is to only buy companies that have some kind of durable competitive advantage.
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when a company shows up with a durable competitive advantage, he jumps on it ten minutes after he sees the deal. Warren knows what he wants before he wants it.
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When sitting alone, think about the conditions under which you’d act. Prepare yourself. Never be so busy that you find yourself unprepared.
“You don’t have to make money back the same way you lost it.”
Accept your losses and find a better game. accept your mistake and learn from it.
But with stocks, unlike casino games of chance, the risk varies dramatically from one stock to another, all of it based largely on two factors—the quality of the company and the price you pay for its shares in relation to that quality. The higher the quality, the lower the risk, and the lower the price in relation to the quality of the business, the lower the risk.
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Is it high margin, low cost, market leading, and undervalued? Very low risk—fair value. Buy and hold.
Low quality and a high price in relation to the quality of the business means stay away, and high quality and a low price in relation to the quality of the business means come play. But every single stock is a new game, with new odds, which change as the price of the stock changes, so wait till you find one where the odds are so much in your favor that you have a margin of safety, then bet big.
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“I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.” Consistent products equal consistent earnings. If the product doesn’t have to change, you can reap all the benefits of not having to spend money on research and development, nor do you have
Jeff bezos’ question. What isn’t going to change in the next decade or century? Human behavior. Does your business generate profits based on a great product and a lollapalooza of human behaviors? That’s as good as a sure thing.
“Someone is sitting in the shade today because someone planted a tree a long time ago.”
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For it is easy to become brilliant at what you do when you stand on the shoulders of a giant—the trick is picking the right giant. In Warren’s case, he chose Graham,
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“With enough inside information and a million dollars, you can go broke in a year.” Face it, by the time inside information gets to you, everyone else has heard it and traded on it. Besides, trading on inside informations is against the law. Warren has often said that one of the advantages to living in Omaha is that no one’s around to whisper inside scoops in his ear over lunch.
Famed 1920s investment great Bernard Baruch was famous for selling out a stock position as soon as someone gave him a hot tip on it. Baruch, by the way, died a very, very rich man.
“Read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.”
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Simplify. Get the best ideas on their simplest most useful forms. It’s not complicated. So don’t make it so.
Warren took Ben’s “buy at a low price to get a margin of safety” and married it to Phil’s “buy the highest-quality company and hold it forever” and ended up with “buy high-quality companies at low prices in relation to their value and then hold them for a long, long time.” This is one of those equations where the sum is greater than its parts.
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“I am a better investor because I am a businessman, and a better businessman because I am an investor.”
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So to be great at investing you need to be like the businessman and know a good business from a bad one, and when you go to buy a business, you need to be like the smart investor and know whether it is selling cheap or it is overpriced.
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In Warren’s early days he was only concerned with the historical financials of a company, he didn’t really care about the products it produced.
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But as Warren became active in running a struggling commodity-type business, he soon realized that it was the consumer-monopoly-type companies that had the competitive advantage and were producing the superior results.
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Warren will only buy a consumer-monopoly-type company that has a competitive advantage, and he doesn’t have to wait for it to be selling cheap. A fair price is all he needs, if he holds on to it long enough, to make his billions.
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“If principles become dated, they’re no longer principles.” Warren woke up one morning and discovered that the investment principles he had learned from his teacher Graham were no longer useful.
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Instead of staying the course, Warren jumped ship and adopted a philosophy of investing in exceptional companies that had a durable competitive advantage, as long as they were selling at reasonable prices—then he would let the rising waters of time and earnings lift the price of the stock.
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“You pay a very high price in the stock market for a cheery consensus.”
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What you want is to find a stock that no one is looking at or that is out of favor with the big investment funds and is selling at a low price relative to its long-term economic value.
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we want to be paying bargain prices for stocks that are waiting to rise.
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“If calculus or algebra were required to be a great investor, I’d have to go back to delivering newspapers.” According to Warren, the math skills you need to be a great investor are addition, subtraction, multiplication, division, and the ability to rapidly calculate percentages and probability.
“You have to think for yourself. It always amazes me how high-IQ people mindlessly imitate. I never get good ideas talking to other people.”
“You want to learn from experience, but you want to learn from other people’s experience when you can.” Experience is the best teacher, but it can be expensive if you are learning from your own mistakes. It is better to learn from the mistakes of others. This is why Warren has made it part of his educational diet to study and dissect the business and investing mistakes of others. He wants to learn where they went wrong so he doesn’t go there.
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you need to study not only what to do, but what not to do.
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“It’s hard to teach a young dog old tricks.” Warren has found that the business acumen that comes with age is next to impossible to teach to younger managers.
They have to want to learn. But you can’t change their minds.
“In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. But the most important is integrity, because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”
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First and foremost, hire for integrity.
If these people are smart and hardworking, they are going to make you a lot of money, but if they aren’t honest, they will find lots of clever ways to make all your money theirs.
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Integrity is the key ingredient to Warren’s management philosophy.
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They are free to run the businesses as if they are the owners. He couldn’t give his managers this much freedom if they lacked integrity.
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