Warren Buffett on Tax Reforms, Markets & Investments

Well, valuations make sense with interest rates where they are. I mean, in the end you measure laying out money for an asset in relation to what you are going to get back, and the number one yard stick is U.S. governments. When you get 2.30 on the ten-year, I think stocks will do considerably better than that. If I have a choice of the two, I’m going to take stocks at that point. On the other hand, if interest rates were on the ten-year were five or six, you know, a whole different valuation standard for stocks. And we’ve talked about that for some time now.

tax reforms

Interest rates are gravity. If we knew interest rates were going to be zero from now until judgment day, you could pay a lot of money for any other asset. You would not want to put your money out at zero. I would have thought back in 19 — I mean, 2009 that rates would not be this low eight years later. It’s been a powerful factor, and the longer it persists, the more people start thinking in terms of something close to the rates they’ve seen for a long time. The one thing I’m sure of is that over time stocks from this level will beat bonds from this level. If I can be short the 30-year bond at 3 percent or something and long the S&P 500 and just have it put away for 30 years, stocks are going to far outperform bonds. The question is which variable is going to change. Everybody expects interest rates to change. But they’ve been expecting that for quite a while.

I don’t try to guess the stock market: I find businesses I like. But if I were to guess: if interest rates — if the ten-year moved up to 5 percent, stocks would be somewhat cheaper.

It’s been so wide I’ve written about it in annual reports. Stocks have been so much more attractive than bonds for a long time now and that’s partly intentional on the part of the fed. I mean, they want assets to increase in value and the way to do it was to reduce that gravity force of higher interest rates.

I think they expect it to increase, but the question is how much. If three years from now interest rates are 100 basis points higher than this, stocks will still be cheap at these prices. If it’s 300 or 400 basis points, they won’t look cheap. Janet Yellen doesn’t know what she would do three years from now. She’s got more of a job than –that’s a simple factor of the stock market. It’s interesting because the fed has said that they would like to see 2% inflation. That’s fairly recent. Paul Volcker would not have slept if he’d ever heard that in the 80s.

If the U.S. government is borrowing at ten years from you at 2.3%, and their own instrument, the fed, is saying ‘we would really like money to become more 2% a year or less,’ they’re not promising you very much in terms of real terms for saving.

Read the full interview here

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Did Warren Buffett Kill Value Investing?

From 1957-1969, Warren Buffett’s partnership returned 2800%, or 29.5% a year*. Over the same time, the S&P 500 rose 153%, or 7.4% a year. Warren Buffett has been crushing the market for seven decades, but his early success went largely unnoticed. His name didn’t appear anywhere noteworthy until Adam Smith’s Supermoney, which wasn’t written until 1972. While his name gained traction in the investment community, it took many years before it became what it is today. Buffett is synonymous with investing, and If you type his name in the Amazon search bar, the machine spits back 1822 book results. His rise to ubiquity can be traced back to 1984, when he destroyed an efficient market hypothesizer.

value investing

On the 50th anniversary of Security Analysis, Buffett wrote an article in the Columbia Business School Magazine called The Superinvestors of Graham-and-Doddsville . A few weeks prior, Buffett faced off against Michael Jensen, a professor from the University of Rochester and the school of efficient markets. In the speech, which was translated into the article, Buffett told a story that would remove any doubt that value investors outperformance should be attributed to skill rather than luck. Imagine that 225 million Americans all flipped a coin. If you landed on heads, you lived to flip another coin. If this was repeated twenty times, 215 people would be expected to remain.

But then some business school professor would probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same…I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were onto something. So You would probably go out and ask the zoo keeper about what he’s feeding them….A disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village that could be called Graham-and-Doddsville.

From 1926 until the time that Buffett wrote this article, the Fama French U.S. Large Value Index, which did not exist until the early 90s, crushed the S&P 500. But you can see that until 1970, the red and black line were neck and neck. So all of the outperformance over this 58 year period came in the 14 years leading up to Buffett’s coin-flipping speech.

Read rest of the article here

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How To Reduce Risk in Stock Markets

Leverage – Debt increases risk. The easiest way to reduce your risk is to not have leverage, especially margin leverage, in your portfolio. Margin leverage is one of the few ways that you can be correct in your investment analysis, and ultimately in the result, but still lose money. It’s not worth it.

The second easiest way to reduce your risk is to not invest in companies that have excessive leverage. Having excessive debt on a company’s balance sheet can lead to problems. Having excessive debt also limits opportunities. One of the key components to the “Balance sheet to income statement investing” that I advocate is the ability for a company to take on debt when they see an unusually attractive opportunity. Better to buy a company with little debt and a strong balance sheet that can use that strength to safely take advantage of those opportunities by adding a reasonable amount of debt. They can’t do it if they are already overleveraged.

risk in stock markets

Margin of safety – Let’s go to Michael Mauboussin quoting Warren Buffett, “We believe the best and most practical way to restate the margin of safety
concept is to think about discounts to expected value. The combination of probabilities and potential outcomes determine expected value.”

Says Buffett, “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.”
A large margin of safety is helpful for many reasons. One, it gives you the opportunity for outsized gains. Two, it mitigates the effects of mistakes in analysis. And three, it helps protect against unknowable and unforeseen market and company-specific stresses.

Know your investment well – In order to know if you have a margin of safety, you must know your investment well enough to roughly determine its intrinsic value. Or, if you want to take the Mauboussin approach, determine the expected value. Clearly you must have the skillset to analyze a company. You also have to have the humility to recognize that the intrinsic value cannot be determined for some, perhaps most, companies. Other times the intrinsic value can be determined, just not by you. There is no shame in having a “too hard” pile. Mine is high.

I am attracted to companies where there are a low number of variables that are at least somewhat measurable. This is easier to do if you are relying on a company’s balance sheet rather than their income statement. It is also far easier for a company to manipulate their income statement, so this approach has the added benefit of higher predictability. Some investors believe that just because a company is small, it is more risky. This isn’t true. Those investors think that because a stock price moves more rapidly, a stock is more risky. They’re mistaken. Intelligently investing in smaller companies can dramatically reduce your risk. Most of the least risky companies I have invested in have been small. They were not risky specifically because of their low price relative to their actual value. They also were much easier to analyze.

Temperament – Here is where the self-awareness and Intellectual honesty fit in. This is a never-ending process and it is not easy. Nearly every investor, including the best, have succumbed to the market’s excitement and depression at one point. I don’t think it makes me a hippy to say that it is vital to protect your psychological wellbeing. Effective analysis consists of thousands of small judgments while researching a company. It’s a big risk if you can’t make those judgments with a clear head. This is also where ideology can blind you, and being blind as an investor is a dangerous thing. An investor always has to be mentally prepared to the idea that he is wrong, and if so, be willing to change his opinion.

Read the full insightful report from Arquitos Capital Management here

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Tilson Funds Research Report – Berkshire Hathaway

Berkshire Hathaway: A Safe, High Quality, Growing Company With 30% Upside Over the Next Year

Who will replace Buffett?

When Buffett is no longer running Berkshire, his job will be split into two parts: one CEO, who has not been named, and a small number of CIOs (Chief Investment Officers). A CEO successor (and two backups) have been identified, but not publicly named. Two CIOs have been named already, Todd Combs and Ted Weschler, both of whom are excellent investors.

Nevertheless, Buffett is irreplaceable and it will be a significant loss when he no longer runs Berkshire for a number of reasons:

There is no investor with Buffett’s experience, wisdom and track record, so his successors’ decisions regarding the purchases of both stocks and entire businesses might not be as good

tilson funds

Most of the 80+ managers of Berkshire’s operating subsidiaries are wealthy and don’t need to work, but nevertheless work extremely hard and almost never leave thanks to Buffett’s “halo” and superb managerial skills. Will this remain the case under his successors?

Buffett’s relationships and reputation are unrivaled so he is sometimes offered deals and terms that are not offered to any other investor and might not be offered to his successors

Being offered investment opportunities (especially on terms/prices not available to anyone else) also applies to buying companies outright. There’s
a high degree of prestige in selling one’s business to Buffett (above and beyond the advantages of selling to Berkshire). For example, the owners of
Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm.

Berkshire’s Culture Is Powerful and Unique: “A Seamless Web of Deserved Trust”

Berkshire operates via extreme decentralization: though it is one of the largest businesses in the world with approximately 360,000 employees, only 25of them are at headquarters in Omaha

There is no general counsel or human resources department. “By the standards of the rest of the world, we overtrust. So far it has worked very well for us. Some would see it as weakness.” – Charlie Munger

“A lot of people think if you just had more process and more compliance. Checks and double checks and so forth, you could create a better result in the world.  Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust.” – Munger

“We will have a problem of some sort at some time…300,000 people are not all going to behave properly all the time.” –Warren Buffett

“Behavioral scientists and psychologists have long contended that trust’ is, to some degree, one of the most powerful forces within organizations. Mr. Munger and Mr. Buffett argue that with the right basic controls, finding trustworthy managers and giving them an enormous amount of leeway creates more value than if they are forced to constantly look over their shoulders at human resources departments and lawyers monitoring their every
move.” –NY Times,

Read the full research report here

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Bill Gates Letter to Warren Buffett

Our 2017 annual letter is addressed to our dear friend Warren Buffett, who in 2006 donated the bulk of his fortune to our foundation to fight disease and reduce inequity. A few months ago, Warren asked us to reflect on what impact his gift has had on the world.

It’s a story about the stunning gains the poorest people in the world have made over the last 25 years. This incredible progress has been made possible not only by the generosity of Warren and other philanthropists, the charitable giving of individuals across the world, and the efforts of the poor on their own behalf—but also by the huge contributions made by donor nations, which account for the vast majority of global health and development funding.

Our letter is being released amid dramatic political transitions in these countries, including new leadership in the United States and the United Kingdom. We hope this story will remind everyone why foreign aid should remain a priority—because by lifting up the poorest, we express the highest values of our nations.

One of the greatest of those values is the belief that the best investment any of us can ever make is in the lives of others. As we explain to Warren in our letter, the returns are tremendous.

Dear Warren,

Ten years ago, when we first got word of your gift to the foundation, we were speechless. It was the biggest single gift anyone ever gave anybody for anything.

We knew we owed you a fantastic return on your investment.

Of course, philanthropy isn’t like business. We don’t have sales and profits to show you. There’s no share price to report. But there are numbers we watch closely to guide our work and measure our progress.

Our goals are shared by many other organizations working to save and improve lives. We’re all in this together. So most of the numbers we look at don’t focus just on how we as a foundation are doing, but on how the world is doing—and how we see our role.

Warren, your gift doubled the foundation’s resources. It’s allowed us to expand our work in US education, support smallholder farmers, and create financial services for the poor. But in this letter, we’re going to tell you about our work in global health—because that was the starting point of our philanthropy, and it’s the majority of what we do.

We’ll tell the story through the numbers that drive our work. Let’s start with the most important one:

Read the rest of the letter here

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Warren Buffett’s Letters to the Shareholders – Berkshire Hathaway 2017

Berkshire’s gain in net worth during 2016 was $27.5 billion, which increased the per-share book value of both our Class A and Class B stock by 10.7%. Over the last 52 years (that is, since present management took over), per-share book value has grown from $19 to $172,108, a rate of 19% compounded annually.* During the first half of those years, Berkshire’s net worth was roughly equal to the number that really counts: the intrinsic value of the business. The similarity of the two figures existed then because most of our resources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax that would be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large part “marked to market.”

berkshire hathaway

By the early 1990s, however, our focus was changing to the outright ownership of businesses, a shift that materially diminished the relevance of balance sheet figures. That disconnect occurred because the accounting rules (commonly referred to as “GAAP”) that apply to companies we control differ in important ways from those used to value marketable securities. Specifically, the accounting for businesses we own requires that the carrying value of “losers” be written down when their failures become apparent. “Winners,” conversely, are never revalued upwards.

We’ve experienced both outcomes: As is the case in marriage, business acquisitions often deliver surprises after the “I do’s.” I’ve made some dumb purchases, paying far too much for the economic goodwill of companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book value. We’ve also had some winners among the businesses we’ve purchased – a few of the winners very big –but have not written those up by a penny. We have no quarrel with the asymmetrical accounting that applies here. But, over time, it necessarily widens the gap between Berkshire’s intrinsic value and its book value. Today, the large – and growing – unrecorded gains at our winners produce an intrinsic value for Berkshire’s shares that far exceeds their book value. The overage is truly huge in our property/casualty insurance business and significant also in many other operations.

Over time, stock prices gravitate toward intrinsic value. That’s what has happened at Berkshire, a fact explaining why the company’s 52-year market-price gain – shown on the facing page – materially exceeds its book-value gain.

What We Hope to Accomplish

Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well. It’s our job, though, to over time deliver significant growth, bumpy or not. After all, as stewards of your capital, Berkshire directors have opted to retain all earnings. Indeed, in both 2015 and 2016 Berkshire ranked first among American businesses in the dollar volume of earnings retained, in each year reinvesting many billions of dollars more than did the runner-up. Those reinvested dollars must earn their keep.

Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.

Read rest of the report here

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Why We Think We’re Better Investors Than We Are

From their earliest days, the loosely confederated research efforts that came to be known as behavioral economics spawned a large quantity of studies centered on securities investment. This was not because the field’s pioneers were especially interested in stocks and bonds, nor was the early research commonly underwritten by financial services firms.

better investors

Rather, the hive of activity that evolved into its own field — behavioral finance — reflected that investment markets provide unusually robust data sets for analyzing “judgment under uncertainty” (the title of a seminal textbook co-edited by the winner of a Nobel in economic science, the behavioral economist Daniel Kahneman) and “decision under risk” (a phrase in the subtitle of his Nobel-winning “Prospect Theory”). Every day, global securities markets provide researchers with billions of data points for understanding how people make choices when resources are at stake and the outcome is unknown.

Which, if you think about it, is a fair description of most decisions. Indeed, the majority of cognitive biases and shortcuts that influence everyday judgment and choice have analogues in investment behavior. Consider the “sunk cost fallacy,” a primary reason an unhappy lawyer might struggle to leave the law and an unsuccessful investor might balk at selling money-losing shares.

Both people are highly likely to obsess over their sunk cost — law school tuition and time served for the lawyer, the original investment amount for the stock picker — in a nonconscious desire to justify their earlier decisions. Both are also very likely to fall prey to “loss aversion,” a key tenet of Prospect Theory, which tells us that humans typically respond to the loss of resources — be it time, effort, emotion, material goods or their proxy, i.e., money — more strongly than they react to a similar gain.

What differentiates the typical lawyer and average investor, however, is their justification for engaging in their activity. Lawyers are trained to do what they do, while the majority of investors are not. Ask a random player in a law firm’s basketball league whether he or she could compete with LeBron James, and the most common response will be laughter. Yet many of those lawyers would willingly compete with the billionaire investor Warren E. Buffett.

Read rest of the article here

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Warren Buffett Finds Stocks Fairly Priced Now

Warren Buffett said stocks have “moved a long way” in the past five years, going from “ridiculously cheap” to “more of less fairly priced now.” “We don’t find bargains around but we don’t think things are way overvalued either. We’re having a hard time finding things to buy.”  Warren Buffett said stocks have “moved a long way” in the past five years, going from “ridiculously cheap” to “more of less fairly priced now.” “We don’t find bargains around but we don’t think things are way overvalued either. We’re having a hard time finding things to buy.”

warren buffett

In a live interview alongside Bank of America CEO Brian Moynihan on CNBC’s “Closing Bell,” Buffett also said the U.S. economy is continuing the “gradual increase” we’ve seen since the fall of 2009. “It just creeps along.” Buffett said it appears the Federal Reserve’s quantitative easing hasn’t worked as well as chairman Ben Bernanke would like, but he doesn’t think its been harmful either. In fact, he said the economy might be doing even worse if there was no Fed asset buying. “Maybe if they hadn’t been doing it, you’d have seen ever less than 2 percent (growth). Who knows?”
Buffett said we could be seeing the same slow rate of increase for “quite awhile” but noted that he doesn’t spend a lot of time trying to predict what the economy will do.  Ask who should be the next Fed chairman, Buffett said he would have asked Bernanke to stay in the job. “When you have a .400 hitter in the lineup you don’t take him out.”

“He may want to leave, but I think he’s done — since the panic of five years ago — I think he’s done a terrific job. And I think he ought to get a little bit more of a chance to play out the hand.” Even though he thinks it is unlikely Bernanke will be staying, Buffett said he has no second choice.

Read rest of the article here

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How do you choose a book to read?

As someone who is on an overdrive reading books this year (more than 28 already in the first 9 months of the year), i do get asked as to what kind of books do i read and why do i read the books that i read. These are the few loose set of rules that i follow while selecting a book to read.

It has to be non-fiction. Fiction is a big no-no to me. I cant bring myself to waste time reading fiction. If at all i want to read fiction, i would rather watch a movie that is made on that book. Saves me considerable time considering the fact that iam a slow reader.

Biographies are an instant pick up for me. Doesnt matter the background of the author or the person the book is based on. I have read biographies of Warren Buffett, Lance Amstrong, Louis Gerstner, Andre Agassi, Steve Jobs, Hillary Clinton, Michael Dell, Jack Welch, Kishore Biyani, Richard Branson etc.

Books on finance, investing, stock markets, management, science etc are also my favourites.

Book recommendations in magazines or by successful people like CEOs or other management people who have read books and recommend the same.

Random search on google or amazon after i have read a particular author and liked their writing.

Listening to audio books is my favorite method of reading. Earlier, audio books had someone reading out in a droning voice which could put you to sleep as soon as the books started. Today professional readers pour emotions into their reading with perfect voice modulation which makes listening to a book very much interesting. Sometimes its the author who himself / herself reads out the book. Sometimes its a professional reader and these have made listening to audio books much interesting.

Earlier i used to complain that i had no time to read books till someone nailed it as excuses. I spend at least 2 hours daily commuting to and from work. Mostly the time is spent looking around or listening to some inane radio DJ railing about some crap in between the same songs that you have been hearing for years now. Not to mention the ads that keep popping in between the songs.

I started with one audio book first. It was a bit difficult concentrating on listening to the book. 2-3 books later, you learn to control your mind and concentrate on listening to the book. Honestly today, i hate wasting time listening to songs or radio. I put on an audio book even when i go jogging or ironing clothes at home.

List of books that i have read are here

Above picture courtesy: ArabDetroit

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Just Read – Common Stocks & Uncommon Profits – Philip A Fisher

Happened to lay my hands on the audio file of this book and managed to finish the audio / book in 2 days flat. Its obviously an advantage getting the audio of books so that i can just transfer the files to my mp3 player and listen to them on my travels to work. Holding a book in hand; trying to read them during rush hour is a chore and these audio books are indeed coming handy for me.

Philip Arthur Fisher was an American stock investor who wrote this book Common Stocks and Uncommon Profits way back in 1958.  Just like Benjamin Graham’s bible of investing, The Intelligent Investor, this book is also considered to be a must read for anyone planning to invest in the stock markets.

Philip Fisher is considered a pioneer in the field of growth investing. Morningstar has called him “one of the great investors of all time”. In Common Stocks and Uncommon Profits, Fisher said that the best time to sell a stock was “almost never”. His most famous investment was his purchase of Motorola, a company he bought in 1955 when it was a radio manufacturer and held until his death in 2004.

Perhaps the best-known of Fisher’s followers is Warren Buffett who has said on some occasions that “he is 85% Graham and 15% Fisher”.  (source: Wikipedia)

Fisher goes on to give a lot of Do’s and Don’ts for investors.  A few of the Do’nts include

  • Dont buy into promotional companies
  • Dont ignore a good stock just because its traded over the counter
  • Dont buy a stock just because you like the tone of its annual report
  • Dont overstress diversification
  • Dont be afraid to buying on a war scare
  • Dont fail to consider time as well as price in buying a true growth stock
  • Dont follow the crowd

Fisher also goes about sharing his ideas of how he goes about finding a growth stock.  Fisher talks about using the Scuttlebutt method to investing.  This means that the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company.  Also he talks about talking to the vendors, customers etc to find the correct information needed for your investment in that particular company.

Common Stocks and Uncommon Profits
Author – Philip Arthur Fisher
Pages – 271
Publisher – John Wiley & Sons

Above picture courtesy: Nickgogerty

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