Category Archives: Warren Buffett

On the Similarities of Underwriting and Investing

In 1999 Warren Buffet wrote, “In Ajit, we have an underwriter equipped with the intelligence to properly rate most risks; the realism to forget about those he can’t evaluate; the courage to write huge policies when the premium is appropriate; and the discipline to reject even the smallest risk when the premium is inadequate. It is rare to find a person possessing any one of these talents. For one person to have them all is remarkable.”

It is interesting that these qualities parallel those required to be a successful investor.

A successful investor must:

  1. properly assess the future prospects of a business;
  2. quickly pass on those businesses he cannot understand;
  3. have the courage to make a large bet when the odds are in his favor;
  4. not invest if the margin of safety is too small.

You can infer from Buffett’s comments that finding (or becoming) an investor with these traits is difficult.

Berkshire Hathaway: an 80 cent dollar?

“It is better to be roughly right than precisely wrong.”

– John Maynard Keynes

“Intrinsic value is an estimate rather than a precise figure.”

– Warren Buffett

 $243 billion – Berkshire Hathaway’s total shareholder equity on December 31, 2014.

+ $20 billion – Adjustment for GEICO’s economic goodwill. This is roughly consistent with the 97%-of-premium-volume valuation yardstick Buffett established in the 2010 shareholder letter. Paul Lountzis, founder of Lountzis Asset Management and a respected investor, suggested in a March 2, 2015 WSJ article that GEICO could be worth as much as $25-$45 billion.

+ $50 billion – Adjustment to properly value BNSF. BNSF comprises approximately $51 billion of Berkshire’s equity, per BNSF’s 2014 10-K. Stripping out $15 billion of accounting goodwill leaves $36 billion of tangible equity. At 3x tangible book, BNSF would be worth approximately $108 billion. Union Pacific, a good comp with similar revenue and assets, has a market cap of about $100 billion and sells at 4.9x book, according to Morningstar. Union Pacific’s 5-year average price/book is 3.1.

+ $37 billion – Adjustment to properly value Berkshire Hathaway Energy (BHE). Berkshire’s Railroad, Utilities, & Energy segment had assets of $159 billion and liabilities of $71 billion, as of December 31, 2014, leaving equity of $88 billion. Netting out $51 billion for BNSF leaves $37 billion of equity for BHE. Here I assume a valuation of 2x book which I based on industry valuation figures maintained by NYU. BHE deserves at least a market multiple given 1) the quality of it’s assets, 2) it’s growth rate, 3) it’s access to and capacity to reinvest capital and 4) it’s management’s skill.

+ $84 billion – Adjustment for Berkshire’s float. Buffett is on record as saying that $1 of float is worth more than $1 dollar to Berkshire. Investors will need to make their own assessment of whether this adjustment overstates the float’s true economic value as Buffett has recently commented that float could decline in the future, albiet at a slow rate. At the 2010 Markel breakfast in Omaha, Tom Gayner was asked if insurance float should be treated as a true liability. Gayner argued that if you’re given $1 to hold and you never need to give it back it should be worth more than $1.

+ $30 billion – Adjustment for half of Berkshire’s deferred tax liabilities. Although GAAP accounting treats deferred taxes (both from unrealized capital gains and investments in fixed assets) as a liability, from an economic standpoint (and using the same logic Markel’s Gayner applied to insurance float), they function as an interest-free loan for Buffett to invest. This approach is consistent with Berkshire’s Owner’s Manual and comments made by Charlie Munger in Wesco’s annual reports, although neither gives a precise valuation formula. This figure may be low given Berkshire’s massive core permanent equity holdings and continued and increasing capex spending in the Railroad, Utilities, & Energy segment. Each investor will need to make their own estimate of when and how much of Berkshire’s capital gains will be realized and when the deferred taxes on Berkshire’s massive investments in BNSF and BHE will reverse, if ever, given Buffett’s characterization of their future opportunities/requirements for substantial amounts of capital. I think the present value of this float in the hands of Buffett and his successors is large.

Total – $464 billion*. This equates to a price/book ratio of 1.9 or a value per A share of $282 thousand. This is broadly consistent with Buffett’s comment in the 2014 shareholder letter, “If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit.”

The reasonableness of this estimate can be crosschecked against the two-column valuation of Berkshire. Assuming an intrinsic value of $282 thousand per share and netting out the current $140 thousand per A shares in investments leaves a value of $142 thousand. This is about 13x Berkshire’s pre-tax earnings per share of $10.8 thousand. This figure would appear fully valued but not unreasonable, considering the quality of Berkshire’s businesses and that it does not include any earnings from insurance underwriting ($24 billion pre-tax over the past twelve years).

According to this estimate, at $220 thousand per A share, Berkshire is trading at approximately 80% of intrinsic value.

I remain long Berkshire Hathaway.

* this estimate of intrinsic value did not make an adjustment for noncontrolling interests. This amount is immaterial given the relative small size of the interests and the huge size and imprecision of the above adjustments.

* No attempt was made in this estimate of intrinsic value to assess whether the economic goodwill of Berkshire’s other businesses – insurance operations ex-GEICO, IMC (Iscar), Lubrizol and Marmon et al. – exceeds that of their accounting value, but this seems likely given the success of these businesses along with Buffett’s unwillingness to overpay when they were acquired.

Buffett & Munger’s Four Investing Filters

A few takeaways:

  1. (Filter #1) The most important thing is to understand the business.
  2. (Filter #2) Look for a business with an enduring competitive advantage.
  3. (Filter #3) Invest with able and trustworthy managers.
  4. Filter out most prospective investments through inversion, i.e. businesses you don’t understand, businesses with lousy economics, etc.
  5. (Filter #4) Pay a price that makes sense and affords a margin of safety.

A few thoughts from Omaha on Berkshire Hathaway’s future ($BRK.A, $BRK.B)

I came away from the Berkshire Hathaway meeting generally reassured about its future as a sound investment.

The results will not be spectacular going forward. Berkshire is simply too big for that. However, the result are likely to be quite satisfactory. I think it is rational to assume (as Buffett himself believes) that Berkshire can still beat the S&P 500 over a complete business cycle, something few managers can do. Moreover, in Berkshire’s case you have a high probability of selecting the manager BEFORE you invest, a rarity.

Buffett has put together a collection of businesses that are not only highly profitable, but also remarkably immunized from creative destruction, which provides a margin of safety. It is not a stretch to assume that one hundred years from now BNSF will still be riding the rails, BH power will be providing energy in one form or another and BH insurance companies will be underwriting. This also is rare.

The key question that will drive Berkshire’s results going forward is whether Buffett or his successors will be able to intelligently put to work the enormous capital the company generates.

For now, Berkshire has shown that it still has this capacity to do this given the following options.

  1. Tuck-in acquisitions and organic growth, i.e. NFM Texas store
  2. Large cap-ex investments in rails and energy. Tens of billions can be put to work here over time at satisfactory returns, i.e. 11%-12%.
  3. Stakes in publicly traded companies
  4. An occasional whale (this may be aided by 3G Capital)
  5. “Special Deals” (such as those done with Goldman, GE, BOA, etc.) – Buffett thinks these will still be available after he is gone, based on Berkshire’s reputation and its ability to write a huge check.
  6. Something we are not thinking about. This may seem a bit of a stretch (and certainly not something to count on) but Buffett is an investing genius who has surprised many times in the past by coming up with new ways to deploy capital.

Another positive is that Berkshire is one the few companies that will have both the firepower – cash, operating profits, borrowing capacity, liquid securities – and investing philosophy to exploit Mr. Market when he goes into a future depressed state. Moreover, confidence is growing that Todd Combs and Ted Weschler are skilled investors who could have a long and successful run ahead of them at Berkshire.

Brief notes on the 1979 Berkshire Hathaway Shareholder Letter

  • Buffett continues to espouse return on equity as the preferred metric for economic performance, provided it is adjusted, where necessary, to capture economic reality.
  • The scorecard for investment results must take both inflation and taxes into account.
  • Buffett underscores outstanding management as a key driver of a successful business, particularly in insurance which tends to “magnify, to an unusual degree, human managerial talent – or the lack of it”.
  • Buffett suggest that it probably makes sense to pay-up for great businesses – those that produce high returns on tangible capital employed – rather than purchase statistical bargains in mediocre or subpar businesses.
  • Early on, Buffett showed the discipline to walk away from insurance business if it could not be underwritten with an expectation of a profit.
  • Successful investing in insurance requires the ability to tolerate lumpy returns.
  • Buffett is disinterested in market trends or fads.
  • Even sophisticated managers can ignore reality if it is too painful to deal with or if it requires a difficult change in direction. (See the example of how the insurance industry reacted to losses on long-term bonds.)
  • Lending money at a fixed price for an extended duration (long-term bonds) is inherently risky in an inflationary world. This is why Buffett favors convertible bonds which function as if they have shortened maturities.
  • It generally doesn’t pay to be clever when the tide is running against you.
  • You usually have to pay up to purchase a high-quality business.
  • “It is difficult to say anything new or meaningful each quarter about events of long-term significance.”
  • Buffett takes pride in running a very lean operation at the top.
  • Buffett wants a shareholder base that understands Berkshire Hathaway and has rational expectations.
  • Buffett likes the trade-offs inherent in running a decentralized operation: whatever he misses by not having more controls he gains in cost savings and responsiveness.

Brief notes on the 1978 Berkshire Hathaway Shareholder Letter

  • GAAP financial statements are merely a starting point to understand the economics of a business.
  • Berkshire is best understood by looking at its various segments.
  • Buffett tries to provide segmented information to investors (“partners”) in the same form that he likes to see it.
  • One-time capital gains should not be used in evaluating the performance of any given single year. Nevertheless, they are a meaningful component of Berkshire’s longterm performance.
  • Buffett does not believe it is possible to forecast short-term stock market prices.
  • Return on equity may be overstated if balance sheet assets, such as property and equipment, are carried materially below replacement cost.
  • Textiles is a lousy business characterized by slow capital turnover, low profit margins, poor returns on capital.
  • Attempts to improve profitability may yield little benefit if a business’s competitors are able to make the same improvements, i.e. differentiating products, lowering costs, increasing productivity, changing product mix, etc. [Author’s note: Buffett will later write that this is akin to standing on your tippy toes at a parade.]
  • When it come to controlling costs, management’s past track record is a meaningful indicator of future performance.
  • As long as a business is generating at least modest returns, Buffett will consider non-economic factors when deciding to remain in the business.
  • The hallmarks of Berkshire’s highly successful insurance operations were already on display in 1978: discipline, growth, realism, conservative expectations, and recognition of the tremendous power of low-cost float coupled with investment skill.
  • Buffett reiterates his investment criteria: “(1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively.”
  • Buffett chides pension fund managers for investing heavily when the market was richly valued and investing relatively little at bargain prices.
  • Buffett sought blocks of stock for Berkshire’s insurance portfolios at valuations lower than what they would “command in negotiated sales”.
  • As a net buyer of securities, Buffett prefers share prices to stay undervalued rather than quickly re-pricing to unattractive levels.
  • Buffett’s policy is to concentrate holdings.
  • Forgoing control is completely rational when 1) a meaningful portion of a business can be purchased in the market for less than it would cost to create it, 2) the business has relatively certain prospects, and 3) possesses proven management. See the SAFECO example.
  • Buffett praises investee companies’ reinvestment of retained earnings, provided it is done at attractive returns. This anticipates his concept of look-through earnings.

Brief notes on the 1977 Berkshire Hathaway Shareholder Letter

  • The best measure of business performance is return on equity, although allowances must made for items that can cloud the metric’s economic meaning, such as high levels of debt or goodwill. Using this metric allows investors to put earnings growth into context.
  • Reinsurance generates high levels of float for investment relative to premiums written. [Author’s note: It is no coincidence that Buffett put a great deal of emphasis on growing Berkshire’s reinsurance business.]
  • Successful insurance operations require the discipline to turn away unprofitable business. Also, insurance operations typically enjoy few important competitive advantages. This makes insurance management particularly important.
  • When investing for the longterm, day-to-day price fluctuations tell little or nothing about the ultimate results that will be achieved. Results will be determined by the economic performance of the underlying business.
  • A key investing concept is to determine where a business will be in 10 to 20 years. A current snapshot, without this longterm view, can be very misleading.  Berkshire Hathaway’s performance from 1955 to 1964 provides a stark example.
  • Buffett purchased Capital Cities in 1977 at approximately 8 times earnings: $10.9 million in shares generating $1.3 million in look-through earnings. This was a 50% discount to Buffett’s estimate of the valuation level required to purchase the entire company. [Author’s note: Moreover, it was a business with numerous hard-to-find advantages.] 
  • Buffett has simple and clear investment criteria: “We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.”
  • In banking investments, Buffett pays attention to return on assets.
  • Buffett likes businesses such as See’s that require little additional capital to grow and that can grow operating earnings even in an industry that is experiencing no unit growth. [Author’s note: In See’s case, this was done through raising prices.]

Berkshire Hathaway 2012 Shareholder Meeting Notes (part 3) – GregSpeicher.com

Buffett stated that Berkshire is not even close to running afoul of the Investment Act of 1940.

Google and Apple are great businesses. They will be difficult to dislodge. Buffett does not get to the level of conviction he needs to buy them. He thinks IBM is less likely to stumble.

Buffett would not have selected Apple ten years ago. What makes him think he can now predict what it will do over the next ten years. (My comment: this is a useful filter to counter hindsight and overconfidence bias.)

Buffett likes the very positive long-term economics of BNSF.

Munger: Getting good and bad breaks is in the nature of things.

REITs and MLP’s would not be attractive to Berkshire because it must pay corporate tax.

The $20 billion of cash that Buffett holds is not a magic number. They think about risk all the time and build in a margin of safety. They are not interested in explaining why the lost the business.

They think about what could go wrong, and they put in place a huge margin of safety. 99 out of 100 years will be punished as a result of this conservative approach. 1 in 100 will be the payoff.

Buffett keeps photocopies from the pages of newspapers that chronicled financial collapses, as a reminder. He mentioned the financial collapse surrounding Pacific Northern.

Regarding Combs and Weschler, Buffett is always more concerned with how a record was achieved. He has seen hundreds of great records – very few from people he would hire.

Combs and Weschler make $1 million per year plus a bonus for each point of outperformance of the S&P 500. 80% of the bonus is based on their individual performance and 20% on the other’s performance, so as to foster cooperation. This is the same comp package that Lou Simpson has. It is based on a rolling average of three year performance.

Buffett recently increased each of their allocation of investment capital to $2.75 billion.

They have a much bigger universe of potential investments than Buffett because of their size. They will do a great job running more money.

Combs has already racked up a large gain.

The majority of people would starve with this comp structure. Combs and Weschler could make more with a different job but with a less desirable life style.

When looking at an investment, Buffett looks at every aspect of how the world may develop over the next five to ten years. They look at all aspects of both the business and the industry. They are looking for a high level of certainty.

Managers at Berkshire have an advantage because they do not need to think about investors, lawyers, etc.

It is very hard to imagine Berkshire getting a bad result.

Getting real GDP growth of 2 1/2% over one’s lifetime if remarkable. Given the U.S.’s mature economy and the increased level of global competition, Buffett and Munger think real GDP growth of 1% is all you can expect. Add to that 2-3% of inflation – which will be lumpy. This gives an expected return on equities of 6%: 1% real growth + 2-3% for inflation + 2% dividends.

Buffett thinks superpacs are wrong. There is enough push towards a plutocracy already. You need to make a stand. He will not spend money to mislead people.

Investing in Berkshire is not for those with a short-term outlook. You should actually feel better today than a year ago because the margin of safety has grown.

They don’t pay a dividend because they think they can get more than a $1 of present value by retaining it within the company. Dividends will come out in due course but, hopefully, that day is a long time in the future.

MidAmerican may be able to put $100 billion to work over the next ten years.

Munger: Buffett has continued to learn.

They could do better with $1 million of capital because there would be many more places to look.

How do you minimize mistakes? Think about things that would not allow you to play tomorrow. Buffett does not worry about mistakes because the next mistake may be different.

He has learned more about people over the years. He will recognize the extraordinary ones perhaps more easily going forward.

They have tried  to learn a lot from the mistakes of others.

Buffett loves to read about financial markets. There is plenty of folly in this area.

They don’t build barriers to entry; they by them. You could not knock off Coke with $20 billion.

GEICO should be valued both on the basis of its float and its underwriting profit. They will grow as far as the eye can see because of their cost advantages.

Ajit must be smart on each deal. He cannot look it up in a book.

If you do 100 deals, you will learn if you are doing things right.

Earnings power is affected by current Fed policy.

Munger: the U.S. would be better off not using its natural gas now. Munger prefers to suffer now so better things will be in the future.

 

Berkshire Hathaway 2012 Shareholder Meeting Notes (part 2) – GregSpeicher.com

Hedges

Some hedging required in operating businesses.

Buffett thinks about worse case scenarios all the time – more than most. They won’t take risks that threaten the business.

Valuations

Valuing GEICO is different than valuing Gen Re.

GEICO’s intrinsic value is greater than net worth and float. This is not true for all insurance businesses. GEICO will have growth plus underwriting profits.

Buffett would love to buy operating businesses at 9-10x pre-tax earnings if they had similar characteristics to Berkshire’s operating businesses. He would pay even more for Berkshrie’s businesses since they know the businesses.

Gold

Buffett would not buy gold. He prefers productive assets.

JP Morgan

Buffett bought JP Morgan for his personal account. He could not buy Wells Fargo in is personal account so he bought JP Morgan. His best ideas are in Berkshire.

Munger likes focused, long-term investing. Munger thinks investors should be thinking about the 98 1/2 percent of things that drive results, not the 1 1/2 percent.

If Buffett was not running Berkshire, he would own a lot of WFC in his personal account.

Acquisitions and Dividends

Buffett would use Berkshire’s stock in acquisitions, if it sold for intrinsic value. Buffett does not want to pay a dividend. It does not make sense to payout 100% when it is worth 110% in Berkshire.

Newspapers

They once were the primary source of information. Now there are other means which are more timely.

The areas where newspapers are the primary source of information has gone way down. They have lost primacy. However, they are still primary in a great many areas, such as local sports, obituaries, marriages, etc.

They are expensive to distribute.

Many newspapers give information away for free which is a poor business model.

There is a future for newspapers in areas where people care about local items. They are not as bullet-proof as they once were.

Berkshire makes reasonable money with the Buffalo News.

Buffett may buy more newspapers in the future. They need strong local interest – a strong sense of community.

Concern about Interent

The Internet is a powerhouse. The Nebraska Furniture Mart is probably OK.

GEICO was affected by the Internet.

Amazon has millions of happy customers. The Internet is really terrible for most retailers.

Buying businesses

It took a long time for Berkshire to be top of mind when someone wants to sell a private business. There is generally no #2.

They generally vote yes in proxies of investee companies. They don’t rule out businesses where they don’t see eye to eye.

If they saw a particularly dumb acquisition, they might vote against it.

They would buy a great P&C insurance business, but there are not many.

Share repurchases

Berkshire’s willingness to repurchase shares under 1.1x book value has not put a ceiling on the stock. It signals that there is not a lot to lose.

Walmart

There may be a large fine but the fundamental dynamics of Walmart have not changed.

Buffett does not think the earnings power in 5 years will be affected.

Munger: A company that big will always have someone doing something wrong.

Takeover concerns

A takeover of Berkshire by a hedge fund is unlikely. Members of the Buffett family will maintain large voting power for many years to come. The size of Berkshire makes a takeover unlikely, and Berkshire is continuing to grow.

Munger: Berkshire’s momentum is in place for the next $200 billion. Berkshire will continue to attract private sellers.

Capital intensive businesses

Buffett thinks the utilities businesses can return 12%.

BNSF’s capex exceeds D&A, but Buffett is confident that Berkshire will be allowed to earn a decent rate of return on these investments.

Float

It is difficult to predict how fast Berkshire’s float will grow. It could shrink.

They are looking for ways to intelligently grow float.

Declining businesses

It is best to stay away. The real money is in growing businesses. Buffett doesn’t look for a cigar butt in a declining business.

Avoiding dumb things

The most important thing is to understand the earnings power of a business in 5-10 years plus its competitive position.

Investing in IPO’s is dumb. The seller picks the timing.

It is dumb to invest where the winners can’t be picked.

They have a number of filters. If something does not get through the filters, it is rejected. You don’t have to do a lot of great things to do well.

You can’t have a big disaster.

They avoid investments where someone is earning a large commission.

They look at things that other smart people are buying. If Graham Newman was buying something, Buffett would take a look.

 

Berkshire Hathaway 2012 Shareholder Meeting Notes (part 1) – GregSpeicher.com

The following is the first part of my notes from the 2012 Berkshire Hathaway shareholder meeting. I have tried to be accurate, but I make no guaranty that I have been so. The notes are not complete, but rather the thoughts I wrote down during the meeting. I hope they are useful. Please take them with a grain of salt and cross check them against other sources.

Managing risk

Buffett’s successor must be the chief risk officer.

Insurance divisions are already overseeing their own risk. Leverage will be avoided in the future.

Berkshire may not have access to all the deals they could do with Buffett, but there will be opportunities. They will do some things better after Buffett.

The special side deals such as the warrants have not been material.

Berkshire has a strong board with deep experience managing risk.

Repurchase of Berkshire shares

Berkshire has always tried to have an attitude of partnership towards shareholders. When Berkshire issued B shares, Buffett said in the proxy that he would not buy them at the offering price.

Buffett stated that Berkshire’s intrinsic value is significantly higher than 110% of book value. Buffett feels very comfortable with 1.1x book. Significantly (dramatically) undervalued.

Some of Berkshire’s businesses are undervalued; some are fairly valued.

Buffett would love to buy “tens of billions” at 1.1x book. The value of each shares goes up if shares are repurchased at 110% of book. It’s obvious.

He won’t go below cash buffer of $20 billion.

Many companies repurchase their stock at overvalued prices.

Banks

American banks are in a better position than European banks. American banks have taken large losses already have large liquidity. The system is in fine shape.

Euro is gasping for air. $1 trillion Euros just pumped into the system. European banks rely more on wholesale funding.

Munger – Having a union in the U.S. is a big structural plus. 17 countries make it a lot tougher.

Energy

MidAmerican will pass on cost savings on coal.

KW hours down 4.7% (last year?).

The ratio of gas to oil is not 50:1 vs. the longterm average of 6:1.

Telematics

Buffett stated that nothing is being done at GEICO to introduce telematics. He does not yet think that it is a factor. They are watching it and he is open to it.

GEICO is worth 15 billion more than book value. Even that price would not tempt him to sell it.

Investment Education

MBA’s have been taught a lot of nonsense about investing.

If Buffett were teaching about investing, he would teach two courses:

  1. How to value a business
  2. How to think about market prices

Ray Kroc did not think about options; he thought about how to sell more hamburgers.

You must know the difference between which businesses can be valued and which cannot. Buying cheap businesses works.

Insurance Pricing

Rates in Thailand have gone higher as a result of flooding and Berkshire is selling more insurance. Losses in New Zealand have been huge on a per capita basis.

Berkshire has proposals out for $10 billion in business.

Market for insurance is significantly better in parts of the world.

Energy Subsidies

There is a $.022 per KWH subsidy from federal government for the next ten years. Solar and wind would not work without subsidies. Wind does not work as base power generation (storing issue).

Berkshire can use tax breaks in energy companies in full because it pays so much in taxes. Up to 80% of other companies cannot use these tax credits. This gives MidAmerican a significant advantage.

Acquisitions

Buffett would do an acquisition greater than $20 billion. He just considered a $22 billion acquisition.

Buffett won’t use stock in the future, not even for 30-40% of a deal.

He wants $20 billion in cash to be on hand. He would not do a $40 billion deal because he does not want the company to be susceptible to a shock. Money is building up month by month.

Berkshire invested $8.8 billion in U.S. last year.

Buffett’s Health

Buffett is feeling good. Munger won’t allow himself to be tested for prostate cancer. Munger views Buffett’s cancer as a non-event given his highly positive prospects.

Insurance Run-Off

Buffett would buy insurance run-off operations at the right price.

Advice on starting out

Buffett would do the same thing again. He would aggregate investment funds earlier. He would develop an audited record as early as possible. He would try to get to the stage of buying entire businesses ASAP.

Berkshire’s stock price

The stocks price has been cut in half four or five times. Cap Cities once sold for 1/3 of the prices that its assets could be sold for.

Read chapters 8 and 20 of The Intelligent investor. Mr. Market makes lots of mistakes.

High to low prices for Berkshire stock is less than that of other stocks.

Make decisions based on what a business is worth.

The stock market is the most obliging way to make money. There is lots of information. This isn’t available with farms. The rules are in your favor if you take advantage of it.

Munger: Get yourself into a position to buy businesses.

Macro risks

Buffett never let macro events affect a buying decision. There will always be good and bad news out there. Buffett bought his first stock in 1942.

Look to valuation, not headlines.

He keeps liquid reserves because he does not want to go broke. The 1st rule is to always play for tomorrow.

Berkshire’s businesses

BNSF has dramatically improved its position. It is an extremely efficient way to move things. Could not be duplicated for 5x or 6x (what Berkshire paid?).

GEICO is much better than its was 5 years ago. It is approaching 10% of the market.

MidAmerican and ISCAR have both done well.

Mistakes have been made when they misjudged the competitive position of the business.

Munger: good fortune will continue after Buffett’s death.