Monthly Archives: September 2011

Links of Interest – September 30, 2011

Buffett says Berkshire has begun share buybacks | Reuters

Why an Old Fashioned Value Fund Like Sequoia Owns Google

Fairfax’s Watsa sees Dirty Thirties pain ahead – The Globe and Mail

GuruFocus Interview with Fairfax CEO Prem Watsa: IRE, RIMM, DELL, BRK.A, BRK.B

Coaching a Surgeon: What Makes Top Performers Better? : The New Yorker

Share buybacks – Friend or Foe? – Terry Smith Straight Talking

Berkshire Share Repurchase — First Time Since 2000 | Alice Schroeder: The Official Website

Berkshire: Not All Buybacks Are Created Equal | The Reformed Broker

Some Thoughts on Buffett’s BRK Buyback Announcement | Vitaliy Katsenelson Contrarian Edge

Warren Buffett Buying Stock Bargains with U.S. Recession ‘Very, Very Unlikely’ – CNBC Video

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100 Ways to Beat the Market #10: Focus on maximizing portfolio earnings ten years out

In his 1991 shareholder letter, Warren Buffett wrote that investors should focus on building a portfolio that maximizes look-through earnings ten years into the future. Look-through earnings are your share of the earnings of a company whose stock you own. For example, if you owned 100 shares of Acme Corp. and it earned $1 per share this year, your look through earnings this year would be $100. Focusing on future look-through earnings is rational because your success as a long-term focused investor will be driven primarily by the economic performance, i.e. future earnings, of the businesses in which you invest.

As Buffett points out, this will force you to think about the long-term prospects of the business, rather than where the company’s stock will be in twelve months. It will also cause you to focus on a number of other important questions about the company’s earnings.

What portion of the earnings comprise free cash versus earnings that need to be re-invested to either maintain or grow the company?

What are the prospects for re-investing the company’s earnings and at what rate of return?

Is the management skilled at capital allocation and can it be trusted to put shareholder’s interests first?

How susceptible over the long-haul is the company’s position to competition?

How much are you paying today for your share of the earnings?

The answers to these questions will determine your estimate of earnings ten years from know. Of course, it is not possible to make this estimate for many businesses either because of the nature of the business or your lack of expertise.

Using this framework also allows you to determine you odds of outperforming the S&P 500 over the next ten years. Once you’ve plugged in your estimates of where your portfolio companies will be in ten years, you can compare them against your assumptions for the S&P 500’s earnings.

Given that the S&P’s economic performance is largely driven by the U.S. economy, start with your assumptions for nominal GDP growth, for example 3% real growth and 3% from inflation, along with something for dividends. You’ll also want to plug in your assumptions of where corporate profits stand as a percent of GDP and whether you expect that percentage to increase or decrease. Finally, you may choose to make an adjustment for the growing portion of S&P companies’ earnings that come from outside the United States.

If you can put together a portfolio whose look-through earnings will be higher than what you could expect to get ten years from now by investing in an index fund of the S&P 500 and you build in a margin of safety, you’ll have a pretty good shot at beating the market.

Notes from Buffett meeting with students from Emory and UT Austin – February 15, 2008

Note: Students from Emory’s Goizueta Business School and McCombs School of Business at UT Austin were invited to come visit Mr. Buffett for a Q&A session. These notes were reproduced to the best of my ability as I heard and as I could recall them from a collection of mine and other students’ notes. There is no guarantee that this was exactly what was said, but the intent was to preserve the spirit of the message. Enjoy.


With the popularity of “Fortune’s Formula” and the Kelly Criterion, there seems to be a lot of debate in the value community regarding diversification vs. concentration. I know where you side in that discussion, but was curious if you could tell us more about your process for position sizing or averaging down.


I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.

If it’s your game, diversification doesn’t make sense. It’s crazy to put money into your 20th choice rather than your 1st choice. “Lebron James” analogy. If you have Lebron James on your team, don’t take him out of the game just to make room for someone else. If you have a harem of 40 women, you never really get to know any of them well.

Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. Later in 1998, LTCM was in trouble. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up.

Over the past 50-60 years, Charlie and I have never permanently lost more than 2% of our personal worth on a position. We’ve suffered quotational loss, 50% movements. That’s why you should never borrow money. We don’t want to get into situations where anyone can pull the rug out from under our feet.

In stocks, it’s the only place where when things go on sale, people get unhappy. If I like a business, then it makes sense to buy more at 20 than at 30. If McDonalds reduces the price of hamburgers, I think it’s great.

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Kindle eBook: How to Become a Better Investor

I have put together my thoughts on improving your investment process into a Kindle eBook titled How to Become a Better Investor.  It is now available at

I hope you find these ideas useful. I am confident that if you apply them, your results will improve. I’d love to hear your feedback – both positive and otherwise. Finally, I encourage you to tell others about this eBook if you think it can be of use to others.

“Highly recommended” – John Mihaljevic, CFA, Managing Editor, The Manual of Ideas

Potential Game-changer: Berkshire Hathaway Authorizes Repurchase Program

OMAHA, Neb., Sep 26, 2011 (BUSINESS WIRE) — Berkshire Hathaway Inc. BRK.A +3.77% BRK.B +4.07% –Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.

Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire.

Berkshire may repurchase shares in open market purchases or through privately negotiated transactions, at management’s discretion. The repurchase program is expected to continue indefinitely and the amount of purchases will depend entirely upon the levels of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discount from management’s estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares.

This release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which contain words such as “expect,” “believe” or “plan,” by their nature address matters that are, to different degrees, uncertain. These uncertainties may cause actual future events to be materially different than those expressed in our forward-looking statements, including with respect to the duration of the repurchase program. We do not undertake to update our forward-looking statements.

Berkshire Hathaway and its subsidiaries engage in diverse business activities including property and casualty insurance and reinsurance, utilities and energy, freight rail transportation, finance, manufacturing, retailing and services. Common stock of the company is listed on the New York Stock Exchange, trading symbols BRK.A and BRK.B.

SOURCE: Berkshire Hathaway Inc.

Links of Interest – September 23, 2011

WealthTrack Interview Transcript with Bruce Berkowitz

You Are Not as Dumb as You Think | Vitaliy Katsenelson Contrarian Edge – Good article from Katsenelson on staying disciplined and not confusing luck and skill.

Berkshire Hathaway Is Now Traded at the Lowest Valuation in Decades

While I’m at it…
It is times like these that the game moves from the locker room (read: theoretical) to the playing field. It is simple but not easy. Humility is required. Fear amplifies the importance of conviction borne of independent thinking. Stay disciplined. Don’t speculate. Sins of omission can be costly but are cheaper than permanent loss of capital. There are many ways to financial heaven, you only need a handful of things you truly understand to be successful. Isolate the variables that make a difference and quantify them. Don’t rely on journalists or pundits to do it for you. Finally, don’t rely on opinions: others may know less than you think and/or have incentives that run counter to your best interests.

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Horizon Kinetics (Murray Stahl) on the market’s high level of volatility and what it means

Following the market swings experienced in August, many investors are understandably rattled. Despite the last-minute agreement to raise the U.S. debt ceiling and avert default, one of the major credit rating agencies downgraded U.S. government debt one notch below its highest AAA rating to AA+. Most agree that the risk of U.S. default on its securities remains remote. However, the protracted negotiations around the debt ceiling, fears about the prospects for corporate profits and continued concerns regarding austerity measures and solvency in some European countries contributed to wide market fluctuations. In just a few days, the S&P 500 gave back its year-to-date gains and then some. In this month’s commentary, we offer our thoughts on recent market conditions as compared to those experienced during the last period of high volatility: the financial crisis of 2008.

(continue reading)

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10 Ways to Improve Your Investment Process – #10. Continuously Improve

The tenth idea I’ll leave you with is to seek to continuously improve your process.

The best coaches, the best CEOs, the best investors all religiously do this.

One of Nick Saban’s assistant coaches, who was with him at LSU in 2000, re-joined him after ten years apart. The assistant coach was asked how Saban’s process had changed. He responded, “It’s been polished. Coach knows what he wants to do. That’s why he’s been so successful.”

In an interview with ESPN, Paul DePodesta, distanced himself from the notion that his baseball process as described in Moneyball was limited to using statistics to identify and draft undervalued ball players. Rather, he defined his process in much broader terms which could be applied whether you’re running a sports club or a hedge fund.

According to DePodesta, “It’s a constant investigation of stagnant systems, to see if you can find value where it isn’t readily apparent. It can be anything. At the time, it happened to be using statistics to make us better decisions. That’s not always the case. There are new frontiers we need to conquer.”

One final example of continuous improvement is that of value investor Mohnish Pabrai – a disciple of Warren Buffett and Charlie Munger. Pabrai uses a checklist to capture investment mistakes that have been made by great investors. Pabrai scoured their past investment letters and holdings looking for mistakes. In some cases, it was easy because the investors acknowledged the mistake and explained why it happened. In other cases, he had to find the mistakes on his own and deduce why they happened.

Pabrai currently has more than seventy items on his checklist which he credits for improving his performance and avoiding mistakes.

I think this is a powerful way to improve – and to keep improving. Create a checklist of all your investing mistakes and then add to it as you come across mistakes made by other investors.

In the words made famous by Nike, “Just Do It!”

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10 Ways to Improve Your Investment Process – #9. Be Patient

The ninth idea to improve your investment process is to be (more) patient.

The great investor Peter Cundill, who died earlier this year and whose fund achieved 15% returns for over thirty years, stated that the most important attribute for success as an investor is being patient and that most investors don’t have it. The importance of patience is frequently cited by other great investors.

No investment process – even the best – outperforms in every period. This is asking too much given the amount of external factors that affect performance.

Patience is not only required of long-term investors. Even frequent traders must have conviction in their investment process and have the patience to trade through the inevitable draw-downs.

In short, investors cannot escape the requirement of patience or they condemn themselves to mediocrity or failure. Without patience, you’ll abandon your current approach only to chase the next investment fad, only to see it take an inevitable downturn.

Can patience be learned? I think it is one of the fruits of a good investment process. The better your process, the greater your conviction to stay with it long enough to bear fruit. This is the only sensible approach to building a consistent record of good performance.

Links of Interest – September 16, 2011

Ruane, Cunniff & Goldfarb 2011 Investor Day

Restoring the Health of Johnson & Johnson –

The Hidden Meaning Behind Buffett’s Hiring: Alice Schroeder – Bloomberg

A Disciplined, Driven ‘Connect-the-Dots’ Investor –

The Intelligent Investor: Why John Bogle Is Upbeat About Stocks –

Diageo (DEO) – Conference Notes

Prince Alwaleed bin Talal: Success is the ‘ultimate kick’ – Profiles, People – The Independent

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