Selected Materials from Book - The Essays of Warren Buffett

The Essays of Warren Buffett Essays by Warren B. Buffett, Edited and Introduced by Lawrence A. Cunningham August 3, 2007

Another must read book. In this collection of essays, Warren Buffett reinforced most of the teaching found in Intelligent Investor, which should be read prior to this one, and provide invaluable amount of information in guiding the corporate practices. The book gives you a good look inside Berkshire of how Buffett himself conduct business. Like Intelligent Investor, I will list some highlights. I urge you to read this book, I know I will read it again and follow many of its sound principles once I start to operate business.

In addition to what I recapped in Intelligent Investor:

The three major contribution of Granham in his book are Mr. Market, Margin of safety, and circle of competence.

Phil Fisher’s suggestion of a company is like restaurant, offer a menu that attract people with particular taste.

Greenmail is an abuse of share as currency.

Accounting is a form, thus can be manipulated.

Use of Look-through-earnings

The three board and management structures: 1. no controlling shareholder 2.contolling owner is also manager. 3. Controller owner who is not involved in management.

Philosophy of David Ogilby: If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants.

Aim to make even the best managers more effective.

Comte’s advice: the intellect should be servant of the heart, but not its slave.

Samuel Johnson: A horse that can count to ten is a remarkable horse – not a remarkable mathematician.

Despite many shortcomings, Stock options has their indiscriminate usage. 1. Options are tied overall performance should be awarded to those managers. 2. it should be carefully structured and be priced at true business value. 3. Use as incentives, make managers think like owners.

When payments to owners are held down, the profit to the option-holding manager increases.

Ronald Reagan creed: It’s probably true that hard work never killed anyone, but I figure why take the chance.

Sound of business: economic prospects, people in charge, and price to pay.

Sell holding when business are more valuable than the underlying facts. To acquire fund for a still more undervalued investment or one that understood better.

Wall Street Proverb: Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.

More on EMT, efficient market theory. Pg 73

Equating beta with investment risks makes no senses. Beta, the risk factor.

Diversification makes no sense for guru.

Tech company: no insight into which participants in that tech field posses a truly durable competitive advantage. (and Buffet don’t understand tech)

Share buy back should happen at right price and right value.

Most of acquisition are value decreasing.

Annual report should made by CEO.

CEO should not predict earnings, but it is okay to talk about goals.

Find outstanding business at sensible price, not mediocre business at bargain price.

The importance of allocate capitals, poor allocation lead to restructure. Be ware of company that goes through restructure.

Theory of Investment value: The value is determined by the cash inflow and outflow, minus the discount at interest rate that can be expected to occur during the remaining life of the asset.

Beware of Cigar Butt approach, current bargain doesn’t equal to future value. Don’t take the last buff of a butt found on the street.

Song: Fools give you reasons, wise men never try.

Buffett: Good jockeys will do well on good horses, but not on broken-down nags.

Superb Management is essential. Buffett mentioned names such as Carl Reichardt, Paul Hazen.

Sound business has good return on equity greater than 12% with little debt.

Analyze equity growth vs earning growth.

Owner earning = reported earning + depreciation/amortization – avg. of annual capital expenditure (Various business weight each differently pg. 197)

The forever diseases of investment community: Fear and Greed.

Heavy transactions and investment management cost investors to underperform the companies they own.

To repurchase its shares, the company first must have available funds and second the market it is selling below its intrinsic value.

I do not know how many times I heard this between Buffet and Munger: Buy good business at fair prices rather than fair business at good prices.

Keynes: The difficulties lies not in the new ideas but in escaping from the old ones.

Buffett: First lesson: business logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return.

GAAP requires goodwill to be amortized. The economic goodwill will not decline at all, but rather will increase. (GEICO)

Except rare occasions, depreciation charges are not same as amortization charges. Pg 193

Buffett: The higher the asset figure, the higher the annual depreciation or amortization charge to earning must be.

Accountant job is to record, not evaluate, which job belong to investors and mangers.

Buffett: Accounting is but an aid to business thinking, never a substitute for it.

Buffett: Intrinsic value … is the discounted value of the cash that can be taken out of a business during its remaining life… it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.

Buffett: book value is meaningless as an indicator of intrinsic value. Pg 201

Aesop: a bird in the hand is worth two in the bush.

Buffett: Common yardsticks … have nothing to do with valuation.

Bubble-market company makes money off investor rather than for them.

Buffett: But a pin lies in wait for every bubble.

Buffett: First, many in Wall Street – a community in which quality control is not prized – will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.

Account should report: 1. How much is company worth? 2. The likehood that it can meet future obligations. 3. How good is managements.

Buffett favoir comic strip Li’l Abner

Buffet yet to be answered question on option: If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world should they go?