Tuesday, October 27, 2009
Monday, October 26, 2009
Evan Davis talks to Warren Buffett
David 'Sandy' Gottesman: 'He loves hamburgers'
Gates: Buffett is 'unique leader'
Don Graham's debt to Warren Buffett
Susie Buffett on being Warren's daughter
FT: How do you judge the state of the world economy? Has the world recovered from the crisis of 2007/2008?
GS: Well, certainly the financial markets have regained their composure so they’re beginning to function again, and also the world economy has overcome the shock that it has suffered because for a while everything froze and now things are moving again. So there is rebound, but I think that the facts of the crisis will take a long time for the world to absorb and the main source of the problem is in the United States. This is where consumers have spent more than they earned for a period of 25 years; where we have accumulated current account deficit that reached 6.5 per cent at its peak, which actually could have continued because there were other countries – particularly China and the Asian tigers – that were very happy to run a continuous surplus and to finance our deficit. So that could have actually continued, but the households became over-indebted and it’s the consumer who accounts for over 70 per cent of the US economy that has to cut down, and that will take a while.
Then also you’ve got the banking system that basically was bankrupted. It’s at the bottom and has to earn its way out of a hole and, again, it’s happening at a pretty fast clip because banks borrow at zero and buy 10-year government bonds, yielding 3.5 per cent, and that’s a pretty fast rate of earnings for no risk. So, they’ll earn their way out of a hole, but it will also take time. And then there’s still the whole area of commercial real estate, where the losses have not been recognised. So the source of weakness in the world will be mainly in the US consumer spending and in, let’s say, the decline in the banking sector.
FT: And is that weakness in the US sufficiently grave that there could be a W-shaped recovery, that there could be another dip downwards?
GS: Well, I think certainly there could be another dip in the stock market because, right now we are enjoying the confidence multiplier and there’s a sort of a hope that this is a crisis like the previous ones and we will just sort of recover in a V-shape recovery. So, when that hope is not fulfilled, I think that will be ...
Saturday, October 24, 2009
The presentation on “Persuasion Tactics” can be downloaded from here.
Many thanks Prof. Bakshi for sharing this wonderful presentation.
Thursday, October 22, 2009
What are the factors you look at before deciding to invest in a company? Can you give us an example?
The first thing you got to look at is, "I am not buying a stock, but I am buying a business." And you only buy the business if you were willing to buy the entire business if you had money for it. So, for example, if Reliance Industries has a market cap of $100 billion and you had a $300 billion, the question you would ask yourself is, would I buy the entire business for a $100 billion?
The first thing is that you are not buying pieces of paper, but you are buying an entire business. The second is that you ask yourself, do I understand the business? Do I truly understand how it will work, how it makes money, how will it do in the future?
Then the third thing is, if Reliance produces$3 billion a year cash flow and it trades for $100 billion, I have no intention of buying it at 33 times cash flow. It is like I have no interest in putting money in an account that pays 3% interest.
So I love Reliance, maybe, if the fair value of business is 15 times cash flow, which is $45 billion. And since I am cheapskate, I don't want to buy it for more than half its fair value, so I just say to myself, that if it goes below $20 billion in value -- or one-fifth the current price -- then I will look at it again. In fact, that is the way to look at the Indian Sensex. You take all the Reliances, the Wipros and Infosyses of the world, chop their price by four, and that's your entry price.
What has been your most successful stockpick till date?
You know that's a very funny question. The most successful company I ever invested in is Satyam. I invested in 1995, and I was completely out by 2000. When I invested the stock was at Rs 40, and Satyam's earnings at that time were about at Rs 12 a share, so you were buying a business for three-and-a-half times earnings. And the more interesting thing for me was that property the company had in Hyderabad exceeded the market capitalisation as it was carried at a value that was bought a long time ago.
The only reason I knew about Satyam was because I was in the IT services space. These guys had actually visited us to see if they could do business together. And I had been pretty impressed by the way the business operated and the people I had met.
I looked at it from my investment point of view after was amazed that such a business could trade at such a price. So I invested in Satyam. In 2000, it was trading at Rs 7,000, that is about a 150 times the price I bought it at. This was in the days before demat, and actually when I bought the stock with an account through Kotak that I had in Mumbai, I was given physical delivery of these shares that looked like tattered pieces of paper that were falling apart.
Satyam from less than a PE of 3 to more than PE of 100. I just said I am out of it because now I owned a bubble stock even though I did not buy it at bubble price. I sold my entire position within 5% of the peak. Within six months it had dropped from Rs 7,000 to Rs 1,000, and continued on the sidelines for a while. That was the best deal that I ever made.
Wednesday, October 21, 2009
CATHY BARON TAMRAZ: Greetings from San Diego, where we have just completed the Fortune Most Powerful Women’s Summit. I am Cathy Baron Tamraz, CEO of Business Wire, and I am here with the only male that is allowed into this conference and that is Warren Buffett, Chairman of Berkshire Hathaway, which is also the parent company of Business Wire. Warren has graciously agreed to answer some questions today, and kick off a conference that Business Wire and Market Platform Dynamics are holding in New York City, to launch a new Web site about the payment industry callexd PYMNTS.com. We are really excited about this new portal, which will be a primary source of news for the payments industry. It will havebreaking news and regulatory news in the payment industry, new technology and new products.
Because the payment industry is so vital to the economy, we thought it would be relevant to talk to Warren and hear his views on the state of the economy and what we can do to revitalize it. So thank you, Warren, for speaking with us today and agreeing to be interviewed by me.
WARREN BUFFETT: You are my favorite interviewer!
CBT: Thank you very much. That’s on tape, by the way. So, the first question I have for you is about the near-term future of our economy. The last 12 months feels like a really bad dream. This year has been the year that shook the world. It’s been a year since the bankruptcy of Lehman Brothers and it almost sent the economy over a cliff. We had the Bear Stearns fallout, Merrill Lynch sold to Bank of America, the AIG crisis, Fannie and Freddie falling under government control. It’s been a really difficult year. So, what do you think is going to happen now in the fourth quarter of 2009 and also in 2010?
WB: I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while.
There are things that have to be cured in the system, but this system works. If you look at this country, we have gone through the Great Depression, we have gone through world wars, we have gone through civil war, and we have progressed like no country in the world. We have the right system. It doesn’t avoid all the problems, but it overcomes all the problems.
CBT: Do you see consumer-spending increasing in the near term?
WB: No, and not for a while. I think people had an experience a year ago that they are not going to get over quickly. But the factories are there, the human potential is there, the system is there. It works over time. Your kids will live better than you and I live, and our grandchildren will live better than they do. This country moves forward.
If you take the 20th century, we had a Great Depression, world wars, a nuclear bomb, a flu epidemic. We had all these things, and at the end of the 20th century, the average American was living seven times better than at the start of the century. It’s amazing. The Dow Jones Average had gone from 66 to 11,400. So the country works, you don’t have to worry about that.
Tuesday, October 20, 2009
One of the nice aspects of trying to solve investment puzzles is recognizing that even
though I am not always going to be right, I don’t have to be. Decent portfolio management
allows for some bad luck and some bad decisions. When something does go wrong, I like to
think about the bad decisions and learn from them so that hopefully I don’t repeat the same
mistakes. This leaves me plenty of room to make fresh mistakes going forward. I’d like to
start today by reviewing a bad decision I made and share with you what I’ve learned from that
error and how I am attempting to apply the lessons to improve our funds’ prospects.
At the May 2005 Ira Sohn Investment Research Conference in New York, I
recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC
reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock
collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky
than its peers and would hold-up better in a down cycle because it had less leverage and held
less land. But this just meant that almost half a decade later, anyone who listened to me
would have lost about forty percent of his investment, instead of the seventy percent that the
homebuilding sector lost.
I want to revisit this because the loss was not bad luck; it was bad analysis. I down
played the importance of what was then an ongoing housing bubble. On the very same day, at
the very same conference, a more experienced and wiser investor, Stanley Druckenmiller,
explained in gory detail the big picture problem the country faced from a growing housing
bubble fueled by a growing debt bubble. At the time, I wondered whether even if he were
correct, would it be possible to convert such big picture macro-thinking into successful
portfolio management? I thought this was particularly tricky since getting both the timing of
big macro changes as well as the market’s recognition of them correct has proven at best a
difficult proposition. Smart investors had been complaining about the housing bubble since at
least 2001. I ignored Stan, rationalizing that even if he were right, there was no way to know
when he would be right. This was an expensive error.