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Charlie Munger warns ‘lots of troubles coming’ – ‘too much wretched excess’

  
  Analysis
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Charlie Munger is Warren Buffett’s longtime business partner and vice chairman of Berkshire Hathaway

CNBC have this report up on his comments at a shareholders meeting.
  • “In China, … they love to gamble in stocks. This is really stupid,” Munger said. “It’s hard to imagine anything dumber than the way the Chinese hold stocks.”
  • To make his point about excess, Munger cited the proliferation of EBITDA as a fake profit metric. “I don’t like when investment bankers talk about EBITDA, which I call bulls— earnings,” 
Here is the link for more.

Warren Buffett Releases Monster 43-Page Half-Century Letter To Berkshire Faithful

  
  Education
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The day the Buffet “value-investing” fanatics have been looking forward to all year, almost as much as the annual pilgrimage to Omaha, has finally arrived – hours ago Warren Buffett released his historic, 50th annual letter to shareholders, which is extra special because as the Oracle notes in the foreword, “Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50 years and what each expects during the next 50.”

The foreword continues: “Neither changed a word of his commentary after reading what the other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39. Shareholders, particularly new ones, may find it useful to read those letters before reading the report on 2014, which begins below.” The result is the magnum opus of Berskshire letter, one which weighs in at 43 pages and a massive 25,100 words compared to “only” 24 pages and about 14,700 words last year, and 15,300 the year before. Almost as if Buffett is telegraphing that this may be his last letter and savoring the moment…

But first, some of the details of Berkshire’s performance, which was not quite the magnum opus Buffett may have expected, after Berkshire Hathaway posted lower earnings for the fourth quarter amid investment derivative gains of $192 million. (more…)

Warren Buffett's Letter to Shareholders

  
Analysis, Education
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warren_buffett

An excerpt:

Our gain in net worth during 2009 was $21.8 billion, which increased the per-share book value of both our Class A and Class B stock by 19.8%. Over the last 45 years (that is, since present management took over) book value has grown from $19 to $84,487, a rate of 20.3% compounded annually.*

Berkshire’s recent acquisition of Burlington Northern Santa Fe has added at least 65,000 shareholders to the 500,000 or so already on our books. It’s important to Charlie Munger, my long-time partner, and me that all of our owners understand Berkshire’s operations, goals, limitations and culture. In each annual report, consequently, we restate the economic principles that guide us. This year these principles appear on pages 89-94 and I urge all of you – but particularly our new shareholders – to read them. Berkshire has adhered to these principles for decades and will continue to do so long after I’m gone.

In this letter we will also review some of the basics of our business, hoping to provide both a freshman orientation session for our BNSF newcomers and a refresher course for Berkshire veterans.

Read Buffett’s full letter to shareholders here.


Wisdom is knowing the limits of your knowledge

  
Analysis, Education
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What does it mean to be wise? What is Wisdom?

One of the more interesting aspects to wisdom is self-awareness. “Thinking about wisdom,” writes Stephen Hall in his book Wisdom: From Philosophy to Neuroscience, “almost inevitably inspires you to think about yourself and your relationship with the larger world.” The book is an investigation into fuzzy questions such as how can it help us shed light on the process by which we deal with big decisions and dilemmas.

He writes:

Wisdom requires an experience-based knowledge of the world (including, especially, the world of human nature). It requires mental focus, reflecting the ability to analyze and discern the most important aspects of acquired knowledge, knowing what to use and what to discard, almost on a case by case basis (put another way, it requires knowing when to follow rules, but also when the usual rules no longer apply). It requires mediating, refereeing, between the frequently conflicting inputs of emotion and reason, of narrow self-interest and broader social interest, of instant rewards or future gains. Moreover, it expresses itself through an insistently social vocabulary of interactive behavior: a fundamental sense of justice (which is sometimes described as an innate form of morality, of knowing right from wrong), a commitment to welfare of social (and, for that matter, genetic) units that extend beyond the self, and the ability to defer immediate self-gratification in order to achieve the greatest amount of good for the greatest number of people. (more…)

17 Investors in One Word Each

  
  Education
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#1 Warren Buffett: Focus

This is the word Warren Buffett uses to describe himself when asked about the key to his success. He focused moe on making money than most people. A lot more than Ben Graham or Charlie Munger. Focus is also a good word to describe Buffett’s investment style. He only makes big investments on big ideas. And at some times he concentrated his investment on an industry like media & advertising in the 70s or consumer products in the 80s.

 #2 Charlie Munger: Smart

I thought he’s the smartest person I knew after reading Poor Charlie’s Almanack. I like his ideas about a multi-disciplinary approach. And I like the way he waits and bets big when opportunities appear. I agree with him that diversification is to protect against ignorance. People may think he’s arrogant. I think he has earned the right to be arrogant.

 #3 Ben Graham: Lazy

Actually Ben Graham did a lot of things. He wrote a Broadway play. He read French novels. He recited Spanish poets. Investing was just one of his interests. By lazy, I mean he didn’t focus on investing as much as Warren Buffett. He wanted to find a safe system for investing. But that doesn’t mean he’s not good. He’s great. He knows where to apply his system.

 #4 Phil Fisher: Conviction

For all his life, Phil Fisher followed what he believed. He wanted to find companies with the capabilities to constantly find new products/services for growth. And when he believed he found the right company, he never sold.

 #5 Tom Russo: Long-Term

I like his investment style. He learned to buy and hold the stocks that he understood best after listening to Warren Buffett’s talk to his Stanford business school class in 1980. He mainly focuses on food and beverage companies. And he holds for very long time. He bought one of his favorites, Nestle, in 1987. And he still owns it today. (more…)

Advantages & Disadvantages of EBITDA

  
Analysis, Education
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The Advantages of EBITDA

Although there is no silver bullet metric in financial statement analysis, nevertheless there are numerous benefits to using EBITDA. Here are a few:

  • Operational Comparability:  As implied above, EBITDA allows comparability across a wide swath of companies. Accounting standards provide leniency in the application of financial statements, therefore using EBITDA allows apples-to-apples comparisons and relieves accounting discrepancies on items such as depreciation, tax rates, and financing choice.
  • Cash Flow Proxy:Since the income statement traditionally is the financial statement of choice, EBITDA can be easily derived from this statement and provides a simple proxy for cash generation in the absence of other data.
  • Debt Coverage Ratios:In many lender contracts, certain debt provisions require specific levels of income cushion above the required interest expense payments. Evaluating EBITDA coverage ratios across companies assists analysts in determining which businesses are more likely to default on their debt obligations.

The Disadvantages of EBITDA (more…)

Seven surprising things you may not know about Warren Buffett

  
  Education
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Here are seven interesting things I learned about Warren Buffett from The Snowball, and some ideas on how they can help your investing:

1. Buffett set goals young. (He really started, really young)

Buffet began obsessing over numbers as a child. He raced marbles with a stopwatch and calculated the lifespan of hymn composers when six-years old. He sold chewing gum at seven and Coca Cola when he was eight: the same year he began wearing a money-changer on his belt.

  • His dad was a stockbroker. This gave him an early view of the markets
  • At ten he was chalking stock prices at a local broker’s office
  • The same year he visited the New York Stock Exchange, and was asked for a tip by senior Goldman Sachs partner Sidney Weinberg – an experience he never forgot
  • His favourite childhood book was One Thousand Ways to Make $1,000
  • At 11 he announced he was going to be a millionaire at 35, a seemingly crazy goal in 1941 (when a million really was a million)
  • He filed his first tax return aged 14, having already made $1,000 (equivalent to around $12,500 in today’s money)

The takeaway: The power of compound interest takes years to work its magic. None of us has a time machine, so the main lesson is not to delay a day when investing for the future.

2. Buffett bought his first stock when he was 12-years old

Warren put everything his schemes had earned him into a stock, Cities Service Preferred, when he was 12. He also enrolled his sister, Doris.

Buffet was already learning how to hold shares through a slump

He paid $114.75 dollars for three shares, and watched the stock price fall from $38.25 to $27 a share. His sister Doris was not happy. When Cities Service went back up to $40, he sold. He made $5 a share profit, and got Doris off his back. After he sold, the stock rose to $202 a share.

Takeaway: We all learn the same lessons. Buffett’s business partner Charlie Munger says that because Warren started thinking about odds, stocks, and goals before he was a teenager, he’s years ahead of the rest of us.

I used to watch share prices rise and fall on the Teletext TV service when I was 11 or 12. At the same age Buffett was learning real-world lessons on holding shares through a slump and selling too soon.

You’ll only discover whether you have the stomach to invest through a bear market or whether you’ll be sucked up by the next property bubble by being an active investor. Start with small sums, sure, but don’t delay that start.

3. Buffet lied, shoplifted, and played truant as a kid

This one was a real surprise. As a teenager Buffett revealed a wild streak. He says:

“We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the club was stolen and so were the bags. I stole hundreds of golf balls.

“I made up this crazy story for my parents – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

Takeaway: Even Buffett had to learn to be Buffett. I don’t know about you, but I found this heartening to read. Together with discovering that Buffett was a shy child who enrolled himself in Dale Carnegie’s public speaking course, it made him seem more human.

It’s easy to feel you haven’t got what it takes to make money. Some are born special, you might conclude. But Buffett’s history shows that even the world’s richest and most admired investor had to iron out his kinks.

Buffett’s history also makes me proud to be an outsider. Many of my college classmates entered the city or became management consultants, and have earned six-figure salaries for a decade. When property prices were booming, I’d sometimes wonder if I’d made the wrong decision by deciding to go it alone – even though I know that working a nine-to-five in an office and answering to some buffoon of a manager would kill me.

Discovering Buffett made being his own boss a top priority puts me in good company. I also suspect the unusual structure of Berkshire Hathaway grew out of Buffett’s non-confirming mentality.

4. Buffett is a businessman first, investor second (more…)

Investment philosophy

  
  Education
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  • “Good information, thoughtful analysis, quick but not impulsive reactions, and knowledge of the historic interaction between companies, sectors, countries, and asset classes under similar circumstances in the past are all important ingredients in getting the legendary ‘it’ right that we all strive so desperately for.” 
  • “[T]here are no relationships or equations that always work. Quantitatively based solutions and asset-allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma. The successful macro investor must be some magical mixture of an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and be a voracious reader.Reading is crucial. Charlie Munger, a great investor and a very sagacious old guy, said it best: ‘I have said that in my whole life, I have known no wise person, over a broad subject matter who didn’t read all the time — none, zero. Now I know all kinds of shrewd people who by staying within a narrow area do very well without reading. But investment is a broad area. So if you think you’re going to be good at it and not read all the time you have a different idea than I do.'” 
  • “[T]he investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner.”  (more…)
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