rss

25 Must-Read Quotes From Buffett's Letter to Shareholders

Warren Buffett released his annual letter (PDF file, Adobe Acrobat required) to Berkshire Hathaway (NYSE: BRK-B  ) on Saturday. If you have the time, it’s worth reading the whole thing. If not, here are 25 important quotes.

On value: “The logic is simple: If you are going to be a netbuyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”

On market moves: “Here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.”

On foreclosures: “A largely unnoted fact: Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.”

On share buybacks: “The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another.”

On predicting turnarounds: “Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong.” (more…)

Jim Chanos on Investment Sytle ,Short Selling ,Contrarian Trading & China

Graham & Doddsville, a Columbia Business School investment newsletter, has recently scored an interview with Jim Chanos, the founder and Managing Partner of Kynikos Associates and one of the world’s most successful short-sellers. His most celebrated short-sale of Enron shares was dubbed by Barron’s as “the market call of the decade, if not the past fifty years. Obviously, he’s still bearish on China’s property market and banking sector and his positions are starting to move his way. In this long (though very insightful) interview with G&D, Chanos talks about his background, investment style, short-selling, contrarian trading and, of course, China.

Here is an excerpt of the original interview (full interview below that… it’s long but it’s worth the read).

On Wall Street ethics:

“… I handed out a two page memo to the senior banker discussing the impact of buying back stock. The senior banker looked at me with an icy stare and stated that we were not in the business of recommending share buybacks to our clients; we were in the business of selling debt. This was my first douse of cold water regarding Wall Street and I became pretty disillusioned after that episode. I had learned that Wall Street wasn’t necessarily doing things in their clients’ best interest…” 

On timing a short-sale:

“I recommended a short position in Baldwin- United at $24 based on language in the 10-K and 10-Qs, uneconomic annuities, leverage issues and a host of other concerns. The stock promptly doubled on me. This was a good introduction to the fact that in investing, you can be really right but temporarily quite wrong… I went home to visit my parents for Christmas and received a phone call from Bob Holmes telling me that I was getting a great Christmas present – the state insurance regulator had seized Baldwin-United’s insurance subsidiaries.” 

On being a contrarian:

“… numerous studies have shown that most rational people’s decision-making breaks down in an environment of negative reinforcement… You’re basically told that you’re wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they’re hearing is not.” 

On shorting:

“We try not to short on valuation, though at some price even reasonably good businesses will be good shorts due to limitations of growth. We try to focus on businesses where something is going wrong. Better yet, we look for companies that are trying — often legally but aggressively — to hide the fact that things are going wrong through their accounting, acquisition policy or other means. Those are our bread-and-butter ideas…. Valuation itself is probably the last thing we factor into our decision. Some of our very best shorts have been cheap or value stocks. We look more at the business to see if there is something structurally wrong or about to go wrong, and enter the valuation last.

…You need to be able to weather being told you’re wrong all the time. Short sellers are constantly being told they’re wrong. A lot of people don’t function well in an environment of negative reinforcement and short selling is the ultimate negative reinforcement profession, as you are going against the grain of a lot of well-financed people who want to prove you wrong. It takes a certain temperament to disregard this.” 

On China:

“This is a bubble that has a long way to go on the downside. Residential real estate prices, in aggregate in China, at construction cost, are equal to 350% of GDP. The only two economies that ever saw higher numbers at roughly 375% were Japan in 1989 and Ireland in 2007, and both had epic property collapses. So the data does not look good for China.”

In China, everyone is incented by GDP. They are fixated on growth. In the West, we go about our economic lives, and at the end of the year the statisticians say, this year your growth was 3%. But in China, it’s still centrally planned. All state policy goes through the banking system. They decide what they want growth to be and then they try and figure out how to get there.” 

Full interview below. (more…)