An oil prospector, moving to his heavenly reward, was met by St.

Peter with bad news.

“You’re qualified for residence,” said St. Peter, “but, as you can see,
the compound reserved for oil men is packed. There’s no way to
squeeze you in.”

After thinking for a moment, the prospector asked if he might say

just four words to the present occupants. That seemed harmless to St.
Peter, so the prospector cupped his hand and yelled, “Oil discovered
in hell.”

Immediately the gates to the compound opened and all the oil men
marched out to head for the nether regions. Impressed, St. Peter
invited the prospector to move in and make himself comfortable.

The prospector paused. “No.”, he said, “I think I’ll go along with the
rest of the boys. There might be some truth to that rumour after all.
Warren Buffett

The Greatest Investor

of All Time?

2
 Outline of Presentation
w Introduction
w Buffet's Investment Style
w Buffet’s Success
w Value Investing for the Lay Investor
w Conclusion

3
 Introduction
w Warren Edward Buffett
w Born August 30, 1930, Omaha.
w Son of Howard and Leila Buffett

4
 Background
w Born during the Great Depression
w Father was a stockbroker
w Emerged with strong drive to get very rich

5
 Money-Making Schemes
M Age 6 - Peddled Coke
M Age 9 - Carrying golf clubs for $3 per day
M Age 11- Bought his first stock
M Age 11-13 - Sold used golf balls.
M Age 13 - Carrier for Washington Post and 4 other
newspapers.
M Age 14 - Bought 40 acres of farmland and leased
it out.
M Age 16 - Rented out used pinball machines
making up to $50 a week. 6
 Employment
M Worked for Buffett-Falk & Co., as an investment
salesman after graduating with a Masters in
Economics. (1951-1954)
M Worked for Graham-Newman Corp, as a
securities analyst (1954-1956)
M Formed Buffett Partnership, Ltd and appointed
himself General Partner. (1956-1969)
M Bought over Berkshire Hathaway Inc in 1962 and
became Chairman and CEO in 1970

7
 Buffett Partnership, Ltd
M $25,000 each from a group of investors
M 1st year - 5 small partnerships, totalling range of
$500,000
M 2nd year - Partnerships soared 41% (Dow 39%)
M 3rd year - Original partnership money doubled
M 1969 - Investment ballooned at compound rate of
29.5% (Dow 7.4%)

8
 Berkshire Hathaway
M A textile mill purchased in 1962. Suffering a
$2.2m loss at time of purchase. Priced at $8/share
though it had $16.50/share of working capital.
M Buffett currently holds 38% of shares, valued at
total of $36bn
M Has stakes in Coca-Cola (2nd largest
shareholder), Gillette, American Express, Disney,
McDonalds, Dairy Queen
M Currently valued at $57.8bn book value. Intrinsic
value unknown. Class A stock priced between
$61,900 and $81,100 in 1999
9
 Holdings of Berkshire
Hathaway, Inc.
w Capital deployed into other fields
– underwriting of property and casualty
insurance,
– newspaper publishing,
– retailing of home furnishings,
– retail jewellery,
– manufacture, import and distribution of
footwear
10
 Business Activities
M All operating decisions for the different
Berkshire businesses are made by the respective
managers of those business units
M All investment decisions and other capital
allocation decisions are made for Berkshire and
its subsidiaries, by Warren Buffett, in
consultation with Charles E Munger
M Main business of Berkshire Hathaway is involved
in property and casualty insurance.

11
 Warren Buffett’s Lifestyle
w Salary of $100000 a year.
w Lived in the same house for 40 years.
w Eats burgers and drinks Coke
w Only extravagance: A Gulfstream IV-SP
jet called “The Indefensible”.

12
 Buffet’s
Investment Style

13
 Buffett’s Investment Style
w Strong business fundamentals
w Buy low, sell high
w Traits of a good investor
w Intrinsic value vs stock price
w Invest for the long term
w Circle of Competence
w Minimize risks
14
 Strong Business Fundamentals
w stable company
w strong management team
w certainty of future cash flows

15
 Buy Low, Sell High
w Stocks ↓
– Investors get cold feet => sell
w Stocks ↑
– Herd instinct => buy
w In effect, buying high, selling low!

16
 Buy Low, Sell High
w Stocks ↓
– Buffett buys
w Stocks ↑
– Buffett sells
w Buy low, sell high
w Short-term market volatility does not
concern him
w Day-to-day stock quotes are meaningless
17
 Traits of a Good Investor
w difference between investors and
speculators
→ attitudes toward stock pricing
w master their emotions
w not get caught up in the market momentum
w discipline, patience, flexibility, courage,
confidence, decisiveness
18
 Intrinsic Value vs Stock Price
Critical Investment Factor
determining the intrinsic value of a business
and paying a fair or bargain price for it

Intrinsic Value
w discounted value of cash that can be taken
out of a business during its remaining life
19
 Intrinsic Value
Buffett values a company based on:
w Return on beginning shareholder’s equity
w Change in operating margins, debt levels,
& capital expenditure needs
w Company’s cash generating ability

20
 Invest for the Long Term
w Market is for buying & selling
w Fluctuations do not bother him
w Investors overreact
– Stock prices too high or low
– Do not reflect true value of company
w In long run, price ≈ true value

21
 Circle of Competence
w Draw a circle only around businesses that
he understands
w does not bother about those outside this
circle
w Never invests in businesses he cannot
understand
w Tech stocks – do they possess a durable
competitive advantage?
22
 Buffet … on tech stocks

“We're perfectly willing to trade away a big

payoff for a certain payoff.”

23
 Minimize Risks
w searches for investments in which risk is
eliminated or minimized
w only take risks where the chances of total
loss are low and gains are substantial
w reduced greatly by concentrating on only a
few holdings (opp. of diversification)
w invest over long term & in stable
companies
24
 Rule-of-Thumb
M Think of owning stock as being an owner of
the company,
M Study that company and its competition
thoroughly,
M Invest in it for the long haul (> 5 years),
M Do not use leverage, and
M Do not be led by the market's moves or by what
other investors do.

25
Buffett’s
Success

26
 Buffett’s Success
Little
Stocks = Business
Diversification

Long-term Perception

+ Folly / Wise
Oppose
Herd Discipline
Instinct

Patience Rationality
27
 Views Stocks as Business
M Buffett’s Point of M Investors’ Point of
View View
– “When investing, we – Mostly do not view
view ourselves as buying shares as
business analysts…” buying a business.
– Holistic view of – Seldom looks into the
business. management aspect of
a business.

28
 Views Stocks as Business
M Thus, investors buy stocks because of superficial
notions.
M While, Buffett buys stocks based on business
fundamentals.
M Implication is that investors will pull out of the
investment once they see signs of trouble, & this
is where they will lose money.

“I am a better investor because I am a businessman, and a

better businessman because I am an investor.” 29
 Views Stocks as Business
w Example:
– Wells Fargo
• Money-centre bank, financially strong
• Nationwide recession in 1990, set aside $1.3
billion for potential loan losses
• Stock price dropped from $86 to $41.30
• Actual losses less than expected.
• Bank remained very solvent & even had profit of
$21 million in 1991.

30
 Views Stocks as Long-term
Investment
M Buffett’s Point of M Investors’ Point of
View View
– “If the business does – Tempted to buy short-
well, the stock term for large quick
eventually follows.” profits.
– Short-term: investors’ – Stock market is the
sentiments final arbiter.
– Long-term: intrinsic
value

31
 Views Stocks as Long-term
Investment
w Example:
– Buffet managed to own Borsheims, See’s
Candy Shops, The Coca-Cola Company, The
Washington Post, Capital Cities/ ABC… all
without looking at daily price quotes.
– “He would not care if the stock market closed
for 10 years.”

32
 Good Business Judgement +
Ignoring Market Sentiments
M Buffett’s Point of M Investors’ Point of
View View
– As long as the stock is – Difficult to ignore
attractive & at market sentiments
reasonable prices, he – Require confidence
will buy boldly, no and courage
matter how pessimistic – Easily influenced
the market sentiments
are, or how high the
market level is.

33
 Good Business Judgement +
Ignoring Market Sentiments
M Examples:
– General Foods Company
• In 1980s, perceived as stodgy food co. by investors
• In 1985, price went up 3-fold after Buffett’s purchase.
– The Coca-Cola Company
• Safe co. but unappealing to investors.
• Buffett bought in 1988-1989, stock price has quadrupled.
– The Washington Post Company
• Buffett bought it even during height of 1973-1974 bear
market.
– GEICO Corporation
• Buffett bought it when others thought GEICO was going
bankrupt. 34
 Resists Inactivity + Holds Few
Stocks
M Buffett’s Point of M Investors’ Point of
View View
– Willing to say “no”. – Hard to say “no”.
– Willing to wait until a – Often felt the need to
good stock comes by. buy many stocks.
– To hold a few good – Hard to stay inactive
stocks than many
mediocre stocks.

35
 Resists Inactivity + Holds Few
Stocks
w Examples:
– In 1986
• 3 major stocks: Capital Cities/ ABC, GEICO &
The Washington Post Co. made up 93% of
Berkshire’s portfolio. (worth $1.7 billion)
• Could not find stocks that met his requirements.
– In 1987
• Market crashed, but Buffett didn’t invest.
• 3 major stocks now worth more than $2 billion.
36
 Resists Conformity
M Buffett’s Point of M Investors’ Point of
View View
– To wait for stock – To wait for stock
prices to go down prices to go up
– To add stock more – Tendency to follow
cheaply to portfolio herd instinct.

37
 Resists Conformity
w Example
– GEICO Corporation
• Made net loss of $126 million, on the brink of
insolvency.
• Many investors pulled out. Buffett bought GEICO
stocks instead.
– American Express
• Loss of $60 million.
• Stock prices fell. Buffett invested.
38
Value Investing
for the
Lay Investor

39
 Value Investing
for the Lay Investor
Analyse Buffett’s strategy in terms of :
w the period (old economy vs. new) and
circumstances,
w available resources (capital, company and
market information),
w general soundness of strategy (avoiding
risk, maximising returns)
w objectives and goals
40
 Starting Out
w Buffet started out early
w à more capital, experience
w An ordinary investor would most probably
start out in the early / late twenties onwards
w Not much capital, limited funds

41
 Starting Out
w Buffet’s peak
w à market boom, fortunate times
w Such circumstances no longer present
w Emergence of new economy, volatile
technology stocks

42
 Resources
Buffet has phenomenal resources
a) capital
b) information networks, friends in high places
c) years of experience, streetwise

The ordinary investor has

a) limited capital
b) have to rely on advice, fund managers
c) low experience, tendency to follow market trends
43
 General Soundness of Strategy
a) Looking for bargain companies, with good
management
b) Invest for the long term
c) Ignore stock market
d) Holding on to a falling company
e) Buying businesses with “strong histories of
profitability and with a dominant business
franchise”
f) Focusing on only a few holdings
44
 Objectives
Objectives and Goals
w Buffett
– Build, develop and sustain a company/ empire
w Ordinary Investor
– Increase and accumulate personal wealth, for
comfortable retirement, upgrading status in
life, affording luxuries etc.

45
 Commentary
M 1999 saw one of the worst absolute performances
since Berkshire Hathaway was formed, and also
one of the worst relative performance compared
to the S& P 500. Reason? One of the insurance
subsidiaries, General Re, suffered a huge
underwriting loss.
M Other factors: Less attractive prices of businesses
now, larger capital base now, rising media rates,
diminishing returns.
47
 Summary
w If you had put $10000 into Berkshire
Hathaway in 1965, you would have more
than $50 million today.
w But what will happen when Warren Buffett
dies? Is his personal worth tied to the
balance sheet of Berkshire Hathaway, or
will it continue to run smoothly even after
he leaves?
48
 Q&A Session

“Fools give you reasons,

wise men never try.”
– Warren Buffett
 Proudly Presented By:
Chua Woon Leng
Gerard Koh
Rachel Chong Ee Ping
Hashikin Maraican bin Mohd Latiff

Online resources available at:

http://www.comp.nus.edu.sg/~kohjoohe/wb
50