In this session, we are shown the awesome track record of Warren Buffett. In just 40 years, the earnings of Berkshire Hathaway has grown from one million to eight billion dollars. And the stock price has grown from $7 to $80,000. That’s ten times the price every ten years!
Here’s a self-made billionaire who as a kid, started off by delivering newspapers (Later on, this also turned out to be one of his best investments, Washington Post). His investment methods were taught by Benjamin Graham. I would certainly be getting hold of the two investment classics written by Ben, The Intelligent Investor and Security Analysis.
One thing that Warren values is reputation. He once told his son:”It takes a lifetime to build a reputation and only five minutes to ruin it. And if you think about that, you might do things differently.”
In his annual letter to his managers, he always begins it the same way:”Dear all-star manager, we can afford to lose money. In fact, we can afford to lose a lot of money. But never do anything in business that you wouldn’t want published on the front page of your local newspaper written by an intelligent but critical reporter.”
If we look at the recent scandals in the corporate world, we can see many cases of management ‘cooking’ the books to make their earnings report look good as well as enhance their own performance bonus. All these takes place at the expense of shareholders!
The character and values of the management is certainly something to look out for next time we read those annual reports. Using Einstein’s famous formula, we derive another formula: Earnings = Management x Character x Character.
The portfolio of Berkshire consists of 5 stocks that make up some 70% of the entire portfolio (Please see comments for a slight correction). Certainly, we do not see diversification here. If you know what you are buying, what’s stopping you from buying more of something that is of value? Finding a good stock is already difficult. How are you going to find 20 good stocks if you limit yourself to 5% of your portfolio for any stock?
On the other hand, if you do not know what you are doing or understand what you are buying, you are taking a big risk!