Review of Seminar – Session 1
Oct 29th, 2005 by Martin Lee
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!
“The portfolio of Berkshire consists of 5 stocks that make up some 70% of the entire portfolio.”
You better check your facts there Martin. Berkshire Hathaway’s annual reports are all publically available, and I think if you do your research you will find you are wrong.
Hi David,
thanks for pointing out my slight inaccuracy.
I left out an important word ‘stock’.
What I meant to say was that if you look at the stock portfolio of Berkshire, you will find that 5 stocks make up 70% of the entire stock portfolio.
If you look at the market values of the top 5 holdings in the 2004 annual report, the number works out to be 70.9%.
True, but Berkshire Hathaway is not just a stock portfolio. It is a company with many subsidiaries, as well as some long-term investments in bonds and stocks. I couldn’t easily figure out what fraction of its holdings are in common stock.
I wouldn’t try to copy Warren Buffet’s asset allocation unless you know what you are doing.
Agreed. It is always good to have a diversified portfolio rather than just holding stock. Even though Warren invested in mainly stock when he started out, not everyone is Warren Buffett!
Of recent years, he has been holding on to more cash. Even he finds it difficult to find good buys in today’s market.
Anyway, my point is, one need not over diversify his stock holdings (of his stock portfolio) if he knows what he is doing. And how many investors do? :)
“one need not over diversify his stock holdings (of his stock portfolio) if he knows what he is doing. And how many investors do?”
Well said.