Sunday, March 2, 2008

Buffett dines out on a good result: You can too!

The enduring brand "Coca Cola" is one of the companies that
has made Warren Buffett's investment portfolio such a rip
roaring success.

*Get the latest Warren Buffett letter to shareholders here- Direct PDF 464 KB
*In blog format

*letters going back to 1977 also available here

Let me pick out some of my favourite parts from warren Buffett's latest letter to Berkshire Hathaway(BRK-A) shareholders. Gems of investment gold for readers to take on board:

"Insurance float – money we temporarily hold in our insurance operations that does not belong to
us – funds $59 billion of our investments. This float is “free” as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, insurance underwriting is volatile, swinging erratically between profits and losses. Over our entire history, however, we’ve been profitable, and I expect we will average break even results or better in the future. If we do that, our investments can be viewed as an unencumbered source of value for Berkshire shareholders".

That 59 billion that Berkshire Hathaway has isn't profit or retained earnings it is cash flow that has come in directly through the company's many insurance business.

That shows the importance in business that cash flow has and what you can do with it. In Buffett's case he has spun-off proceeds from the big money earner to use to buy other businesses. This is something I do with my share portfolio. The big dividend payer(around 15% net annual div) Sky City Entertainment(SKC) I have used consistently to buy share holdings in other companies I like, the NZ$20000.00 I receive in annual dividends from SKC and my other portfolio holdings have helped build my holdings consistently.

Nowhere as big as the Big Buffett Boy's portfolio but who knows, I could get there in the end.

Buffett and his business partner Charlie Munger have strict criteria when picking businesses to buy:

'Charlie and I look for companies that have a) a business we understand; b) favorable long-term

economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases.

It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.
A truly great business must have an enduring “moat” that protects excellent returns on invested
capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.

Therefore a formidable barrier such as a company’s being the low cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed".

I simply love the idea of what Buffett calls a "moat" business and the importance he places on that moat being retained as long as possible so as to achieve spectacular returns.

It is hard to pick a moat business in New Zealand but one that I think fits his criteria somewhat is Goodman Fielder(GFF), the Australasian food giant, that I have a small holding in. While not as moat worthy as Buffett's large shareholding in Coca Cola(KO) or Gillette, GFF is more like Buffett's shareholding in the company, Kraft Foods(KFT).

Plenty of brand strength, easily understood companies and steady, if not solid cash flows.

People have to eat!

While Buffett commented on the sad state of Americas trade imbalance with the rest of the world, especially China, pointing the finger at overspending US citizens on credit, he also looked for the long-term in his country's economy:

"At Berkshire, we will attempt to further increase our stream of direct and indirect foreign earnings. Even if we are successful, however, our assets and earnings will always be concentrated in the U.S.

Despite our country’s many imperfections and unrelenting problems of one sort or another, America’s rule of law, market-responsive(capitalistic) economic system, and belief in meritocracy are almost certain to produce ever growing prosperity for its citizens".

Very true, but longer term China is going to finish first, if it doesn't return to that other "ism", communism.

The United States must turn its hand at being a much larger exporter, its goods are in high demand overseas and its lower dollar makes China a very big opportunity for them indeed. Their protectionism when it comes to trade must be lowered dramatically.

Now while Buffett's politics are more to the left of centre and mine are more truly capitalist, I would give Buffett more benefit to himself for his success in life rather than his "start in life":

"At 84 and 77, Charlie and I remain lucky beyond our dreams. We were born in America; had

terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being.

Moreover,we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Every day is exciting to us; no wonder we tap-dance to work. But nothing is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 3rd at the Qwest for our annual Woodstock for Capitalists. We’ll see you there".

Buffett is wrong, the "business gene" that he talks about is inside everyone. While Warren may have been lucky in business and investing a few times, it is what he learn't for himself that made him the success he is today.

He studied, worked hard and had the stick ability and long-term goals to be able to achieve what he did.

Most of us are capable of the same.

Related Share Investor reading

Warren Buffett's 2007 letter to Berkshire Hathaway highly anticipated
Warren Buffett 2007 Letter in Blog Format
Global market meltdown: What is Warren Buffett doing?
The Intelligent Investor: Book review

Related Amazon Reading

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham
Buy new: $14.95 / Used from: $10.74
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c Share Investor 2008

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