My random thoughts on Warren Buffett’s investing philosophy – 1


“I can not guarantee results to partners. What I can and do promise is that:
  1. Our investments will be chosen on the basis of value, not popularity.
  2. That we will attempt to bring risk of permanent capital loss (not short-term quotational lose) to an absolute minimum by obtaining a wide margin of safety in each commitment and a diversity of commitments; and
  3. I will have virtually our entire net worth invested in the partnership”
Power of compounding: the compounding of $100K at 5%, 10%, 15% for 10, 20, 30 years
5%
10%
15%
10
162,889
259,374
404,553
20
265,328
672,748
1,636,640
30
432,191
1,744,930
6,621,140
Method of operation:
The first category of securities that Buffett invested in was undervalued securities, which he could buy at a stiff discount compared to net worth, which offered a huge margin of safety. Securities in this category promised the highest return but Buffett cant predict when the value was fully realized.
The second category was what Buffett called “work-out”. He read newspapers for potential no-risk arbitrage situation such as M&A, liquidation, reorganization, spin-off, … “work-out” is extremely safe for Buffett since he only got into situation where he cant lose. When he’s certain, he would borrow money to buy “work-out”
Buffett believed that by buying assets at a bargain price, he doesnt need to wait for a good price to sell: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
My thought on reading Buffett’s partnership letters:
He was definitely well-trained under Graham. He was quite young when he started his partnership but was very disciplined already. Buffett talked about buying a security with a huge margin of safety and would like the stock to go down so that he could buy more of it for less. He was certainly confident with his analysis and calculation of the company’s value.
Another discipline that Buffett used was to compare his performance against the Dow average instead of his performance against the last year. This ensures that when his performance was negative, he’d still be happy if the Dow performed worst; or when his performance was positive but was below the Dow, he’d still be unhappy.
Buffett really understood the importance of having the right yardstick. He understood that anything can be made to look good in relation to something or other. He wanted to be judged against the Dow using the minimum of 3 years.
Another discipline that Buffett followed was to not make any prediction. Buffett made it very clear that he would not attempt to predict how a stock or market moves in a year or two.
A method of valuation that Buffett used was to apply discount to assets such as 40% discount on inventory, 15% discount on receivables …

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