Category Archives: Quotes

Fear is the foe of the faddist, but the friend of the fundamentalist

A Bloomberg report (Buffett Broadens Portfolio by Spending $23.9 Billion in Quarter) dated Nov 7, 2011, said that Warren Buffett’s Berkshire Hathaway Inc invested US$23.9 billion in the third-quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings.

“Buffett, 81, drew down Berkshire’s cash as Europe’s debt crisis and Standard & Poor’s downgrade of the US pushed stocks to their worst quarterly performance since 2008. The investments disclosed Nov 4 include $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp. and the acquisition of Lubrizol Corp. for about $9 billion,” the report said.

Why was Warren Buffett’s Berkshire Hathaway investing at a time when market sentiment had been hit by eurozone crisis and US economic woes?

Mr Buffett’s letter to Berkshire Hathaway shareholders (March 7, 1995) for Year 1994 gave an insight into his investment approach.

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of
the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%,” the Year 1994 letter said.

Mr Buffett went on to say in the letter: “But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”

To underscore this point, Mr Buffett also said in the Year 1994 letter: “A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

When financial institutions swim naked

“You only learn who has been swimming naked when the tide goes out…”

This quote comes from Warren Buffett in his letter (February 2008) to Berkshire Hathaway shareholders for Year 2007. Mr Buffet was commenting on the woes facing financial institutions.

Here is an excerpt:
“Some major financial institutions have, however, experienced staggering problems because they engaged in the ‘weakened lending practices’ I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: ‘It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.’

“You may recall a 2003 Silicon Valley bumper sticker that implored, ‘Please, God, Just One More Bubble.’ Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.

“As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Warren Buffett: French cuisine or take-out chicken?

warrenbuffettstockfreeIs a corporation trying to attract shareholders akin to a restaurant trying to attract potential customers?

In his letter dated March 3, 1980 for FY1979 to Berkshire Hathaway stakeholders, Warren Buffett said: “Phil Fisher, a respected investor and author, once likened the policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A restaurant could seek a given clientele – patrons of fast foods, elegant dining, Oriental food, etc. – and eventually obtain an appropriate group of devotees. If the job were expertly done, that clientele, pleased with the service, menu, and price level offered, would return consistently.”

The letter cautioned that restaurant could not change its character constantly and end up with a happy and stable clientele.

If the business vacillated between French cuisine and take-out chicken, the result would be a revolving door of confused and dissatisfied customers,” said the letter. “So it is with corporations and the shareholder constituency they seek. You can’t be all things to all men, simultaneously seeking different owners whose primary interests run from high current yield to long-term capital growth to stock market pyrotechnics, etc.”

One thing that Warren Buffett found puzzling is “the reasoning of managements that seek large trading activity in their shares”. “In effect, such managements are saying that they want a good many of the existing clientele continually to desert them in favor of new ones – because you can’t add lots of new owners (with new expectations) without losing lots of former owners,” said the FY1979 letter.

“We much prefer owners who like our service and menu and who return year after year. It would be hard to find a better group
to sit in the Berkshire Hathaway shareholder “seats” than those already occupying them. So we hope to continue to have a very
low turnover among our owners, reflecting a constituency that understands our operation, approves of our policies, and shares
our expectations. And we hope to deliver on those expectations,” said the Warren Buffett letter.

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

Warren Buffett looks for enduring moat

moatfreeWarren Buffett: “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.”

Mr Buffett said this in his letter to Berkshire shareholders (February 2008) for Year 2007.

Illustrating on this ‘moat’ concept, Mr Buffett said: “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.”

So what industries does Mr Buffet rule out then?

“Our criterion of ‘enduring’ causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

“Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

“But if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013

America’s best days lie ahead

statuelibertyThis line came from Berkshire Hathaway chairman Warren Buffett in his annual letter (26 February 2011) to shareholders for Year 2010.

To the prophets of doom, Warren Buffett has this to say: “The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.”

In the FY2010 letter (26 February 2011), Warren Buffett said that last year – in the face of widespread pessimism about our economy – “we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment.”

Here is a great excerpt from his letter:
“Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk of ‘great uncertainty.’ But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain.
“Don’t let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
“We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013