Tag: Value Investing

Are some companies so outstanding that it’s worth paying any price for them? This question becomes particularly relevant when stock prices reach stratospheric heights.

In his 1997 Chairman’s Letter to Berkshire Hathaway’s shareholders, Warren Buffett highlighted Coca-Cola and Gillette as “The Inevitables.” He described these companies as ones that “will dominate their fields worldwide for an investment lifetime.” However, during that year’s annual meeting, Buffett clarified that even these “Inevitable” companies can be overpriced.

“You can pay too much, at least in the short run, for businesses like that,” Buffett said at the 1997 Berkshire Hathaway Annual Meeting. He emphasized that no matter how wonderful a business is, there’s always a risk of paying a price so high that it takes years for the business to catch up with the stock. Essentially, the stock can outpace the business itself.

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Throughout history, pivotal moments of insight have often emerged in the most unexpected of places. Just as the ancient Greek mathematician Archimedes famously exclaimed “Eureka!” upon his realization in a bath, so too did Warren Buffett find inspiration while soaking in his tub.

In the depths of the Great Recession in 2011, when investing in banks seemed perilous, Buffett made a bold move. His “Eureka moment” led him to invest $5 billion in Bank of America, a decision that raised eyebrows at the time but ultimately proved to be immensely profitable. Over the years, this investment brought Buffett over $22 billion in returns.

Yet, Buffett himself is quick to downplay the significance of the bathtub in his revelation. Speaking at the 2013 Berkshire Hathaway Annual Meeting, he attributed his moment of clarity not to the water around him, but to the vast reservoir of knowledge he had accumulated over decades. He recalled reading “Biography of a Bank” more than 50 years prior, a book chronicling the history of banking and the likes of A.P. Giannini, the founder of Bank of America. This foundational understanding of the industry, cultivated over half a century, laid the groundwork for his inspired investment.

In essence, both Archimedes and Buffett exemplify the power of preparation meeting opportunity. While the setting may differ, the common thread remains: a deep understanding of their respective fields paved the way for their moments of genius. Whether it’s a bathtub or a boardroom, the lesson endures—the path to enlightenment is often paved with knowledge and experience.

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

If you’re searching for a book to guide you to financial success, Warren Buffett recommends Benjamin Graham’s “The Intelligent Investor” as the essential read.

At the 2012 Berkshire Hathaway Annual Meeting, Buffett highlighted two chapters as particularly crucial: “Chapters 8 and 20 are really all you need to do to get rich in this world.”

In Chapter 8, Graham introduces the concept of “Mr. Market,” a metaphor for the stock market’s volatility. Buffett explained, “In the market, you’re going to have a partner named ‘Mr. Market,’ and the beauty of him as your partner is that he’s kind of a psychotic drunk. He will do very weird things over time, and your job is to remember that he’s there to serve you, not to advise you.”

Buffett emphasized the importance of maintaining a rational perspective: “If you can keep that mental state, then all those thousands of prices that Mr. Market is offering you every day on every major business in the world, practically, he is making lots of mistakes. He makes them for all kinds of weird reasons. All you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security.”

By understanding and applying these principles, investors can leverage market fluctuations to their advantage and achieve financial success.

Buffett’s full explanation

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Excessive speculation has repeatedly been the downfall of investors and markets. As Warren Buffett points out, it often starts innocently enough when early investors discover a previously overlooked opportunity. Initially driven by sound fundamentals, the opportunity begins to spread. But as more people get involved, it loses its connection to reality and turns into pure speculation, inevitably leading to a bad outcome.

At the 2006 Berkshire Hathaway Annual Meeting, Buffett illustrated this with a timeless observation: “What the wise man does in the beginning, the fool does in the end.” He explained that when any asset class experiences a significant rise, initially due to fundamentals, it eventually attracts speculative interest. Over time, this speculation can overshadow the fundamentals. He referenced the famous example of tulip bulbs, noting that while they may have initially been valued for their beauty, it was the speculative frenzy that drove prices to absurd levels. As people saw others profiting effortlessly, envy and greed took over, leading to inevitable disaster.

Hear Buffett’s full explanation

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

In recent years, Special Purpose Acquisition Companies (SPACs) became a popular investment vehicle, offering a way for private companies to go public without the traditional initial public offering (IPO). This trend attracted retail investors eager to own shares in the next hot company. However, as the initial excitement waned, many investors found themselves holding stocks that significantly declined in value.

Warren Buffett, renowned for his investment wisdom, has been skeptical of SPACs from the start. One critical issue he highlighted is the inherent pressure for SPACs to acquire a company within two years or return the funds to investors. This deadline can drive SPAC managers to make hasty deals, regardless of their long-term benefits for investors.

“If you put a gun to my head and said, ‘You’ve got to buy a big business in two years,’ you know, I’d buy one. But it wouldn’t be much of one,” Buffett remarked at the 2021 Berkshire Hathaway Annual Meeting.

Buffett recalled an interaction with a well-known figure who needed to invest the money quickly to avoid returning it to investors. “I had a call from a very famous figure many years ago who was involved in it and wanted to learn about reinsurance. And I said, ‘Well, I don’t really think it’s a very good business.’ And he said, ‘Yeah, but,’ he says, ‘if I don’t spend this money in six months, I’ve got to give it back to the investors.’ So, you know, it’s a different equation that you have if you’re working with other people’s money, where you get the upside and you have to give it back to them if you don’t do something. ”

Hear Buffett’s full explanation

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Warren Buffett, one of the most successful investors of all time, emphasizes a critical lesson for investors: history often repeats itself because people fail to learn from it. Speaking at the 2004 Berkshire Hathaway Annual Meeting, Buffett remarked, “What we learn from history is that people don’t learn from history.”

This observation is particularly relevant in financial markets, where boom and bust cycles are common. Despite past experiences with market excesses, investors frequently make the same mistakes, chasing quick profits during booms and panicking during busts.

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

When bull markets reach their zenith, a familiar spectacle unfolds: a flurry of companies rushing to go public through Initial Public Offerings (IPOs). Yet, amidst the fervor of investors clamoring for shares, one legendary investor remains notably aloof: Warren Buffett.

To Buffett, the allure of IPOs fades in comparison to the potential pitfalls they harbor.

Buffett’s skepticism stems from a fundamental principle: the pursuit of value. In his eyes, the frenzy surrounding IPOs often fails to yield favorable pricing. Unlike scanning through established companies in the stock market, where bargains may be unearthed, the IPO landscape presents a different dynamic. Negotiated sales dominate, making it arduous to secure advantageous deals. Drawing parallels to real estate transactions in his hometown of Omaha, Buffett illustrates how sellers in negotiated deals are keenly aware of market prices, thereby limiting the scope for bargains.

Central to Buffett’s argument is the concept of auction markets versus negotiated sales. In auction markets, where shares of established companies trade, the possibility of stumbling upon undervalued assets is more pronounced. This stands in stark contrast to IPOs, which mirror negotiated sales. Here, the seller dictates the terms, often without regard to the buyer’s interests or market conditions.

Buffett’s insights, articulated at the 2004 Berkshire Hathaway Annual Meeting, offer a timeless lesson in market dynamics. He underscores the importance of understanding the fundamental differences between auction markets and negotiated deals, highlighting the potential for occasional extraordinary bargains in the former.

In essence, Buffett’s stance on IPOs serves as a reminder to investors: the allure of new offerings may be enticing, but true value often lies in the patient pursuit of opportunities in the stocks that are already trading.

Hear Buffett’s full explanation

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

A cornerstone of Warren Buffett’s strategy for identifying a worthwhile company, whether for full acquisition or just a minority stake, lies in determining its intrinsic value. For Buffett, intrinsic value is centered on the business’s future cash flow, akin to the interest paid on a bond. However, unlike bonds, stocks do not have their “interest rate” clearly printed.

At the 1997 Berkshire Hathaway Annual Meeting, Buffett explained, “If we could see what a business’s future cash inflows or outflows to and from the owners would be over the next hundred years, or until the business ceases to exist, and then discount that back at the appropriate interest rate, we would have a number for intrinsic value.”

Buffett likened this process to evaluating a bond with numerous future coupons. The value of a bond with 5% coupons differs from one with 7% coupons, just as different businesses have varying future “coupons.” The challenge for investors is estimating these future coupons, as they are not printed on the stock. This estimation is crucial for determining the intrinsic value and making informed investment decisions.

Buffett’s full explanation on determining intrinsic value

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Warren Buffett’s ascent to becoming one of the world’s wealthiest individuals is often attributed to his exceptional investing skills. As of July 2024, Buffett’s fortune stood at over $157 billion, despite having donated more than $55 billion to philanthropic causes.

In a statement released in June 2024, announcing his latest charitable donations of 13,008,758 shares of Berkshire Hathaway “B” stock to five foundations, Buffett reflected on the simple yet powerful factors behind his wealth. He highlighted four key elements: a long runway, sound capital deployment, the American economic tailwind, and the power of compounding.

Long Runway: Buffett’s journey began early when he bought his first stock at age 11—three shares of Cities Service preferred at $38 per share. From that young age, he consistently invested, allowing his investments to grow over the next 83 years.

Sound Capital Deployment: Buffett emphasized not just saving but investing. He ensured that his money was actively working to generate more wealth. His strategy involved investing in stocks and businesses that would yield returns greater than the initial investment.

The American Tailwind: Buffett has frequently noted that the productivity and strength of U.S. businesses provide a favorable environment for prudent investors. The collective success of the U.S. economy has been a significant driver of his wealth.

Compounding: The ability of investments to compound over long periods has been crucial. Compounding adds exponential growth to investments, significantly boosting wealth over time.

While few may reach Buffett’s level of wealth, adopting his principles of early investing, strategic capital deployment, leveraging the strength of the economy, and harnessing the power of compounding can help individuals grow their own wealth effectively.

See the complete Lessons From Warren Buffett series

© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

When stocks experience sharp declines, news outlets often criticize the resulting market volatility. However, Warren Buffett views volatility as a significant advantage for investors.

“Volatility is a huge plus to the real investor,” Buffett remarked at the 1997 Berkshire Hathaway Annual Meeting. He referenced Ben Graham’s concept of “Mr. Market,” where the stock market is likened to an obliging partner who daily offers to buy or sell shares at a fluctuating price. In a private business, such daily buy-sell offers are unheard of, but the stock market provides this unique opportunity.

Buffett explained that this partner, “Mr. Market,” is akin to a “heavy-drinking manic depressive.” The more unpredictable and erratic the market behaves, the greater the chances for investors to profit from mispriced stocks. For those not on margin, volatility is a welcome phenomenon, presenting numerous opportunities for smart investments.

Buffett’s full explanation on volatility

See the complete Lessons From Warren Buffett series

© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.