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WISDOM OF: Warren Buffett

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  • WISDOM OF: Warren Buffett

    Over the years, I have spent a lot of money on books, tapes, seminars, bootcamp, etc. to try to learn how to invest in properties. Then, one day it just dawned on me. "Is it possible to learn from the richest man in the world and apply Warren Buffett's stock investing techniques to commercial property investing?"

    An excellent source containing Warren Buffet's wisdom is his Letters to Shareholders written in the last 30 years, which are available from www.berkshirehathaway.com. In the following weeks, I plan to go through each of the letters, pick out his wisdom, and write down my thoughts on how to apply them in my commercial property investing.

    The earliest letter available on his website is 1977.

  • #2
    Warren Buffett Letter to Shareholders 1977

    Source: http://www.berkshirehathaway.com/letters/1977.html

    We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.
    Warren Buffet has been using these four rules for over 30 years. He still mentioned them in recent interviews.

    Translated into commercial property investing:
    (1) means buying commercial properties that I can understand, e.g. retail
    (2) means choosing a location with good long-term prospects, e.g. CBD, Newmarket in Auckland
    (3) means having good tenants. If I can start with a vacant property, that's even better.
    (4) means exactly the same -- bargain hunting!


    • #3
      Warren Buffett

      Hello Fudosan

      I too am a great Buffett fan and enjoy his wisdom. 'Essays of Warren Buffett' is a condensation from his letters to shareholders (which I am waiting to start shortly). It is supposed to be easier reading than trawling through his letters!


      • #4
        Hello King13. I'll be interested in knowing what you have learned from Warren Buffett. I like the advice you gave to a 17 year old in http://www.propertytalk.com/forum/sh...378#post116378

        Yes, "Essays of Warren Buffett" is the one. It's written by Lawrence A. Cunningham and is the best book that Warren Buffett picked a while ago to truly reflect his thoughts. Warren said this book is basically a rewrite/re-arrangement of the Letters to Shareholders into a form easy to understand. I have not read this book, but I prefer the original letters instead.
        Last edited by fudosan; 05-03-2009, 10:04 PM.


        • #5
          Warren Buffett

          Hi Fudosan

          Had forgotten that post! I am not much of a poster, unless something really gets me going.

          Buffett is a great investor and he is also a wonderful human being. Inspite of his wealth, he remains down-to-earth, practical and can simplify investment & life principles. Your byline has his golden rules of investment which are so sensible. Now if only we can develop the discipline to follow them!

          My current favorite Buffett quote is that you don't have to swing the bat at every pitch sent your way. You must have the patience to wait for the perfect pitch before swinging.

          I also like Benjamin Graham's definition of investment 'an operation which, upon thorough analysis promises safety of principal and an adequate return; operations not meeting these requirements are speculative'.

          You Tube has some Buffett interviews which are fascinating and very insightful. Can go on...ad nauseam.


          • #6
            The book you guys are talking about is a good and interesting read.
            It is also interesting to see how his point of view on some things changed over the years on things such as corporate jets.


            • #7
              Warren Buffett Letter to Shareholders 1978

              Source: http://www.berkshirehathaway.com/letters/1978.html

              While we believe it is improper to include capital gains or losses in evaluating the performance of a single year, they are an important component of the longer term record.
              Ignore "total return" (cap rate + capital growth) which is commonly used in the industry. Focus on cap rate, while understanding the benefit of capital growth in the long term.

              We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively. We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action.
              For (1) he also uses the term "circle of competence," which means becoming an expert in a small area.

              We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying.
              Warren Buffett has said in numerous times that he prefers stock prices going down so that he can buy more, just like shopping at your local supermarket. This works in commercial property investment when lowered prices give good cashflow.

              We paid less than 100 cents on the dollar for the best company in the business, when far more than 100 cents on the dollar is being paid for mediocre companies in corporate transactions.
              Bargain hunting!

              Ben is now 75 and, like Gene Abegg, 81, at Illinois National and Louie Vincenti, 73, at Wesco, continues daily to bring an almost passionately proprietary attitude to the business. This group of top managers must appear to an outsider to be an overreaction on our part to an OEO bulletin on age discrimination. While unorthodox, these relationships have been exceptionally rewarding, both financially and personally. It is a real pleasure to work with managers who enjoy coming to work each morning and, once there, instinctively and unerringly think like owners. We are associated with some of the very best.
              Be creative and unconventional when trying to recruit outstanding tenants.


              • #8
                Like you King13, I also admire him as a person.

                You Tube has some Buffett interviews which are fascinating and very insightful.
                They are gems. I intend to cover them after I have completed the letters.


                • #9
                  Warren Buffett Letter to Shareholders 1979

                  Source: http://www.berkshirehathaway.com/letters/1979.html

                  The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) ... Ben Rosner, at Associated Retail Stores, continues to pull rabbits out of the hat - big rabbits from a small hat. Year after year, he produces very large earnings relative to capital employed - realized in cash and not in increased receivables and inventories as in many other retail businesses - in a segment of the market with little growth and unexciting demographics. Ben is now 76 and, like our other "up-and-comer", Gene Abegg, 82, at Illinois National and Louis Vincenti, 74, at Wesco, regularly achieves more each year.
                  In commercial property investing, the aim is to minimize debt but generate high cash income. When it comes to borrowing, Warren Buffett's philosophy is "Neither a short-term borrower nor a long-term lender." In other words, he borrows long but lends short.

                  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. But the 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.

                  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.
                  In commercial property investing, this can mean seeking the kind of tenants we are comfortable working with.


                  • #10
                    Warren Buffett Letter to Shareholders 1980

                    Source: http://www.berkshirehathaway.com/letters/1980.html

                    It is encouraging, moreover, to realize that our record was achieved despite many mistakes. The list is too painful and lengthy to detail here. But it clearly shows that a reasonably competitive corporate batting average can be achieved in spite of a lot of managerial strikeouts.
                    Aim for outstanding performance, but accept painful mistakes.

                    We have written in past reports about the disappointments that usually result from purchase and operation of "turnaround" businesses. ... GEICO may appear to be an exception, having been turned around from the very edge of bankruptcy in 1976. It certainly is true that managerial brilliance was needed for its resuscitation, and that Jack Byrne, upon arrival in that year, supplied that ingredient in abundance.

                    But it also is true that the fundamental business advantage that GEICO had enjoyed - an advantage that previously had produced staggering success - was still intact within the company, although submerged in a sea of financial and operating troubles.

                    GEICO was designed to be the low-cost operation in an enormous marketplace (auto insurance) populated largely by companies whose marketing structures restricted adaptation. Run as designed, it could offer unusual value to its customers while earning unusual returns for itself. For decades it had been run in just this manner. Its troubles in the mid-70s were not produced by any diminution or disappearance of this essential economic advantage.

                    GEICO's problems at that time put it in a position analogous to that of American Express in 1964 following the salad oil scandal. Both were one-of-a-kind companies, temporarily reeling from the effects of a fiscal blow that did not destroy their exceptional underlying economics. The GEICO and American Express situations, extraordinary business franchises with a localized excisable cancer (needing, to be sure, a skilled surgeon), should be distinguished from the true "turnaround" situation in which the managers expect - and need - to pull off a corporate Pygmalion.
                    Don't touch a property if the basics are bad, e.g. leaky buildings, buildings on leashold land, retail shops with very little foot traffic. However, a short-term crisis may create excellent property buying opportunities, e.g. power disruption, street mobs, flood in central business area.

                    Unlike most businesses, Berkshire did not finance because of any specific immediate needs. Rather, we borrowed because we think that, over a period far shorter than the life of the loan, we will have many opportunities to put the money to good use. The most attractive opportunities may present themselves at a time when credit is extremely expensive - or even unavailable. At such a time we want to have plenty of financial firepower.

                    Our acquisition preferences run toward businesses that generate cash, not those that consume it. As inflation intensifies, more and more companies find that they must spend all funds they generate internally just to maintain their existing physical volume of business. There is a certain mirage- like quality to such operations. However attractive the earnings numbers, we remain leery of businesses that never seem able to convert such pretty numbers into no-strings-attached cash.

                    Businesses meeting our standards are not easy to find. (Each year we read of hundreds of corporate acquisitions; only a handful would have been of interest to us.) And logical expansion of our present operations is not easy to implement. But we'll continue to utilize both avenues in our attempts to further Berkshire's growth.

                    Under all circumstances we plan to operate with plenty of liquidity, with debt that is moderate in size and properly structured, and with an abundance of capital strength. Our return on equity is penalized somewhat by this conservative approach, but it is the only one with which we feel comfortable.
                    Build up a large revolving credit facility to allow us to act quickly when a bargain comes around, while it does not incur interest cost when not used. Also, keep looking for properties that generate cash, not those that consume it.


                    • #11
                      Warren Buffett?

                      You Buffett fans need to check the news more often. Buffett has lost billions. In fact, according to CNBC, Berkshire Hathaway now has a higher risk of default than Russia.

                      Given that Buffett has been investing since the early 1960s, this would tend to indicate that the current crisis is much worse than any crisis he has experienced.


                      • #12
                        Just read "Snowball". Fantastic read. What else can you say.


                        • #13
                          What else can you say? You could say that it was a fantastic read, just like Moby Dick, another piece of American fiction.


                          • #14
                            Warren Buffett Letter to Shareholders 1981

                            Source: http://www.berkshirehathaway.com/letters/1981.html

                            During 1981 we came quite close to a major purchase involving both a business and a manager we liked very much. However, the price finally demanded, considering alternative uses for tbuhe funds involved, would have left our owners worse off than before the purchase. The empire would have been larger, but the citizenry would have been poorer.
                            The first three of his Four Golden Rules are fine, but the last one is not met, so NO GO! Price must be very attractive and capital gain issue does not enter into the buying decision.

                            Over half of the large gain in Berkshire's net worth during 1981 - it totaled $124 million, or about 31% - resulted from the market performance of a single investment, GEICO Corporation.
                            It appears the 80/20 principle is working here, where a few investments contribute the most to the overall portfolio.

                            Berkshire continues to retain its earnings for offensive, not defensive or obligatory, reasons.
                            Re-invest profit to buy more properties if the Four Golden Rules are met.


                            • #15
                              Warren Buffett Letter to Shareholders 1982

                              Source: http://www.berkshirehathaway.com/letters/1982.html

                              As we look at the major acquisitions that others made during 1982, our reaction is not envy, but relief that we were non- participants. For in many of these acquisitions, managerial intellect wilted in competition with managerial adrenaline The thrill of the chase blinded the pursuers to the consequences of the catch. Pascal's observation seems apt: "It has struck me that all men's misfortunes spring from the single cause that they are unable to stay quietly in one room."
                              Avoid the thrill in just doing deals, but focus on result of purchase.

                              Should the stock market advance to considerably higher levels, our ability to utilize capital effectively in partial-ownership positions will be reduced or eliminated. This will happen periodically: ...
                              Stop buying when prices are too high, during boom.

                              Berkshire’s economic goal remains to produce a long-term rate of return well above the return achieved by the average large American corporation.
                              Aim for cap rate higher than the industry average.

                              This annual report is read by a varied audience, and it is possible that some members of that audience may be helpful to us
                              in our acquisition program.

                              We prefer:
                              (1) large purchases (at least $5 million of after-tax earnings),
                              (2) demonstrated consistent earning power (future projections are of little interest to us, nor are “turn-around” situations),
                              (3) businesses earning good returns on equity while employing little or no debt,
                              (4) management in place (we can’t supply it),
                              (5) simple businesses (if there’s lots of technology, we won’t understand it),
                              (6) an offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

                              We will not engage in unfriendly transactions. We can promise complete confidentiality and a very fast answer as to possible interest - customarily within five minutes. Cash purchases are preferred, but we will consider the use of stock when it can be done on the basis described in the previous section.
                              Is it possible to make a cash offer decision in 5 minutes? I think so. You start by concentrating on a small geographical area, and study properties in that area. I've been practising this strategy for a while and now there are already some properties in my area that I know very well and can make a cash offer decision within 5 minutes. SPEED! CASH!

                              In a characteristically rash move, we have expanded World Headquarters by 252 square feet (17%), coincidental with the signing of a new five-year lease at 1440 Kiewit Plaza.
                              Small office, but big investment portfolio