👑 It was wonderful to meet Charlie Munger and Warren Buffett last weekend.
Berkshire Hathaway has built an empire of more than $700 billion.
Here's how they've done it:
Berkshire Hathaway has built an empire of more than $700 billion.
Here's how they've done it:
1. Think like an owner
The entire philosophy of Berkshire Hathaway is built on the fact that Warren and Charlie think like owners.
They try to acquire entire businesses and when they buy just a part of a company, they act like they would own it completely.
The entire philosophy of Berkshire Hathaway is built on the fact that Warren and Charlie think like owners.
They try to acquire entire businesses and when they buy just a part of a company, they act like they would own it completely.
This means Charlie and Warren are not not stock pickers, but business pickers. This is a fundamental difference as you can see here:
2. Capital allocation is key
Allocating capital is the key task of Buffett at Berkshire Hathaway.
Both gentlemen aren’t involved in the daily operations of the companies they own.
Instead, they direct capital at their subsidiaries and select the CEOs who make daily decisions.
Allocating capital is the key task of Buffett at Berkshire Hathaway.
Both gentlemen aren’t involved in the daily operations of the companies they own.
Instead, they direct capital at their subsidiaries and select the CEOs who make daily decisions.
As an investor you should invest in companies which are led by managers who are experts in allocating capital efficiently.
Berkshire Hathaway as well as Constellation Software are two great examples.
Berkshire Hathaway as well as Constellation Software are two great examples.
3. Skin in the game matters
More than 99% of Warren Buffett’s net worth is invested in Berkshire Hathaway.
This means that Warren will do everything he possible can to maximize the value for shareholders and himself.
More than 99% of Warren Buffett’s net worth is invested in Berkshire Hathaway.
This means that Warren will do everything he possible can to maximize the value for shareholders and himself.
Academic research has proven that companies with skin in the game outperform the market by 3.7% per year on average.
4. Focus on intrinsic value
While in the short term the market is a voting machine, in the long term it’s a weighting machine.
In the long term, it’s all about the growth of the intrinsic value of the companies you own.
While in the short term the market is a voting machine, in the long term it’s a weighting machine.
In the long term, it’s all about the growth of the intrinsic value of the companies you own.
You can calculate it as follows:
Growth in intrinsic value = free cash flow per share growth + dividend yield
“Our long‐term economic goal is to maximize the average annual rate of gain in intrinsic business value on a per‐share basis.” - Warren Buffett
Growth in intrinsic value = free cash flow per share growth + dividend yield
“Our long‐term economic goal is to maximize the average annual rate of gain in intrinsic business value on a per‐share basis.” - Warren Buffett
5. Return on invested capital matters
A high and consistent Return On Invested Capital (ROIC) is a must for quality investors.
Warren Buffett already stressed this in his annual letters of the 70s.
A high and consistent Return On Invested Capital (ROIC) is a must for quality investors.
Warren Buffett already stressed this in his annual letters of the 70s.
A company’s ROIC must be higher than its cost of capital because otherwise the company will destroy shareholder value when they invest for growth.
6. Cash is like oxygen
Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.
At the end of the year, Berkshire had almost $128 billion in cash.
Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.
At the end of the year, Berkshire had almost $128 billion in cash.
Why? Because Warren Buffett’s entire empire is built on the principle that they will always avoid behavior that could result in uncomfortable cash needs at inconvenient times.
7. Good businesses are rare
It’s a misconception that Warren Buffett is a value investor.
Over the years, Warren Buffett has evolved from a pure value investor to a quality investor thanks to the influence of Charlie Munger.
It’s a misconception that Warren Buffett is a value investor.
Over the years, Warren Buffett has evolved from a pure value investor to a quality investor thanks to the influence of Charlie Munger.
The fact that Berkshire Hathaway has owned great companies like Geico, Coca-Cola and See’s Candies for decades confirms this.
Good business are very rare. That’s why once you’ve found one, the right time to sell is almost never.
Good business are very rare. That’s why once you’ve found one, the right time to sell is almost never.
8. Never make economic forecasts
Making economic forecasts and trying to predict the stock market in the short term is a fools game.
In the world, there are only 2 kinds of people: those who don’t know and those who don’t know they don’t know.
Making economic forecasts and trying to predict the stock market in the short term is a fools game.
In the world, there are only 2 kinds of people: those who don’t know and those who don’t know they don’t know.
Economic and market forecast are worse than useless.
9. Let your winners run
Peter Lynch once said that selling your winners and holding your losers is like cutting the flowers and watering the weeds.
Peter Lynch once said that selling your winners and holding your losers is like cutting the flowers and watering the weeds.
If you invest $1.000 in a stock, all you can lose is $1.000 but you stand to gain $10.000 or even $50.000 over time if you’re patient.
10. The acquisition criteria of Warren Buffett
Warren Buffett uses a strict approach to acquire entire businesses.
The acquisition criteria can be found in his annual letters.
Warren Buffett uses a strict approach to acquire entire businesses.
The acquisition criteria can be found in his annual letters.
1️⃣ The company must have demonstrated consistent earnings power
2️⃣ The business must earn a high ROE while employing little debt
3️⃣ Management should be in place (Berkshire won’t supply it)
4️⃣ The business should be simple (invest within your circle of competence)
5️⃣ A fair price
2️⃣ The business must earn a high ROE while employing little debt
3️⃣ Management should be in place (Berkshire won’t supply it)
4️⃣ The business should be simple (invest within your circle of competence)
5️⃣ A fair price
As you probably already noticed, a lot of quality criteria can be found in this list.
If even Warren Buffett focuses on quality companies, shouldn’t you?
If even Warren Buffett focuses on quality companies, shouldn’t you?
That's it for today.
Soon we're sharing a course with everything we learned from the Berkshire Hathaway weekend in Omaha.
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Soon we're sharing a course with everything we learned from the Berkshire Hathaway weekend in Omaha.
Sign up here to receive it: eepurl.com
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