SƯU TẬP QUOTES CỦA BUFFETT THEO CHỦ ĐỀ

 

Warren Buffett COLLECTION

Handpicked Quotes

by Topics, Time, Stories, Interview, BRK Annual Meeting (BRK AM) , BRK Shareholder Letters (BRK Letters )

 

 

1. TRIẾT LÝ SỐNG ( A LIFE PHILOSOPHY ): Time Stoic FIRE/ Life/ Love/ Luck/ Family/ Work/ Pasion/ Wealth/ Rich slow-quick/ Risk/ Debt Margin/ Liquor Ladies Leverage/  

• “ If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds—though we have learned to live with those also” ( BRK Letters, 1989 )

• “We enjoy the process far more than the proceeds“ ( BRK Letters, 1989 )
• “There’s only three ways that a smart person can go broke…‘liquor, ladies, and leverage’.”
• “We wouldn’t have liked those 99:1 odds and never will “ ( BRK Letters, 1989 )
• “Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor” ( BRK Letters, 2010 )
• “History tell us that leverage all too often produces zeroes, even when it is employed by very smart people “ ( BRK Letters, 2010 )
• “In these cases, the evicted homeowner was the winner, and the victim was the lender” ( BRK Letters, 2012 )  “Borrowers then learn that credit is like oxygen” ( BRK Letters, 2010 )
•  “Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival “ ( BRK Letters, 2010 )
• “That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008 “ ( BRK Letters, 2010 )
• “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your position aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions” ( BRK Letters, 2017 )
• “No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow “ ( BRK Letters, 2017 )
• “ When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If “ If you can wait and not be tired by waiting …” “ ( BRK Letters, 2017 )
• “ We will reject interesting opportunities rather than over leverage our balance sheet “ ( BRK Owner’s Manual ) 
•   “If you’re smart, you’re going to make a lot of money without borrowing.”
•  “You only find out who is swimming naked when the tide goes out “ (BRK Letters, 2001)
• “As house prices fall… You only learn who has been swimming naked when the tide goes out “ ( BRK Letters,2007) 
• “I have pledged… to always run Berkshire with more than ample cash… I will not trade even a night’s sleep for the chance of extra profits.”
• “ Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars “
• “[The perfect amount of money to leave children is ] enough money so that they would feel they could do anything, but not so much that they could do nothing “ ( Fortune, 1986)
• “ There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children “
• “ Someone is sitting in the shade today because someone planted a tree a long year ago “
• “The only way to be loved is to be loveable “ (CityClub Seattle, 2001)
•  “Love is the greatest advantage a parent can give “
• “I’m just lucky to have been in the right place at the right time. Another place, another time, I would not have been as successful “
• “It’s better to hang out with people better than you”
• “ Working with people who cause your stomach to churn seems much like marrying for money – probably a bad idea under any circumstances, but absolute madness if you are already rich “
•  “It takes 20 years to build a reputation and 5 minustes to ruin it “
•  “If you buy things you do not need, soon you will have to sell things you need.”
• “I really like my life. I’ve arranged my life so that I can do what I want.”
• “You won’t keep control of your time, unless you can say ‘no.’ You can’t let other people set your agenda in life.”
• “I don’t measure my life by the money I’ve made. Other people might, but certainly don’t.“
• “Money to some extent sometimes let you be in more interesting environments. But it can’t change how many people love you or how healthy you are.“
•  “Enjoy your work and work for whom you admire.“
• “Exercise humility and restraint.”
• “ Don’t sell anything you wouldn’t buy yourself” ( Munger )
• “Don’t work for anyone you don’t respect and admire” ( Munger )
• “Work only with people you enjoy” ( Munger )
• “Have low expectation” ( Munger )
• “Have a sense of humor” ( Munger )
• “Surround yourself with the love of friends and family “ ( Munger )
• “Never give up searching for the job that you’re passionate about. Try to find the job you’d have if you were independently rich. Forget about the pay. When you’re associating with the people that you love, doing what you love, it doesn’t get any better than that.”
• “When you are living a life of passion and obsession, there are no limits. There are no time clocks or time off, no vacations, no bosses breathing down your neck to perform, because with obsession, there is no boss, there is only you.”  George Ilian, Warren Buffett: The Life and Business Lessons of Warren Buffett
• Without passion, you don’t have energy. Without energy, you have nothing.
• "You want to have a passion for what you are doing. You don't want to wait until 80 to have sex."
• “There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of bed in the morning. I think you are out of your mind if you keep taking jobs that you don’t like because you think it will look good on your resume. Isn’t that a little like saving up sex for your old age?”
• ...I will give you two pieces of advice. Invest as much in yourself as you can; you are your own best asset by far. Then follow your passion; you want to be really excited to get out of bed every morning.
• Charlie [Munger] and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
• Don't settle for anything other than your passion - if you're lucky enough to find it.
• Do what you would do for free, having passion for what you do is the most important thing.
• "Would you prefer to be the greatest lover in the world and known as the worst, or would you prefer to be the worst lover and known as the greatest?" (Inner Scorecard)
• “If a diplomat says yes, he means maybe. If he says maybe, he means no. And if he says no, he’s no diplomat.”
• “If a lady says no, she means maybe. And if she says maybe, she means yes. And if she says yes, she's no lady.”
• “It’s not that we have a short time to live, but that we waste a lot of it . Life is long if you know how to use it ““ On the shortness of life “ ( Seneca - Stoic )
• “Your time is limited, so don't waste it living someone else's life” ( Steve Jobs )
• "There is a limit to the time assigned you, and if you don't use it to free yourself it will be gone and never return."  ( Marcus Aurelius )
• “You could leave life right now. Let that determine what you do and say and think.”  ( Marcus Aurelius )
• “It’s the only thing you can’t buy. I mean, I can buy anything I want, basically, but I can’t buy time,” ( CNBC, 2017 )
• “Charlie and I really have only two jobs. One is to attract and keep outstanding managers to run our various operations “ (BRK Letters, 1998)
• "You know, if I'm playing bridge and a naked woman walks by, I don't ever see her." (FOCUS)
• “You only have to do a few things right in your life so long as you don’t do too many things wrong “

 

2. TRIẾT LÝ ĐẦU TƯ GIÁ TRỊ ( VALUE INVESTING PHILOSOPHY ):  Rule No1 & Rule No2/ Compound Interest/ Margin of safety/ Intrinsic Value/ Free Cash Flow/ BUY A WONDERFUL COMPANY AT A FAIR PRICE/ Concentration & Diversification:

• “Investing is laying out money now to get more money back in the future.”
• Rule No.1: Never lose money. Rule No.2: Never forget rule No.1
• My wealth has come from a combination of living in America, some lucky genes, and compound interest
• “ As Ben said: “ In the short run, the market is a voting machine but in the long run it is a weighing machine “ (BRK Letters, 1987) ( Value Investing Philosophy ) 
• You don’t try and buy businesses worth 83$ million for 80$ million. You leave yourself an enormous margin of safety When you build a bridge, you insist it can carry 30,000 pounds (13.6 tons), but you only drive 10,000 pounds ( 4.5 tons) trucks across it. And that same principle works in investing  ( Graham & Doddsville, 1984 )
• “ In engineering, people have a big margin of safety. But in the financial world, people don’t give a damn about safety. They let it balloon and balloon and balloon. It’s aided by false accouting “ ( Munger )
• A Margin of Safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world ( Seth Klarman )   
• “If you were to distil the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” wrote Benjamin Graham in Chapter 20 of The Intelligent Investor
• “Second, and equally important, we insist on a margin of safety in our purchase price. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success” ( BRK Letters, 1992 )
•  “ The three most important words for investing: Margin of Safety “
• Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. ( Owner’s Manual 1996 )
• “The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”
• “ Price is what you pay, value is what you get “
• “ In candy, as in stocks, price and value can differ; price is what you give, value is what you get “ ( BRK Letters, 1983 )
• “ We want the business to be one:
  • a/ That we can understand
  • b/ With favorable long-term prospects
  • c/ Operated by honest, competent people
  • d/ Available at a very attractive price “  (BRK Letters, 1976,1977-2017)
• “ 4M - 1) 2) 3) 4) …. It is difficult to find investments meeting such a test and that is one reason for our concentration of holdings. We simply can not find one hundred different securities that conform to  our investment requirements  ( BRK Letters, 1976 ) 
• “ 4M -1) 2) 3) 4) … We usually can identify a small number of potential investment meeting requirement (1), (2), and (3), but (4) often prevents action” ( BRK Letters, 1978 )
•  “ Charlie and I decided long ago that in investment lifetime it’s too hard to make hundreds of smart decisions. We’ll now settle for one good idea a year ( Charlie says it’s my turn ) “ ( BRK Letters, 1993 )
• “ We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with it’s economic characteristic before buying into it “ ( BRK Letters, 1993 ) 
• “ Diversification is a protection against ignorance. It makes every little sence for those who know what they’re doing “ ( BRK Letters, 1993 )
• As Mae West said: “ Too much of a good thing can be wonderful “ ( BRK Letters, 1991 )
• “Risk can be greatly reduced by concentrating on only a few holdings.”
• “Diversification may preserve wealth, but concentration builds wealth.”
• "If you have a harem of 40 women, you never get to know any of them very well."
• “ Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock “ (BRK Letters, 1996)
• “Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. Therefore, we normally will not talk about our invesment ideas. This ban extends even to securities we have sold ( because we may purchase them again ) (BRK Letters, 1983)
• “ The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved “ (BRK Letters, 1996)
•  “An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.”
• “In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices “ (BRK Letters, 1996)
• “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” ( BRK Letters, 1989 )
•  “Time is the friend of the wonderful company, the enemy of the mediocre.“ (BRK Letters,1989)

 

 (2.1). Thế nào là A WONDERFUL COMPANY ? 

 (a) MEANING: Simply Understand/ Circle of Competence/ Simplicity & Complexity

• “ Risk comes from not knowing what you are doing “
• “Never invest in a business you cannot understand.”
•  “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”
• " Multiply by 3 than by pi (3.14159) "
•  “ I don’t look to jumb over 7-foot ( 2m ) bars, I look around for 1-foot (0.3m) bars that I can step over “
• “We have been successful, it is because we concentrated on identifying 1-foot ( 0.3m) hurdles that we could step over rather than because we acquired any ability to clear 7-footers (2.1m).” (BRK Letters,1989)
• “ Charlie and I have not learned how to solve difficult problems. What we have learned is to avoid them “ (BRK Letters,1989)
•  “We done better by avoiding dragons than by slaying them “ (BRK Letters,1989)
• “ What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. ( 1996 )
• " You don’t have to be right on 4,000 or 5,000. You don’t have to be right on 400. You don’t have to be right on 40. You just have to stay within the circle of competence, the things that you can understand. And look for things that are selling for less than they’re worth, of the ones you can value. And you can start out with a fairly small circle of competence and learn more about businesses as you go along." ( BRK AM 2009 )
• “ This explains, by the way, why we don’t own stocks of tech companies, even though  we share the general view that our society will be transformed by their products and services. Our problem – which we can not solve by studying up – is that we have no insights into which participants in the tech field possess a truly durable competitive advantage “ (BRK Letters, 1999)
• “ Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise… So we simply don’t get into judgments in those fields “ (BRK Letters, 1999)
• “ If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter… Instead, we just stick with what we understand “ (BRK Letters, 1999)
•   “ If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price “ ( 1999 )
• “ Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. Should Charlie and I now think we can predict the future of other rapidly-evolving businesses? We will stick instead with the easy cases  “ (BRK Letters,1993)
• “ Why search for a needle buried in a haystack when one is sitting in plain sight ? “, (1993)
• In the words of the prophet Mae West: “ Too much of a good thing can be wonderful “ ( BRK Letters, 1993 )
• “ John Maynard Keynes, 1934, says it all : “ One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence “ (1991) 
•  “ We are more comfortable in that kind of business ( non-tech Stocks )…We are perfectly willing to trade away a big payoff for a certain payoff “ ( BRK Letters, 1999 )
•  “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.” ( BRK Letters, 2013 )
• “Buy companies with strong histories of profitability and with a dominant business franchise.”
• “ In the business world, unfortunately, the rear-view mirror is always clearer than the windshield “ ( 1991 )
• “I was so beguiled by the company’s long history of profitable operations ( USAir, BRK Letters 1996)
• “If the past is any guide, you may from time to time read inaccurate or misleading statements about them “ ( BRK Letters, 1990 )
•  “ Uncertainty is the friend of buyer of long term values “ 
•  “ The more the industry has grown, the worse the disaster for owners “ (1992)
• “ If there are a lot of technology, we won’t understand it “ (BRK Letters, 1983)
• “You don’t need to be an expert. You must recognize your limitations and follow a course certain to work reasonably well. Keep thing simple and don’t swing for the fences. When promissed quick profits, respond with a quick “no” “ (BRK Letters, 2013)
• “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience it not necessary; you only need to understand the actions you undertake ” ( BRK Letters, 2013 )
• “ When Charlie and I buy stocks, we first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock ( or business ) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects “ (BRK Letters, 2013)
• “ Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strengths ten or twenty years from now. A fast – changing industry enviroment may offer the chance for huge wins, but it precludes the certain we seek “ (BRK Letters, 1996)
• " The Fortune champs may surprise you in two respects. First, most use very little leverage compared to their interest-paying capacity. Really good businesses usually don't need to borrow. Second, except for one company that is "high-tech" and several others that manufacture ethical drugs, the companies are in businesses that, on balance, seem rather mundane. Most sell non- sexy products or services in much the same manner as they did ten years ago (though in larger quantities now, or at higher prices, or both). The record of these 25 companies confirms that making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produces exceptional economics. " (BRK Letters 1987)
• “ And since finding great businesses and outstanding managers is so difficult, why should we discard proven products? Our motto is: “ If at the first you do succeed, quit trying “ ( 1991 )
• " I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good. As Citizens, Charlie and I welcome change. As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride “ (BRK Letters, 1996)
• “ But the reasons why people today buy boxed chocolates and why they buy them from us rather than from someone else, are virtually unchanged from what they were in the 1920s when the See family was building the business. Moreover, these motivations are not likely to change over the next 20 years, or even 50” (BRK Letters, 1996)
• “I was recently studying the 1896 report of Coke..Companies such as Coca-Cola might well be labeled “ The Inevitables” “ (BRK Letters, 1996)
• “Obviously many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms than will The Inevitables. But I would rather be certain of a good result than hopeful of a great one “ (BRK Letters, 1996)
• “ Of course, Charlie and I can identify only a few Inevitables, even after a lifetime of looking for them. Leadership alone provides no certainties “ (BRK Letters, 1996)
• “It’s no sin to miss a great opportunity outside one’s area of competence “ (BRK Letters,1989)
• “Thomas J Watson Sr. of IBM followed the same rule: I’m not genius”, he said, “ I’m smart in spots – but I stay around those spots “ (BRK Letters,1990)
• “ If a business is complex or subject to constant change, we are not smart enough to predict future cash flows. Incidentally, that short-coming doesn’t bother us. What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know ” (BRK Letters, 1992)
• " Our failure here illustrates the importance of a guideline – stay with simple propositions – that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for – if you’ll excuse an oxymoron – mono-linked chains." (BRK Letters, 2004)

 

 (b) MOATS: Business model/ Economics Characteristics/ ROE - Return on Equity/ ROIC - Returns on Invested Capital/ Accounting

•  “Time is the friend of the wonderful company, the enemy of the mediocre.“ (BRK Letters,1989)
• " In addition, we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price." (BRK Letters 2019)
• "Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return." (BRK Letters, 2007)

• "Focus on return on equity ROE, not earnings per share EPS"

• “ First, a few words about accounting […] This full consolidation of sales, expenses, receivables, inventories, debt, etc. produces an aggregation of figures from many diverse businesses – textiles, insurance, candy, newspapers, trading stamps – with dramatically differrent economic characteristics “ ( BRK Letters, 1978 )
•  “ In aggregate, the insurance business has worked out very well. But it hasn’t been a one-way street. Some major mistakes have been made during the decade [....]. It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results.  One of the lessons your management has learned – and, unfortunately, sometimes re-learned – is the importance of being in businesses where tailwinds prevail rather headwinds “(BRK Letters,1977 )
• “Good jockeys will do well on good horses, but not on broken-down nags” ..They were never going to make any progress while running in quicksand”(BRK Letters,1989)
•  “ Look for the durability of the franchise. The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles “ ( BRK Letters, 1994 )
• “ The key to investing is determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors “        (Fortune, 1999)
• “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage” ( Sun Valley, 1999 )
• “Earnings of $1.3 million in 1978, while much improved from 1977, still represent a low return on the $17 million of capital employed in this business. Textile plant and equipment are on the books for a very small fraction of what it would cost to replace such equipment today. And, despite the age of the equipment, much of it is functionally similar to new equipment being installed by the industry. But despite this “bargain cost” of fixed assets, capital turnover is relatively low reflecting required high investment levels in receivables and inventory compared to sales. Slow capital turnover, coupled with low profit margins on sales, inevitably produces inadequate returns on capital. Obvious approaches to improved profit margins involve differentiation of product, lowered manufacturing costs through more efficient equipment or better utilization of people, redirection toward fabrics enjoying stronger market trends, etc. Our management is diligent in pursuing such objectives. The problem, of course, is that our competitors are just as diligently doing the same thing...[...]... We hope we don’t get into too many more businesses with such tough economic characteristics” (Textiles, BRK Letters, 1978)
• “Our textile business also continues to produce some cash, but at a low rate compared to capital employed. This is not a reflection on the managers, but rather on the industry in which they operate. In some businesses - a network TV station, for example - it is virtually impossible to avoid earning extraordinary returns on tangible capital employed in the business. And assets in such businesses sell at equally extraordinary prices, one thousand cents or more on the dollar (10:1), a valuation reflecting the splendid, almost unavoidable, economic results obtainable. Despite a fancy price tag, the “easy” business may be the better route to go. Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price ” (Textiles and Retailing, BRK Letters, 1979)
• “Increased earnings produced by increased investment don’t count. Only a few business come close to exhibiting this ability. And BRK is not one of them” ( BRK Letters, 1980)
• For capital to be truly indexed, return on equity must rise, i.e., business earnings consistently must increase in proportion to the increase in the price level without any need for the business to add to capital—including working capital—employed. (Increased earnings produced by increased investment don’t count.) Only a few businesses come close to exhibiting this ability. And Berkshire Hathaway isn’t one of them ( BRK Letters, 1980)
•  “The first involves companies that, though design or accident, have purchased only business that are particularly well adapted to an inflationary environment. Such favored business must have two characteristics: (1) an ability to increase prices rather easily ( even when product demand is flat and capacity is not fully utilized ) without fear of significant loss of either market share or unit volume ), and (2) an ability to accommonodate large dollar volume increase in business ( often produced more by inflation than by real growth ) with only minor additional investment of capital… However, very few enterprises possess both characteristics” ( BRK Letters, 1981 )
• “Hence the constant struggle of every vendor to establish and emphasize special qualities of product or service. This work with candy bars ( customers buy by brand name, not by asking for a “two-ounce candy bar”) but doesn’t work with sugar ( how often do you hear, “ I will have a cup of coffee with cream and C&H sugar, please) (BRK Letters,1982)
• “The financial results at See’s continue to be exceptional…The poundage volume in our retail stores has been virtually unchanged each year for the past four, despite small increases every year in the number of shops ...Despite the volume problem, See’s strengths are many and important. In fact, we believe most lovers of chocolate prefer it to candy costing two or three times as much” ( BRK Letters,1983 )

 

• ( Goodwill and it’s Amortization , BRK Letters,1983 )

“ The appendix that follows this letter –“Goodwill and it’s Amortization: The Rules and The Realities” – explains why economic and accounting Goodwill can, and usually do, differ ecormously 

 

Blue Chip Stamps bought See’s early in 1972 for $25 million, at which time See’s had about $8 million of net tangible assets. (Throughout this discussion, accounts receivable will be classified as tangible assets, a definition proper for business analysis.) This level of tangible assets was adequate to conduct the business without use of debt, except for short periods seasonally. See’s was earning about $2 million after tax at the time, and such earnings seemed conservatively representative of future earning power in constant 1972 dollars.

 

Thus our first lesson: businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.

 

In 1972 (and now) relatively few businesses could be expected to consistently earn the 25% after tax on net tangible assets that was earned by See’s – doing it, furthermore, with conservative accounting and no financial leverage. It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.

 

Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price. Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry.

[...]

But what are the economic realities? One reality is that the amortization charges that have been deducted as costs in the earnings statement each year since acquisition of See’s were not true economic costs. We know that because See’s last year earned $13 million after taxes on about $20 million of net tangible assets – a performance indicating the existence of economic Goodwill far larger than the total original cost of our accounting Goodwill. In other words, while accounting Goodwill regularly decreased from the moment of purchase, economic Goodwill increased in irregular but very substantial fashion.

Another reality is that annual amortization charges in the future will not correspond to economic costs. It is possible, of course, that See’s economic Goodwill will disappear. But it won’t shrink in even decrements or anything remotely resembling them. What is more likely is that the Goodwill will increase – in current, if not in constant, dollars – because of inflation.

That probability exists because true economic Goodwill tends to rise in nominal value proportionally with inflation. To illustrate how this works, let’s contrast a See’s kind of business with a more mundane business. When we purchased See’s in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill.

A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.

To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.

But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.

Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital.

After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)

See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested.

Remember, even so, that the owners of the See’s kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.

And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets ("In Goods We Trust"). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.

In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment – yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.

[...]

If you cling to any belief that accounting treatment of Goodwill is the best measure of economic reality, I suggest one final item to ponder.

Assume a company with $20 per share of net worth, all tangible assets. Further assume the company has internally developed some magnificent consumer franchise, or that it was fortunate enough to obtain some important television stations by original FCC grant. Therefore, it earns a great deal on tangible assets, say $5 per share, or 25%.

With such economics, it might sell for $100 per share or more, and it might well also bring that price in a negotiated sale of the entire business.

Assume an investor buys the stock at $100 per share, paying in effect $80 per share for Goodwill (just as would a corporate purchaser buying the whole company). Should the investor impute a $2 per share amortization charge annually ($80 divided by 40 years) to calculate "true" earnings per share? And, if so, should the new "true" earnings of $3 per share cause him to rethink his purchase price?

( Goodwill and it’s Amortization , BRK Letters,1983 )

 

 

• Three Very Good Businesses (and a Few Thoughts About Incentive Compensation) ( BRK Letters,1985 )

I am merging the discussion of Nebraska Furniture Mart, See’s Candy Shops, and Buffalo Evening News here because the economic strengths, weaknesses, and prospects of these businesses have changed little since I reported to you a year ago. The shortness of this discussion, however, is in no way meant to minimize the importance of these businesses to us: in 1985 they earned an aggregate of $72 million pre-tax. Fifteen years ago, before we had acquired any of them, their aggregate earnings were about $8 million pre-tax.

While an increase in earnings from $8 million to $72 million sounds terrific - and usually is - you should not automatically assume that to be the case. You must first make sure that earnings were not severely depressed in the base year. If they were instead substantial in relation to capital employed, an even more important point must be examined: how much additional capital was required to produce the additional earnings?

In both respects, our group of three scores well. First, earnings 15 years ago were excellent compared to capital then employed in the businesses. Second, although annual earnings are now $64 million greater, the businesses require only about $40 million more in invested capital to operate than was the case then.

The dramatic growth in earning power of these three businesses, accompanied by their need for only minor amounts of capital, illustrates very well the power of economic goodwill during an inflationary period (a phenomenon explained in detail in the 1983 annual report). The financial characteristics of these businesses have allowed us to use a very large portion of the earnings they generate elsewhere. Corporate America, however, has had a different experience: in order to increase earnings significantly, most companies have needed to increase capital significantly also. The average American business has required about $5 of additional capital to generate an additional $1 of annual pre-tax earnings. That business, therefore, would have required over $300 million in additional capital from its owners in order to achieve an earnings performance equal to our group of three.

When returns on capital are ordinary, an earn-more-by- putting-up-more record is no great managerial achievement. You can get the same result personally while operating from your rocking chair. just quadruple the capital you commit to a savings account and you will quadruple your earnings. You would hardly expect hosannas for that particular accomplishment. Yet, retirement announcements regularly sing the praises of CEOs who have, say, quadrupled earnings of their widget company during their reign - with no one examining whether this gain was attributable simply to many years of retained earnings and the workings of compound interest.

If the widget company consistently earned a superior return on capital throughout the period, or if capital employed only doubled during the CEO’s reign, the praise for him may be well deserved. But if return on capital was lackluster and capital employed increased in pace with earnings, applause should be withheld. A savings account in which interest was reinvested would achieve the same year-by-year increase in earnings - and, at only 8% interest, would quadruple its annual earnings in 18 years. 

[...]

Now let’s get back - at long last - to our three businesses:

At Nebraska Furniture Mart our basic strength is an exceptionally low-cost operation that allows the business to regularly offer customers the best values available in home furnishings. NFM is the largest store of its kind in the country. Although the already-depressed farm economy worsened considerably in 1985, the store easily set a new sales record. I also am happy to report that NFM’s Chairman, Rose Blumkin (the legendary “Mrs. B”), continues at age 92 to set a pace at the store that none of us can keep up with. She’s there wheeling and dealing seven days a week, and I hope that any of you who visit Omaha will go out to the Mart and see her in action. It will inspire you, as it does me.

At See’s we continue to get store volumes that are far beyond those achieved by any competitor we know of. Despite the unmatched consumer acceptance we enjoy, industry trends are not good, and we continue to experience slippage in poundage sales on a same-store basis. This puts pressure on per-pound costs. We now are willing to increase prices only modestly and, unless we can stabilize per-shop poundage, profit margins will narrow.

At the News volume gains are also difficult to achieve. Though linage increased during 1985, the gain was more than accounted for by preprints. ROP linage (advertising printed on our own pages) declined. Preprints are far less profitable than ROP ads, and also more vulnerable to competition. In 1985, the News again controlled costs well and our household penetration continues to be exceptional.

One problem these three operations do not have is management. At See’s we have Chuck Huggins, the man we put in charge the day we bought the business. Selecting him remains one of our best business decisions. At the News we have Stan Lipsey, a manager of equal caliber. Stan has been with us 17 years, and his unusual business talents have become more evident with every additional level of responsibility he has tackled. And, at the Mart, we have the amazing Blumkins - Mrs. B, Louie, Ron, Irv, and Steve - a three-generation miracle of management.

 ( BRK Letters 1985 )

 

• " At Berkshire, however, my appraisal of our operating managers is, if anything, understated. To understand why, first take a look at page 7, where we show the earnings (on an historical-cost accounting basis) of our seven largest non- financial units: Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, and World Book. In 1987, these seven business units had combined operating earnings before interest and taxes of $180 million.

By itself, this figure says nothing about economic performance. To evaluate that, we must know how much total capital - debt and equity - was needed to produce these earnings. Debt plays an insignificant role at our seven units: Their net interest expense in 1987 was only $2 million. Thus, pre-tax earnings on the equity capital employed by these businesses amounted to $178 million. And this equity - again on an historical-cost basis - was only $175 million.

If these seven business units had operated as a single company, their 1987 after-tax earnings would have been approximately $100 million - a return of about 57% on equity capital. You'll seldom see such a percentage anywhere, let alone at large, diversified companies with nominal leverage. Here's a benchmark: In its 1988 Investor's Guide issue, Fortune reported that among the 500 largest industrial companies and 500 largest service companies, only six had averaged a return on equity of over 30% during the previous decade. The best performer among the 1000 was Commerce Clearing House at 40.2% " ( BRK Letters 1987 )

• " If, to become a shareholder and part owner of Commerce Clearing House, you pay, say, six times book value, that does not change CCH's return on equity " (BRK Letters 1987)
• " Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.

The Fortune study I mentioned earlier supports our view. Only 25 of the 1,000 companies met two tests of economic excellence - an average return on equity of over 20% in the ten years, 1977 through 1986, and no year worse than 15%. These business superstars were also stock market superstars: During the decade, 24 of the 25 outperformed the S&P 500.

The Fortune champs may surprise you in two respects. First, most use very little leverage compared to their interest-paying capacity. Really good businesses usually don't need to borrow. Second, except for one company that is "high-tech" and several others that manufacture ethical drugs, the companies are in businesses that, on balance, seem rather mundane. Most sell non- sexy products or services in much the same manner as they did ten years ago (though in larger quantities now, or at higher prices, or both). The record of these 25 companies confirms that making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produces exceptional economics. " (BRK Letters 1987)

• " Last year we dubbed these operations the Sainted Seven: Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See’s, and World Book. In 1988 the Saints came marching in. You can see just how extraordinary their returns on capital were by examining the historical-cost financial statements on page 45, which combine the figures of the Sainted Seven with those of several smaller units. With no benefit from financial leverage, this group earned about 67% on average equity capital." (BRK Letters 1988)
• " Let's call the group "The Sainted Seven Plus One". This divine assemblage - Borsheim's, The Buffalo News, Fechheimer Bros., Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See's Candies, World Book - is a collection of businesses with economic characteristics that range from good to superb. Its managers range from superb to superb.... On an historical accounting basis, after-tax earnings of these operations were 57% on average equity capital. Moreover, this return was achieved with no net leverage: Cash equivalents have matched funded debt." (BRK Letters 1989)
• " The sales of trading stamps by Blue Chip thereafter declined from $102.5 million in 1972 to $1.2 million in 1991. But See's candy sales in the same period increased from $29 million to $196 million. Moreover, profits at See's grew even faster than sales, from $4.2 million pre-tax in 1972 to $42.4 million last year.

For an increase in profits to be evaluated properly, it must be compared with the incremental capital investment required to produce it. On this score, See's has been astounding: The company now operates comfortably with only $25 million of net worth, which means that our beginning base of $7 million has had to be supplemented by only $18 million of reinvested earnings. Meanwhile, See's remaining pre-tax profits of $410 million were distributed to Blue Chip/Berkshire during the 20 years for these companies to deploy (after payment of taxes) in whatever way made most sense.

In our See's purchase, Charlie and I had one important insight: We saw that the business had untapped pricing power. ( Twenty Years in a Candy Store - BRK Letters 1991) 

• " As you can see, Scott Fetzer's earnings have increased steadily since we bought it, but book value has not grown commensurately. Consequently, return on equity, which was exceptional at the time of our purchase, has now become truly extraordinary. Just how extraordinary is illustrated by comparing Scott Fetzer's performance to that of the Fortune 500, a group it would qualify for if it were a stand-alone company.

Had Scott Fetzer been on the 1993 500 list - the latest available for inspection - the company's return on equity would have ranked 4th. But that is far from the whole story. The top three companies in return on equity were Insilco, LTV and Gaylord Container, each of which emerged from bankruptcy in 1993 and none of which achieved meaningful earnings that year except for those they realized when they were accorded debt forgiveness in bankruptcy proceedings. Leaving aside such non-operating windfalls, Scott Fetzer's return on equity would have ranked it first on the Fortune 500, well ahead of number two. Indeed, Scott Fetzer's return on equity was double that of the company ranking tenth." (BRK Letters 1994) 

• “ Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return business need relatively little capital “ (BRK Letters, 1992)

 

• ( Businesses: The Great, The Good and The Gruesome.-BRK Letters, 2007) 

Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss what we wish to avoid. Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. 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 lowcost 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.

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. 

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

+ Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

+ One example of good, but far from sensational, business economics is our own FlightSafety. This company delivers benefits to its customers that are the equal of those delivered by any business that I know of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the best is like taking the low bid on a surgical procedure. 

Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have 273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far from See’s-like, return on our incremental investment of $509 million.

Consequently, if measured only by economic returns, FlightSafety is an excellent but not extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For example, our large investment in regulated utilities falls squarely in this category. We will earn considerably more money in this business ten years from now, but we will invest many billions to make it.

+ Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.

+ To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

( BRK Letters, 2007 )

 

• “ Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price. Charlie and I have found that making silk purses out of silk is the best that we can do; with sow’s ears, we fail “ ( BRK Letters, 1987 )
• “ It must be noted that your Chairman, always a quick study, required only 20 years to recognize how important it was to buy good businesses “ ( BRK Letters, 1987 )
• “The most important thing to do if you find yourself in a hole is to stop digging.” (BRK Letters,1990)
•  “ At least our kisses didn’t turn them into toads “
• “ And, finally, we have occasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices “ ( BRK Letters, 1981 ) 
• “After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them.”
•  “ In the business world, the rearview mirror is always clearer than the windshield “
• “Buy companies with strong histories of profitability and with a dominant business franchise.”
•  “One’s objective should be to get it right, get it quick, get it out and get it over…your problem won’t improve with age “
•  “Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it is going to be hurt by the Internet. That’s the kind of business I like.”
• “We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports. Clearly our kisses fell flat” ( BRK Letters,1981 )
• “We have done well with a couple of princes – but they were princes when purchased. At least our kisses didn’t turn them into toads “ ( BRK Letters,1981 )
• “And, finally, we have accasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices” (BRK Letters,1981)
• “ In a business selling a commodity-type product, it’s impossible to be a lot smarter than your dumbest competitor” ( BRK Letters, 1990)
• “We want products where people feel like kissing you instead of slapping you.”
• “ Impossible to formulate for obscenity, Justice Stewart: “ I know when I see it “ “ (1993)
•  “A line from Bobby Bare’s country song explains what too often happens with acquisitions: 'I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.'”
• “In insurance business, there is no statute of limitation on stupidity “
• “Cost control is an important factor in the bank’s success” ( BRK Letters, 1976 )
• “ ’Just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes’. After each round of investment, all the players had more money in the game and returns remained anemic “ ( BRK Letters,1985)
• “Thus, we faded a miserable choice: huge capital investment would have helped to keep our textile business alive “ ( BRK Letters,1985)
• “ A horse that can count to ten is a remarkable horse – not a remarkable mathematician “. Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company—but not a remarkable business ( BRK Letters,1985)
• “ My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad).” ( BRK Letters,1985)
• “ Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronicallyleaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks” ( BRK Letters,1985)

• “Should you find yourself in a chronically leaking boat, enrgy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks” (BRK Letters, 1985)
• “ As a wise friend told me long ago: “If you want to get a reputation as a good businessman, be sure to get into a good business” “ (BRK Letters, 2006)
• “ Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed “ (BRK Letters, 2006)
• “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact “ (BRK Letters,1989)
• “Richard Branson : “ There is really nothing to it. Start as a billionaire and then buy an airline “ (USAir, BRK Letters, 1996)
• “ No one pushed me; in tennis parlance, I committed an “ unforced error” “ (USAir, BRK Letters, 1996)
• “In a business selling a commodity-type business, it’s impossible to be a lot smarter than your dumbest competitor.“ (USAir, BRK Letters, 1996)
• " Retailing is a tough business. During my investment career, I have watched a large number of retailers enjoy terrific growth and superb returns on equity for a period, and then suddenly nosedive, often all the way into bankruptcy. This shooting-start phenomenon is far more common in retailing than it is in manufacturing or service businesses. In part, this is because a retailer must stay smart, day after day. Your competitor is always copying and then topping whatever you do. Shoppers are meanwhile beckoned in every conceivable way to try a stream of new merchants. In retailing, to coast to fail. In contrast to this have-to-be-smart-every-day business, there is what I call the have-to-be-smart-once business. For example, if you were smart enough to buy a network TV station very early in the game, you could put in a shiftless and backward nephew to run things, and the business would still do well for decades. You would do far better, of course, if you put in Tom Murphy, but you could stay comfortably in the black without him. For a retailer, hiring that nephew would be an express ticket to bankruptcy " ( Bershire Hathaway, Letters to Shareholders 1995 )
•  “I try to buy a stock in business that are so wonderful that an idiot can run them. Because sooner or later, one will “
• Shoes are a tough business - of the billion pairs purchased in the United States each year, about 85% are imported - and most manufacturers in the industry do poorly. The wide range of styles and sizes that producers offer causes inventories to be heavy; substantial capital is also tied up in receivables. In this kind of environment, only outstanding managers like Frank and the group developed by Mr. Heffernan can prosper. " ( H.H.Brown - BRK Letters 1991 )
• " Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage. Therefore, it seems to us to be both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant. This view is not the product of either our advancing age or prosperity: Our opinions about debt have remained constant." (BRK Letters 1987)
• " The fact is that newspaper, television, and magazine properties have begun to resemble businesses more than franchises in their economic behavior. Let's take a quick look at the characteristics separating these two classes of enterprise, keeping in mind, however, that many operations fall in some middle ground and can best be described as weak franchises or strong businesses.

An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.

In contrast, "a business" earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low- cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management. " ( A Change in Media Economics and Some Valuation Math - BRK Letters 1991) 

• " Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us.(BRK Letters,1977 )
• “ We continue to look for ways to expand our insurance operation… It is not easy to buy a good insurance business, but experience has been that it is easier to buy one than create one “ ( BRK Letters,1978)
• " The book value per share of Berkshire Hathaway on September 30, 1964 (the fiscal yearend prior to the time that your present management assumed responsibility) was $19.46 per share. At yearend 1979, book value with equity holdings carried at market value was $335.85 per share. The gain in book value comes to 20.5% compounded annually ..[...]...A few years ago, a business whose per-share net worth compounded at 20% annually would have guaranteed its owners a highly successful real investment return " ( BRK Letters,1979)
• " 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. ( BRK Letters, 1980)

 

(c) MANAGEMENT: Integrity/ Intelligence/ Energy/ Passion/ Capital Allocation/ Cost Obsessive /

• “ You can not make a good deal with a bad person “ (BRK Letters,1989)
• Charlie [Munger] and I are not big fans of resumes. Instead, we focus on brains, passion and integrity
•  “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”
•  “If you don’t know jewelry, know the jeweller”
• " What does this have to do with management? It’s simple – to be a winner, work with winners." BRK Letters,2002)
•  “I try to buy a stock in business that are so wonderful that an idiot can run them. Because sooner or later, one will “
• “And so the important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing.”
• " We hear a great many insurance managers talk about being willing to reduce volume in order to underwrite profitably, but we find that very few actually do so. Phil Liesche is an exception: if business makes sense, he writes it; if it doesn’t, he rejects it." (Insurance Underwriting, BRK Letters,1979)
• “In insurance, as elsewhere, the reaction of weak managements to weak operations is often weak accounting ( “It’s difficult for an empty sack to stand upright”) (BRK Letters,1982)
•  “Since you don’t have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that’s not a difficult job “ ( Graham & Doddsville, 1984 )
• “When we own portions of outstanding business with outstanding managements, our favorite holding is forever “
• “ 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.) and not the achievement of consistent gains in EPS ) ( BRK Letters, 1979 )
• “ It’s simply to say that managers and investors alike must understand that accounting numbers is the beginning, not the end, og business valuation “ ( BRK Letters, 1982 )
• “ When returns on capital are ordinary, an earn-more-by-putting-up-more-record is no great managerial achievement “ (BRK Letters, 1985)
• “Adam Smith would disagree with my first proposition and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comforable “ (BRK Letters,1985)
•  “ Working with people who cause your stomach to churn seems much like marrying for money – probably a bad idea under any circumstances, but absolute madness if you are already rich “ (BRK Letters,1998)
• “Management changes, like marital changes, are painful, time-consuming and chancy “ ( BRK Letters, 1987 )
• “Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”
•  “It takes 20 years to build a reputation and 5 minustes to ruin it “
• “When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept or uninterested, you will find yourself with more than you can handle.”
•  “Cost control is an important factor in the bank’s success” ( BRK Letters, 1976 )
• “Our experience has been that the manager of an already high-cost operation frequently is uncommonly resourceful in finding new ways to add overhead, while the manager of a tightly-cost operation ussually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitor. No one has demonstrated this latter ability better than Gene Abegg “ ( BRK Letters, 1978 )
• “Naming the plane has not been easy. I initially suggested "The Charles T. Munger“. Charlie countered with "The Aberration“. We finally settled on "The Indefensible“ “    ( Cost Obsessive ) ( 1989 )
•  “ To stretch the point, it’s as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chair-man of the FED “ ( Capital Allocation ) ( 1987 )
• “Many management apparently were overexposes in impressionable childhood years to the story in which the imprisoned handsome prince is released from a toad’s body by kiss from a beautiful princess” (BRK Letters, 1981)
• “In other words, investor can always buy toads at the going price for toads… We are observed many kisses but very few micracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses” (BRK Letters, 1981)
• “Our preaching was better than our performance” ( BRK Letters, 1981 )

• "The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

  Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.

  With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another - Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt. (Thomas J. Watson Sr. of IBM followed the same rule: "I'm no genius," he said. "I'm smart in spots - but I stay around those spots.")  ( BRK Letters, 1990 )

• "Three suggestions for investors:

First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen. Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?

Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to. Enron’s descriptions of certain transactions still baffle me.

Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering books of investment bankers).

Charlie and I not only don’t know today what our businesses will earn next year – we don’t even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future – and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers." ( BRK Letters, 2002 )

 

(2.2) Thế nào là A FAIR PRICE ? MARGIN OF SAFETY ? : VALUING-VALUATION/ Discounted Cash Flow/ Net-Net (Cigar Butt)/ Intrinsic Value/ Free Cash Flow/ Accounting

•  “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” ( BRK Letters, 1989 )“
• “I am a better investor because I am a businessman and a better businessman because I am an investor.”
• "Investment is most intelligent when it is most businesslike" (Ben Graham, Warren Buffett - BRK Letters 2014 )
• “When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomics analysts, and not even as security analysts “ ( BRK Letters, 1987)
• . You don’t try and buy businesses worth 83$ million for 80$ million. You leave yourself an enormous margin of safety When you build a bridge, you insist it can carry 30,000 pounds (13.6 tons), but you only drive 10,000 pounds ( 4.5 tons) trucks across it. And that same principle works in investing  ( Graham & Doddsville, 1984 )
• Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. ( Owner’s Manual 1996 )
• “Book Value is an accounting concept…Book Value tells you what has been put in; Intrinsic Business Value estimates what can be take out “ ( BRK Letters,1983 )
• "Of course, it's per-share intrinsic value, not book value, that counts. Book value is an accounting term that measures the capital, including retained earnings, that has been put into a business. Intrinsic value is a present-value estimate of the cash that can be taken out of a business during its remaining life. At most companies, the two values are unrelated. Berkshire, however, is an exception: Our book value, though significantly below our intrinsic value, serves as a useful device for tracking that key figure. In 1993, each measure grew by roughly 14%, advances that I would call satisfactory but unexciting." ( BRK Letters,1993 )
• To see how historical input (book value) and future output (intrinsic value) can diverge, let's look at another form of investment, a college education. Think of the education's cost as its "book value." If it is to be accurate, the cost should include the earnings that were foregone by the student because he chose college rather than a job. ( BRK Letters,1994 )
• “Valuing a business is part art and part science.“
• “I call this the “Cigar Butt” approach to investing “ ( BRK Letters, 1989 )
• “Keynes identified my problem: “ The difficulty lies not in the new ideas but in escaping from the old ones “. My escape was long delayed, in part because most of what I had been taught by the same teacher had been so extraordinarily valuable” ( BRK Letters,1983 )
• "Its a wonderful business but we paid too much" ( Kraft Heinz - BRK AM 2019 )
• " If you pay too much, you can turn a good business into a bad investment " (2019)
• “ Investor making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with price they paid “ ( BRK AM, 1998 )
•  “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
• “If you make a mistake in pricing, you have to live with it for an uncomfortable period of time “ (BRK Letters,1981)
• “Buy companies with strong histories of profitability and with a dominant business franchise.”
•  “ In the business world, the rearview mirror is always clearer than the windshield “ 
•  “The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.”(History)
• “The investor of today does not profit from yesterday’s growth “ ( Partnership Letters, 1961 )
•  “The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.” ( Munger )
•  “I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable "
• " Interest rates - the cost of borrowing - are the price of "When". They are to finance as gravity is to physics “ ( Sun Valley 1999, The Snowball )
• There were only three ways the stock market could keep rising at 10% or more a year. One was if interest rates fell and remained below historic levels. The second was if the share of the economy that went to investors, as opposed to employees and government and other things, rose above it's already historically high level. Or he said, the economy could start growing faster than normal .... Ultimately, the value of the stock market could only reflect the output of the economy " ( Sun Valley 1999, The Snowball )     
• “The most important item over time in valuation is obviously interest rates. Any investment is worth all the cash you’re going to get out between now and judgment day discounted back. If interest rates are destined to be at very low levels. … It makes any stream of earnings from investments worth more money.” (CNBC,2017) 
• The attention given this form of dilution is overdone: current earnings per share (or even earnings per share of the next few years) are an important variable in most business valuations, but far from all powerful. ( BRK Letters, 1982 )

 

• ( BRK - A part of the shareholder letter 1992 about Valuation ) 

[ " Our equity-investing strategy remains little changed from what it was fifteen years ago, when we said in the 1977 annual report: "We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price." We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute "an attractive price" for "a very attractive price."

But how, you will ask, does one decide what's "attractive"? In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth." Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross- dressing.

We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

In addition, we think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening).

Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price- earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase.

Similarly, business growth, per se, tells us little about value. It's true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor.

In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future "coupons." Furthermore, the quality of management affects the bond coupon only rarely - chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity "coupons."

The investment shown by the discounted-flows-of-cash calculation to be the cheapest is the one that the investor should purchase - irrespective of whether the business grows or doesn't, displays volatility or smoothness in its earnings, or carries a high price or low in relation to its current earnings and book value. Moreover, though the value equation has usually shown equities to be cheaper than bonds, that result is not inevitable: When bonds are calculated to be the more attractive investment, they should be bought.

Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite - that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.

Though the mathematical calculations required to evaluate equities are not difficult, an analyst - even one who is experienced and intelligent - can easily go wrong in estimating future "coupons." At Berkshire, we attempt to deal with this problem in two ways. First, we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we're not smart enough to predict future cash flows. Incidentally, that shortcoming doesn't bother us. What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.

Second, and equally important, we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success. ]  

( BRK Letters, 1992 )

 

• ( BRK - A part of the shareholder letter 2000 about Valuation ) 

[ " Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush - and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oilroyalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years. Market commentators and investment managers who glibly refer to “growth” and “value” styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component - usually a plus, sometimes a minus - in the value equation. Alas, though Aesop’s proposition and the third variable - that is, interest rates - are simple, plugging in numbers for the other two variables is a difficult task. Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach." 

...

At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge (a formulation that my grandsons would probably update to “A girl in a convertible is worth five in the phonebook.”). Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners. Even so, we make many mistakes: I’m the fellow, remember, who thought he understood the future economics of trading stamps, textiles, shoes and second-tier department stores. ]  ( BRK Letters, 2000 )

 

• ( BRK, A Part of BRK Letters 2013 about Valuation ) 

[“You don’t need to be an expert. You must recognize your limitations and follow a course certain to work reasonably well. Keep thing simple and don’t swing for the fences. When promissed quick profits, respond with a quick “no” “ 

“If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience it not necessary; you only need to understand the actions you undertake ” 

“ When Charlie and I buy stocks, we first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock ( or business ) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects “

  “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.” ] ( BRK Letters, 2013 )

                  " The tour we've taken through the last century proves that market irrationality of an extreme kind periodically erupts--and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What's needed is an antidote, and in my opinion that's quantification. If you quantify, you won't necessarily rise to brilliance, but neither will you sink into craziness.   

On a macro basis, quantification doesn't have to be complicated at all " ( Fortune, 2001 ) 

 

 (2.3) TÂM LÝ CHIẾN PSYCHOLOGY: Circle of Competence/ Risk-Volatility-   Fluctuation-Mr Market vs Forecast-Predict-Timing-  When/  Rational - Independent - Inner Scorecard vs Discipline - Patience - Waiting - Inactivity vs Long term - Time - IQ EQ - Greed Fear - Ego Envy Imitation:

• (a) Circle of Competence
  • “ What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. ( 1996 )
  • " You don’t have to be right on 4,000 or 5,000. You don’t have to be right on 400. You don’t have to be right on 40. You just have to stay within the circle of competence, the things that you can understand. And look for things that are selling for less than they’re worth, of the ones you can value. And you can start out with a fairly small circle of competence and learn more about businesses as you go along." ( BRK AM 2009 )
  • “ If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter… Instead, we just stick with what we understand “ (BRK Letters, 1999)
  • There is nothing wrong with a 'know nothing' investor who realizes it. The problem is when you are a 'know nothing' investor but you think you know something " 
  • It is because we concentrated on identifying 1-foot ( 0.3m ) hurdles that we could step over rather than because we acquired any ability to clear 7-foot ( 2.1m ) footers "
  • " Multiply by 3 than by pi (3.14159) "
  • “It’s no sin to miss a great opportunity outside one’s area of competence “ (BRK Letters,1989)
• “ The most common cause of low prices is pessimism some times pervasive, somes times specific to a company or industry. We want to do in such an environment” ( BRK Chairman’s Letter, 1990 ) 
•  “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”
•  “A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem.“

 

(b)Risk-Volatility-Fluctuation-Mr Market vs Forecast-Predict-Timing- When

• + Risk-Volatility-Fluctuation-Mr Market
  • “ In fact, the true investor welcome volatility… The more manic-depressive this chap is, the greater the opportunities available to the investor. That’s true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses “ (BRK Letters, 1993)
  • " Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it " 
  • " He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr Market who is your partner in a private business. Without fail, Mr Market appears daily and names a price at which he will either buy your interest or sell you his. " (BRK Letters, 1987)
  • “ Mr Market has another endearing characteristic: He doen’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option “ (BRK Letters, 1987)
  •  " Indeed, if you aren't certain that you understand and can value your business far better than Mr Market, you don't belong in the game. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy." " (BRK Letters, 1987)
  • “ Mr Market is there to serve you, not to guide you “ (BRK Letters, 1987)
  • " Following Ben's teachings, Charlie and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: "In the short run, the market is a voting machine but in the long run it is a weighing machine." The speed at which a business's success is recognized, furthermore, is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price." (BRK Letters, 1987)
  • Volatility is the friend, I love Volatility. If no stock ever moved around very much, it'd be imposible to make any real money. Volatility is what will enable you to make a lot of money "
  • Using volatility as a measure of risk is nuts. Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return. ( Charlie Munger )

 

• + Forecast-Predict-Timing- Charting-Technical Analysic / Macro Economics/ Political-Speculating ( WHEN )
  •         “ As Ben said: “ In the short run, the market is a voting machine but in the long run it is a weighing machine “ (BRK Letters, 1987)
  • “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
•  “Even now, Charlie and I continue to believe that short-term market forecasts are poison “
• " We believe that short-term forecasts of stock or bond prices are useless. The forecasts may tell you a great deal about the forecaster; they tell you nothing about the future " ( BRK Letters, 1980 )  
• ”Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future” “ (BRK Letters,1981)
• “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
• “We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”
• " Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet " ( BRK Letters, 2014 )
• " 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%." ( BRK Letters, 1994 )
• " I will be talking about pricing stocks, but I will not be talking about predicting their course of action next month or next year. Valuing is not the same as predicting ( Sun Valley 1999, The Snowball )
• Valuing is not the same as predicting 

• It’s fairly, it’s not so difficult to figure out what will happen. It’s impossible, in our view, to figure out when it will happen. So we focus on what will happen." ( BRK AM 1994 )

• I know it will work out over 20 or 30 years. I don’t know whether it will work out over two years at all " ( BRK AM 2020 ) 

• If you are an investor, you are looking on what the asset is going to do. If you are a speculator, you are commonly focusing on what the price of the object is going to do. That is not our game” ( BRK Letters, 1997 )
• “ As Pogo would say,” The future isn’t what it used to be” (BRK Letters,1981)
•  “I violated the Noah rule: Predicting rain doesn’t count, building arks does”
•  “If the history was all there was to the game, the richest people would be librarians “
• “The fact that people will be full greed, fear or folly is predictable. The sequence is not predictable “ ( Financial Review, 1985 )
• " This statement in no way translates into a stock market prediction: we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near - or intermediate term future. What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." ( BRK Letters, 1986 )
• “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”
• “Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.”
• “ Forming macro opinions or listening to the macro or market predictions of others is a waste of time “ (BRK Letters, 2013)
• " Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere." ( BRK Letters, 2013 )
• " My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price." ( BRK Letters, 2018 )
• Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts, or the opinions of media pundits.
• " Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well " ( BRK Letters, 2017 )
• " I did a lot of daydreaming and I was always charting things - I would bring stock charts to school and just wasn't paying attention to what was going on in class " ( The Snowball p.75)
• " He had been fascinated by numberical patterns - technical analysic - " I read all of them over and over. The book that probably had the most influence on me was Garfield Drew, who wrote an important book about odd-lot stock trading. I read that about three times. I read Edwards and McGee, which is the bible of technical analysic. I would go down to the library and just clean them out. But when he found The Intelligent Investor, he read and reread it " It was almost like he found a God " ( The Snowball p.116 )

 

(c)Rational - Independent - Inner Scorecard vs Discipline - Patience - Waiting - Inactivity vs Long term - Time - IQ EQ - Greed Fear - Ego Envy Imitation:

• + Rational - Independent - Inner Scorecard
  • Failure comes from ego, greed, envy, fear, imitation. I have sucess not because I'm smart, but because I'm rational
  • Investment must be rational; if you can not understand it, don't do it
  •  “I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that …I’m paying $32 billion today for the Coca Cola Company because… If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money.“
• “You are neither right because other people agree with you. You are right because your facts are right and your reasoning is right, and that is the only thing that makes you right”
• “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
•  “We don’t get paid for activity, just for being right. As to how long we will wait, we will wait indefinitely “ ( BRK AM, 1998 )
• We don’t read other people’s opinions. We want to get the facts, and then think.”
• The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: ‘Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?’ Now, that’s an interesting question."
• “ Churchill once said: “ You shape your houses and then they shape you “ (BRK Letters, 1987) ( Inner Scorecard )
• "Would you prefer to be the greatest lover in the world and known as the worst, or would you prefer to be the worst lover and known as the greatest?" (Inner Scorecard)
• " The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard " (Sun Valley 1999, The Snowball )
• “ An oil prospector: Oil discovered in hell” (BRK Letters, 1985)

 

• + Discipline - Patience - Waiting - Inactivity
  •  “One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down “I am buying Microsoft at $300 billion because...” Force yourself to write this down. It clarifies your mind and discipline.”
  •  “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
  • “ When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If “ If you can wait and not be tired by waiting …” “ ( BRK Letters, 2017 )
  • “In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In orther words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors “ ( BRK Letters,1997 )
  •  “We don’t get paid for activity, just for being right. As to how long we will wait, we will wait indefinitely “ ( BRK Annual Meeting, 1998 )
  •  “An investor should act as though he had a lifetime decision card with just 20 punches on it.” (The 20-Slot Rule )
• “ We call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47 ! US Steel at 39! And nobody calls a strike on you. There is no penalty except opportunity lost. All day you wait for the pitch you like, then when the fielders are asleep, you step up and hit it “
• “The stock market is a no-called-strike game. You don’t have to swing at everything, you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling “ Swing, you bum!” ( BRK AM, 1999 )
• “Inactivity strikes us as intelligent behavior “ (BRK Letters, 1996)
• Sucess in investing does not correlate with IQ ... what you need is the temperament to control the urges that get other people into trouble in investing "
• The most important quality for an investor is temperament, not intellect "  
• “The stock market is designed to tranfer money from the Active to the Patient “
• “Big opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” (BRK Letters,2009)
•  “Sound investing can make you very wealthy if you're not in too big a hurry.”
• “The big money is not in the buying and selling, but in the waiting.” ( Charlie Munger )
• “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”  ( Charlie Munger )
• " Through 1973 and 1974, The Washington Post Company (WPC) continued to do fine as a business, and intrinsic value grew. Nevertheless, by yearend 1974 our WPC holding showed a loss of about 25%, with market value at $8 million against our cost of $10.6 million. What we had thought ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents on the dollar of intrinsic value."  (BRK Letters, 1985)

 

•  + Long term - Time - IQ EQ - Greed Fear - Ego Envy Imitation
  • “ As Ben said: “ In the short run, the market is a voting machine but in the long run it is a weighing machine “ (BRK Letters, 1987)
  • " Indeed, because of the heavy transaction and investment management costs they bear, stockholders as a whole and over the long term must inevitably underperform the companies they own. If American business, in aggregate, earns about 12% on equity annually, investors must end up earning significantly less. Bull markets can obscure mathematical laws, but they cannot repeal them." (BRK Letters, 1986)
  •   “Buy a business, don’t rent stocks.”
  •  “If a business does well, the stock eventually follows.”
  • “The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.”
  •  “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” (BRK Letters, 1996)
  • “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.”
  • “Our favorite holding period is forever” (BRK Letters, 1988 ) 
  • “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
  • “Only buy something that you would be perfectly happy to hold if the market shut down for 10 years “
  •  “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
  • "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant." (BRK Letters 1985)
  • “Do not take yearly results too seriously. Instead, focus on four or five-year averages.”
  • “Pascal observation seems apt: “ It has struck me that men’s misfortunes spring from the single cause that thay are unable to stay quietly in one room “ ( BRK Letters,1982 )
  • “ In our activities, we will heed the wisdom of Herb Stein: “ If something can not go on forever, it will end “ (BRK Letters, 1988)
  •  “ The dumbest reason in the world to buy a stock is because it’s going up”
  • “What the wise man does in the beginning, the fool does in the end.”
• “The Fourth Law of Motion: For investors as a whole, returns decrease as motion increases “ ( BRK Letters, 2005 )
• “No one pushed me: in tennis parlance, I committed an “unforced error” (BRK Letters, 1990)
• “It is not necessary to do extraordinary things to get extraordinary results.”
• Success in investing doesn’t correlate with IQ ... what you need is the temperament to control the urges that get other people into trouble in investing.
• “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
•  “Investors should remember that excitement and expenses are their enemies.”
•  “ I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out” ( Wharton, 2003 )
• “ The most important quality for an investor is temperament, not intellect “
• “In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond” ( BRK Letters, 1997 )
• “Unfortunately, the hangover may prove to be proportional to the binge” ( 2003 )
• “Like most trends, what the wise man does in the beginning, the fools does in the end” ( BRK AM, 2006 )
• “The world went mad. What we learn from history is that people don’t learn from history”
• “You can’t buy what is popular and do well”
• “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is”
• “A public opinion poll is no substitude for thought”
•  “ The most common cause of low prices is pessimism some times pervasive, somes times specific to a company or industry. We want to do in such an environment” ( BRK Letters, 1990 ) 
• “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”
•  “A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem.“
•  “ If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period ? “ ( BRK Letter, 1997 )
• “A climate of fear is their best friend “ (BRK Letters,2009)
• “Widespread fear is your friend as an investor because it serves up bargain purchases.”
• “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
• “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
• “The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they’re on the operating table.”
• “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
• “It is a terrible mistake for investors with long-term horizons – among them pension funds, college endowments, and savings-minded individuals – to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks,”
• “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
• Buy into a company because you want to own it, not because you want the stock to go up.
• “In the 54 years (Charlie Munger and I) have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.”
• “In the 20^th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
• “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
• “Don’t get caught up with what other people are doing. Being a contrarian isn’t the key but being a crowd follower isn’t either. You need to detach yourself emotionally.”
•  “We will have another bubble, but usually you don’t get it the same way you got it before.”
• “What we learn from history is that people don’t learn from history.”
• “A climate of fear is your friend when investing; a euphoric world is your enemy.”
•  “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
• “Anything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen, that you’re still around to play the next day.“
• “You do not adequately protect yourself by being half awake when other are sleeping.“
• “It’s us fun being a gorse when the tractor comes along, or the blacksmith when the car comes along.“
• "I feel like an oversexed guy on a desert island. I can't find anything to buy." ( 1973 )
• "I feel like an oversexed man in a harem. This is the time to start investing." (1974 )
• “A bull market is like sex, it feels best just before it ends”
• Forbes: “ How do you feel? “ “ Like an oversexed guy in a whorehouse. Now is the time to invest and get rich “
• “Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturday and Sunday without looking at stock prices, give it a try on weekdays “ (BRK Letters, 2013)
• "I read it in the spring of 2002, and I never asked anyone else their opinion. I thought it was worth $100 billion after reading the report. I then checked the price, and it was selling for $35 billion. What is the sense of talking to management? It doesn’t make any difference. If the market value was $40 billion, you would need to refine the analysis. We don’t like things you have to carry out to 3 decimal places. If someone weighed somewhere between 300-350 pounds, I wouldn’t need precision—I would know they were fat." ( BRK AM 2002 )
• " It’s not greed that drives the world, but envy " (Charlie Munger)
• “Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy “ (BRK Letters, 2013)

 

3. TẠI SAO VALUE INVESTING LẠI QUÁ KHÓ ?( WHY IS VALUE INVESTING IS SO DIFFICULT ? ):  Reading/ Learning/ Waiting/ Habits/ Knowledge/ Experience/ Mistakes/ Lessons

 

(a) A READING HABIT: 

• “I just sit in my office and read all day”
• “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business.”
•  “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”
• “When asked how he became so successful in investing, Buffett answered: ‘we read hundreds and hundreds of annual reports every year.”
• “I knew a lot about what I did when I was 20. I had read a lot, and I aspired to learn everything I could about the subject.”
• “Do a lot of reading.” – on how to determine the value of a business
• Smith asked, “But there are 27,000 public companies! Where should one start?” . Buffett replied, “Well, start with the A’s.” ( Money World PBS 1993 )
• “Read Ben Graham and Phil Fisher read annual reports, but don’t do equations with Greek letters in them.“
• “Other guys read Playboy, I read annual reports”
• “ Jack asked, “ How do you do it? “. Buffett said he read ‘ a couple of thousand ‘ financial statement a year “ ( p130, The making of American Capitalist )
• “ He – Buffett- once told Forbes that he carefully read ten annual reports a week “ ( p266, The making of American Capitalist )

 

(b) A LEARNING MACHINE: 

• “If you don’t know jewelry, know the jeweller”
•  “The most important investment you can make is in yourself.”
• “ Accounting numbers, of course,  are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking it’s progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it “ (1986 ) 
• “You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements – you really shouldn’t select stocks yourself”
•  “Managers thinking about accounting issues should never forget one of Abraham Lincoln’s favorite riddles: `How many legs does a dog have if you call his tail a leg?’ The answer: `Four, because calling a tail a leg does not make it a leg’.”
• “There is nothing like writing to force you to think and get your thoughts straight.”
• " Without lifelong learning, you’re not going to do very well. You’re not going to get very far in life based on what you already know " ( Charlie Munger )
• “Without Warren Buffett being a learning machine — a continuous learning machine, the record would have been absolutely impossible.”  ( Charlie Munger )
• " I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.… so if civilization can progress only with an advanced method of invention, you can progress only when you learn the method of learning. " ( Charlie Munger ) 
• " Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” ( Charlie Munger )
• " The game of investment is really continuous learning." ( Li Lu )
• " Knowledge compounds almost in the same way that your money compounds. In fact, only when your knowledge compounds at a faster pace, your money is safe " ( Li Lu )

 

(c) A GET-RICH-SLOW MINDET (WAITING): 

• “In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In orther words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors “ ( BRK Letters,1997 )
•  “We don’t get paid for activity, just for being right. As to how long we will wait, we will wait indefinitely “ ( BRK AM, 1998 )

 

HABITS/ KNOWLEDGE/ EXPERIENCE/ MISTAKES/ LESSONS: 

•  “Chain of habit are too light to be felt until they are too heavy to be broken “
• “If something is not worth doing at all, it is not worth doing well” ( BRK Letters,1981 )
• “ Can you really explain to a fish what it’s like to walk on land ? “
• “Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway “
•  “ Most business mistakes are irreversible setbacks, but you get another chance “
• “ There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children “
• “You only have to do a few things right in your life so long as you don’t do too many things wrong “
• “The difference between successful people and really successful people is that really successful people say no to almost everything.”
• “One can best prepare themselves for the economic future by investing in your own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future.”
• “You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.“
• “An investor needs to do very few things right as long as he or she avoids big mistakes.“ (BRK Letters, 1992)
• “In insurance, as elsewhere, the reaction of weak managements to weak operations is often weak accounting ( “It’s difficult for an empty sack to stand upright”) (BRK Letters,1982)
• “ You do whatever the probabilities indicated based on the knowledge that you have at that time “ (Forbes, 1997)

 

4. CÁC CHỦ ĐỀ KHÁC ( OTHERS ):

 

 (a) Academy/ Business School/ EMT/ Risk Beta/

• “ The business schools rewards difficult complex behavior more than simply behavior, but simple behavior is more effective “
• “ I would be a bum on the street with a tin cup if the markets were always efficient “ ( Fortune, 1995 )
• “ After all, what witch doctor has ever achieved fame and fortune by simply advising : “ Take two aspirins ?” (BRK Letter, 1987)
• “ However, they forgot a fundamental principle: It is better to be approximately right than precisely wrong “ (BRK Letters, 1993)
• " Amazingly, EMT was embraced not only by academics, but by many investment professionals and corporate managers as well. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day. In my opinion, the continuous 63-year arbitrage experience of Graham-Newman Corp. Buffett Partnership, and Berkshire illustrates just how foolish EMT is " (BRK Letters, 1988)

 

(b) Investing vs Speculating

• “If you are an investor, you are looking on what the asset is going to do. If you are a speculator, you are commonly focusing on what the price of the object is going to do. That is not our game” ( BRK Letters, 1997 )
• “If you instead focus on the prospective price change of a contemplated purchase, you are speculating (BRK Letters, 2013)
•  “Speculation is most dangerous when it looks easiest.” ( BRK Letters,2000)
• “Bitcoin has no unique value at all. You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more. You aren’t investing when you do that, you’re speculating.”  
• “The future is never clear, and you pay a very high price in the stock for a cheery consensus “  
•  “ The line separating investment and speculation, which is never bright and clear… After a heady experience of that kind, normally sensible people drift into akin to that of Cinderella at the ball…Therefore, the giddy participants all plan to leave just seconds before midnight. There is a problem, though: They are dancing in a room in which the clocks have no hands  “ ( BRK Letters, 2000 )
• “ We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one night stands a ‘romantic’ “ (1991)
• “Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
• Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game.
• “What we learn from history is that people don’t learn from history.”
• “Cash combined with courage in a time of crisis is priceless.
• “With enough insider information and a million dollars, you can go broke in a year.“
• “Why pay for pornorghraphy when you can just stare up at the sky until you see a clound that look like two people have sex for free ?”
• “ My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments “ (BRK Letters, 2013)
• “ Because there is so much chatter about markets, the economy, interest rates, price behavior of stock, etc, some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments “ (BRK Letters, 2013)

 

(c) Alternatives:  Currency/ Gold/ Bitcoin/ Comodities/ Productive Assets vs Non Productive Assets

• “It’s manager would have been kidding themselves if they thought of any portion of that interest as “ income “ “ ( Bonds, Bank Deposit, BRK Letters, 2011 )
• “Bonds promoted as offering risk-free returns are now priced to diliver return-free risk “ ( BRK Letters, 2011 )
• “The second major category of investment involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else will pay more for them in the future”  ( BRK Letters, 2011 )
• “Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at it’s end “ ( BRK Letters, 2011 )
• “Today the world’s gold stock is about 170,000 metric tons… It’s value would be $9.6 trillion… The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond “(BRK Letters, 2011 )
• “I have no views as to where it (gold) will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money, and there will be a lot – and it’s a lot – it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.”
•  “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
• “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything."
•  “Bitcoin has no unique value at all. You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more. You aren’t investing when you do that, you’re speculating.”
• “Stay away from it [Bitcoin]. It’s a mirage, basically...The idea that it has some huge intrinsic value is a joke in my view.”
• "Cryptocurrencies basically have no value, they don't produce anything." ( CNBC, 2020 )
• "You can't do anything with it [Cryptocurrencies] except sell it to somebody else, but then that person's got the problem." ( CNBC, 2020 )
• "I don't own any cryptocurrency. I never will."
• "Bitcoin has been used to move around a fair amount of money illegally,"
• "The logical move from the introduction of bitcoin is to go short suitcases,"

•  “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you….it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.”
•  "Derivatives are like sex. It's not who we're sleeping with, it's who they're sleeping with that's the problem."
• “Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca Cola, IBM and our own See’Candy meet that double-barreled test” ( BRK Letters, 2011 )
• “Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirement on them. To earn more, their owners must invest more” ( BRK Letters, 2011 )
• “Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20^th century when the Dow increased from 66 to 11,497 ( and paid loads of dividends as well ) ( BRK Letters, 2011 )

 

(d) Stock Market/ Cycles/ Bubbles Bull Bear Market/ Bridge and Probabilities/ Sports

• “You are seeing through new situastions every ten minutes… Bridge is about weighing gain/loss ratios. You are doing calculations all the time”
• “In bridge, you behave in a way that gets the best from your partner. An in buseness, you behave in the way that gets the best from your managers and your employees”
• “I would not mind going to the jail if I had there cellmates who played”
• “I spend twelve hours a week, a little over 10% of my waking hours, playing the game”
• “Investing is not as tough as being a top-notch bridge player. All it takes is the ability to see things as they really are”