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Warren Buffetts8 Best Investment Plays
Financial Intelligence ReportThe Global Resource to Protect and Grow Your Wealth
Special Report
By Brian OConnell
Whats the secret to Warren Buffetts investment success?
The secret, according to the Sage of Omaha, is that there
is no secret. All there is to investing, he says, is picking
good stocks at good times and staying with them as long as
they remain good companies.
Buffett has done that in spades over the past 40 years
at the helm of Berkshire Hathaway, one of the most
successful investment companies in the history of Wall
Street. The $44 billion company is like a block of granite in
an otherwise fragile investment environment. Astute
investments in brand-name value plays like Coca-Cola,H&R Block, American Express and Comcast have fueled
Berkshire Hathaways rise to the top of the global investment
period. All solid, no-nonsense companies that offer investors
the three things that Buffett prizes in his investment picks:
steady growth, good management and no surprises.
Buffetts results speak for themselves. A $10,000
investment in Berkshire Hathaway in 1965 would be worth
nearly $30 million by 2005. In contrast, $10,000 in the
S&P 500 would have risen to roughly $500,000.
Consequently, Buffett is a Zen-like figure to both WallStreet and Main Street. Business writers and stock market
analysts jot down his every utterance. Berkshire Hathaway
annual meetings are almost mythical events, with a small
army of Berkshire investors and Buffett zealots
hanging on his every word. And he always delivers.
Prior to Berkshire Hathaways six-hour annual general
meeting in May 2002, investors began lining up for seats at
4 a.m. Attendees were not disappointed. Among the treats?
A film of Berkshire Hathaway chief Warren Buffett playing a
ukulele and singing, When the NASDAQs down, youll
never frown, Berkshires here to stay. In typical fashion, the
folksy Buffett later led a visit to the local Dairy Queen down
the street, which, by the way, he owned.
So, whats on Buffetts mind these days? In this Financial
Intelligence Reportspecial report, Warren Buffetts 8 Best
Investment Plays,well lay it all out for you. From why
China is the next big opportunity on Wall Street to why,
thanks to rampant American consumerism, the U.S. dollar
is in great peril, well show you what Wall Streets greatest
living legend considers to be the biggest economic and
investment plays on the world stage. Eight of them, in fact,all culled from the laser-sharp mind of the Sage of Omaha.
Well also delve into Buffetts personal investment
philosophy and detail, point by point, the investment traits
and characteristics that Buffett has used over the years to
drive his mega-billion company, Berkshire Hathaway, to the
top of the investment charts.
Its a story worth hearing and NewsMax is here to tell it.
The Buffett Way
Before we examine Buffett's eight key financial plays for
2005, as explained by the guru himself, the investment
philosophy that earned the Sage of Omaha $40 billion is
worth examining.
Call it the Buffett Way as many people do.
In this day and age, when traditional investment like
stocks and bonds ebb and flow along with the economic
tides, seemingly tethered to nothing and batted about in
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global financial markets on an almost daily occurrence,
there is comfort in the knowledge that a visionary like
Warren Buffett exists. His company, Berkshire Hathaway, is
one of the most successful businesses in American history,
if not the most successful. As noted above, a $10,000
investment in Berkshire Hathaway when Buffett took
control in 1965 would be worth over $50 million today.Buffet himself has a personal net wealth of more than $40
billion, making him the second-wealthiest individual in the
U.S. (behind Microsoft founder Bill Gates).
But it wasnt so long ago that the so-called experts on
Wall Street were laughing at Warren Buffett, mocking his
cautious, carefully measured methodology of investing in
the financial markets.
To the self-proclaimed gurus, Buffetts take on things
seemed out of tune. The rules of the game had changed,
and he just didnt get it. Warren Buffett should say, Imsorry, fumed Harry Newton, publisher of Technology
Investor Magazine, in early 2000. How did he miss the
silicon, wireless, DSL, cable, and biotech revolutions?
That was a year when America Online stock rose sixfold
and Amazon.com had rocketed by 1,000 percent in a year,
while shares in Berkshire Hathaway, the investment
company Buffett had built virtually from scratch, had
climbed cue ominous music only 11 percent.
But, as history has proved, the Buffett Way won out in
the end, as the Dot-Com bubble exploded, leaving millions
of Americans with huge holes in their investment portfolios
and more than a few experts with egg on their faces
experts who right now would kill for 11 percent
investment returns. Yes, wise old Warren (a lifelong
techno-phobe, as he confesses on the Berkshire Hathaway
Web site) stuck with boring blue chips like Gillette, Coca-
Cola and American Express, saying he couldnt understand
these newfangled companies.
What did Buffett know that the Dot-Com geniuses
didnt? How to look for good value plays. Buffett and his
partner, Charles Munger, began looking closely at Dot-Com company valuation sheets and came away convinced
that there was more folly than fortune in all those
celebrated new-economy companies. Instead, they returned
to the grounds they had tilled before and knew so well
value stocks. They invested in companies like Procter and
Gamble that made products that people actually used.
It is hardly necessary to point out that this was during
the age of irrational exuberance, when the NASDAQ was
flying and Berkshires stock was flopping. While the experts
considered Buffetts fixation on value (and values) old hat,
the Sage proved them all wrong. But now its an old hat
that lots of people would like to try on to see if it fits, just
like Cinderellas glass slipper.
The Buffett Saga
Warren Buffetts story is quintessentially American. He
is by most counts the second-richest man in America (the
richest is Bill Gates) with a fortune estimated by Forbes
magazine at more than $44 billion. He is the only U.S.
billionaire to have made his money entirely through
investing, and today, along with Alan Greenspan and Paul
Volcker, both chairmen of the Federal Reserve, he is
arguably the most respected voice of financial America.
His natural habitat is not Wall Street or Washington,
but the unpretentious Midwest heartlands. Weve told you
about his moniker The Sage of Omaha, but that is not
his only nickname. Buffett is also known as the Oracle of
Omaha, Omaha being the pleasant but largely
unremarkable Nebraska city on the banks of the Missouri
River where he was born and raised, where he made his
fortune and where he lives to this day, in the same gray
stucco house he bought for $31,500 back in 1956.
Buffett is today the best-known Nebraskan on earth, a
gray-haired, no-nonsense Man of the Heartland who has
been triumphantly vindicated by financial market eventstime and time again. He is not so much a financial
institution as a national institution, the object of a cult that
attracts around 22,000 people to Omaha every May for
Berkshire Hathaways annual meeting. Buffett himself has
called the occasion the Woodstock of capitalism. Some
people buy a Berkshire Hathaway share just to attend (not
as small a matter as it sounds, for old-fashioned Warren has
never been one for fancy devices such as stock splits, and a
single share of Berkshire Hathaway stock can cost upward
of $80,000).
In this age when CEO stands in many minds for chief
embezzlement officer, Buffett embodies those Midwest
virtues of probity, modesty and common sense Americans
like to think of as part of the national character. It should
be noted that this same part of the world spawned Arthur
Andersen, once held as another paragon of honesty and
good housekeeping. But Buffett has kept his halo. He is a
CEO for the nation, the self-made man who made his
fortune honestly, the scourge of less-principled peers.
Warren Buffett Financial Intelligence Report Page 2
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Not So Fast, Mr. Greenspan
Affable and avuncular with the media and, especially,
with Berkshire Hathaway shareholders, Buffett can be very
combative when it comes to getting his point across
even if his intended target is one of the most powerful men
in the world.
A few years back, Buffett and Federal Reserve Chairman
Alan Greenspan agreed to disagree about the effect that so-
called derivative securities would have on financial
markets. Greenspan said they had reduced risk. Buffett saw
things differently. In his letter to shareholders in 2003,
Buffett called them weapons of mass destruction.
A Student of Graham
The foundations of the Buffett legend were laid young.
The son of a stockbroker and Republican congressman,he made his first trade in 1941 when he was just 11, buying
three shares in a company for $38 apiece. They dropped to
$27, then rose to $40, at which point the cautious youth
sold, earning a tiny profit but missing a later climb to $200.
These events sowed the seeds of his lifelong investing
philosophy, that share-buying is for the long term.
As a child he was industrious in the extreme running
a double paper route and collecting lost golf balls, selling
them and putting the proceeds toward buying 40 acres of
farmland, which he then rented out. College in Omaha
was followed by a graduate degree at Columbia University
in New York City, where he met and worked with
Benjamin Graham, the author ofThe Intelligent Investor
and eventually Buffetts financial mentor.
Grahams strategy was to search for what he called cigar
butt companies, no longer of interest to the market and
thus undervalued, but which still had a few puffs of life in
them. In 1962 Buffett found one a rundown
Massachusetts textile concern called
Berkshire Hathaway. He poured what
resources it had into other businesses,notably insurance.
It was a stroke of genius. Insurance
companies may not be hugely profitable
intrinsically, but they have a float, up-front
premium payments from policyholders, from which claims
are settled only later. The cash pile grew during the early
1970s bear market on Wall Street.
Buffett used the money to buy stakes in companies at
bargain prices, and the Berkshire Hathaway phenomenon
was born.
Now, when Buffett speaks, ordinary Americans not only
listen, they are enraptured. But the truly sacred texts of
Warren Edward Buffett are Berkshire Hathaways annual
letters to shareholders, studied at business schools across
the country and collectively published in 1998 as TheEssays of Warren Buffett.They are pithy and wise, sprinkled
with the endearing admissions of human failure that a
deity may occasionally permit himself.
The 2001 edition, for instance, contains a huge mea
culpa for his failure to protect General Re, one of Berkshire
Hathaways re-insurance units, from the shockwaves of
the September 11 terrorist attacks. Buffett well knew
that a mega-catastrophe (albeit more likely natural than
man-made) was possible. I violated the Noah rule, he
groveled. Predicting rain doesnt count; building arks does.Few shareholder letters quote Horace. But BHs in 2001
noted that Many shall be restored that now are fallen and
many shall fall that are now in honor which pretty
succinctly describes the reversals of reputation, between
1999 and now, of Buffett on the one hand and AOL-Time
Warner on the other, not to mention disgraced erstwhile
superstars like Ken Lay of Enron and WorldComs Bernie
Ebbers.
Buffetts Keys to Profitable InvestingWhat strategies does Buffett deploy when picking stocks?
For starters, he looks for companies with solid financial
performance managed by seasoned and savvy executives.
Buffett also favors companies with histories of above-average
earnings growth. His holdings in American Express and
Coca-Cola are good examples of that.
Here is a list of additional attributes Buffett looks for
when buying stocks:
Simple Businesses. Buffett likes to
keep things simple and he likes his
companies to do the same. Again and again,
Buffett has railed against the kinds of
companies that seem too complicated or that
are difficult to valuate. His avoidance of
Internet and technology companies during the
Dot-Com bubble is the most famous manifestation of his
keep it simple dictum. Buffett jokingly calls himself a
techno-phobe, but in reality he shies away from technology
Warren Buffett Financial Intelligence Report Page 3
Buffett-isms In the business world,
the rearview mirroris always clearer than
the windshield.
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Warren Buffett Financial Intelligence Report Page 4
and telecom stocks. He likes to base his stock picks on,
among other things, what a company will look like 10
years down the road. Technology companies, he says, are
much too volatile and risky for that kind of analysis. The
10-year rule also applies in a backward sense Buffett will
consider only those companies with a good 10-year track
record. Most technology companies havent been aroundthat long and, for their lack of seasoning and earnings
history, tend to fall off Buffetts radar.
Return on Equity.Another key criterion for Buffett
is a companys return on equity (ROE). Again, he favors a
10-year plan, where he can predict ROE 10 years out.
Companies that cant be gauged accurately dont make it
into the Buffett portfolio. Buffett also favors companies
that dont need much capital. Such companies, he has said,
generate significantly higher returns on equity.
Cash on the Barrel. The Buffett Way is long oncompanies that have deep pockets. Companies that have
what Buffett refers to as ample cash flow are companies
that have plenty of financial resources both to pay their
bills and to keep growing.
Low Debt. Companies that can limit and manage
their debt are high on Buffetts priority list. Insurance
companies (he owns both Geico and General Re) are
particular favorites in this regard. With the Buffett Way,
low debt equals significant room for growth. Buffetts
emphasis on low debt is grounded in reality. With limited
debt, earnings growth is based on shareholders equity asopposed to borrowed money.
Emphasis on Value. Historically, Buffett has targeted
investments in undervalued companies with good long-
term growth potential. Identifying such companies isnt
easy, but Buffett has mastered the technique. In a nutshell,
Buffett favors stocks that are unjustifiably low based on
their intrinsicworth. He bases his calculations of intrinsic
worth by analyzing a companysfundamentals. As with
most bargain hunters, Buffett targets companies that are
good revenue producers and are capably managed, thoughunderpriced.
Buffett is also famous for his aversion to reading stock
market tea leaves. Thats not what he is about. Quite
simply, he selects stocks solely on the basis of their overall
potential as a company. Once Buffett adds a stock to his
portfolio, he will hang on to it for years even decades.
Buffett could care less if other investors ever get around to
recognizing the stock markets value. His only concern is
that his companies earn money and lots of it.
The Big Six
There are other highly visible cues to take from the Sage
on his investing philosophy. In fact, Buffetts investing
criteria are outlined in his yearly reports to shareholders.
They are:
1. Large purchases (at least $50 million of before-taxearnings).
2. Demonstrated consistent earning power (future
projections are of no interest to him, nor are
turnaround situations).
3. A history of earning good returns on equity while
employing little or no debt.
4. Management in place (he cant supply it).
5. Simple businesses (if theres lots of technology, he
wont understand it).
6. An offering price (he doesnt want to waste his or the
sellers time by talking, even preliminarily, about a
transaction when the price is unknown).
Source: Berkshire Hathaway annual report
Buffett has said candidly that, if a company falls within
these criteria, dont call an investment banker, call him.
For Buffett, Its All About Businesses
Not Stocks
Buffett can be a bit of a contrarian, sliding away from
his own investment philosophy from time to time. Some
Buffett watchers were surprised by his modest investments
in struggling companies like Level 3 Communications, a
fiber optics network operating in the red, and The
Williams Cos., an energy group. Buffett is known for
preferring old-economy companies and firms that are
already in the black. He doesnt like technology companies
because he says that he doesnt understand technology. He
invests in companies like Gillette because he loves the fact
that millions of men grow whiskers every night. But theinvestments were not a complete surprise to true Buffett
aficionados. Buffett had said that if markets fell
significantly, he would use that situation as a buying
opportunity and he did.
In the end, Buffetts investment philosophy is also
attractively simple. He believes that investors should be
buying a business, not simply a stock. Buffetts annual report
is nothing if not readable quite famously so and is
perhaps the best window into the way his mind works.
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Warren Buffett Financial Intelligence Report Page 5
One of his annual reports contained what is probably as
clear a one-paragraph summary of Buffetts investment
philosophy as can ever be stated: Whenever we buy
common stocks we approach the transaction as if we
were buying into a private business. We look at the
economic prospects of the business, the people in charge of
running it, and the price we must pay. We do not have inmind any time or price for sale. Indeed, we are willing to
hold a stock indefinitely so long as we expect the business
to increase in intrinsic value at a satisfactory
rate. When investing, we view ourselves as
business analysts not as market analysts,
not as macroeconomic analysts and not even
as security analysts.
Thus the Buffett paradox. On the one
hand, this paragraph is so steeped in old-
fashioned values largely vanished fromtrading-obsessed Wall Street that one can immediately
understand why Buffett has followers. On the other hand,
its clear that Buffetts investing style just isnt that difficult
to understand. Its nothing more than a balanced four-
legged stool: Buffett cares about the future prospects of the
business. He wants to know that management has both
integrity and drive. He doesnt want to overpay for the
stock. And whether the shares go up or down, he wont sell
so long as the fundamentals remain the same. Pretty
simple, right?
The Buffett Paradox
So, is it a bit over the top to call Warren Buffett a
modern-day miracle worker? Probably not.
Its not as if he is parting the Red Sea, though his
investment record an average annual gain of over 30
percent since 1965 is not too far off. He is certainly a
living, breathing antithesis of the random walk theory
beloved by economists attempting to
rationalize market behavior the theory
that stock movement is random because allinformation about the future prospects of a
company has already been built into the
share price. They try to explain away
Buffetts unusual success by pointing out
that in any game of chance someone has to
come out on top and it just happens to
be him.
But of course everyone knows thats not true. Its sort
of the equivalent of saying that the reason the golf ball
found the bottom of the cup more often for Tiger Woods
has to do with luck, not skill. No, like Woods, Buffett has
something we mere mortals have no real hope of emulating
which leads to the real Buffett paradox, a phenomenon
that is quite the opposite of the supposed random walk
theory. Just as Woods is far more likely to ascribe his
success to hard work than to his supernatural talent, so toodoes the greatest investor of our time make investing seem
easier than it actually is.
Listening to him speak, reading his many
writings on investing, absorbing his message,
even watching his investment moves over the
years, an investor is more likely to gain hope
than to lose it. How difficult can it be, after
all, to buy Coca-Cola and hold it forever
a practice at the core of Buffetts investment
methodology? It should make the averageinvestor feel a lot more confident, knowing that Buffett
firmly rejects all the fancy-pants trading techniques so
beloved by modern Wall Street techniques that make it
seem as if the big boys have an insurmountable advantage
over the rest of the hoi polloi. Simplicity is the key.
Buffettology Redux
So why doesnt everyone invest like Buffett? For one
thing, very few people can stomach the ups and downs
of the market without wanting to jump on and off. For
most investors, it is difficult not to panic when the market
tanks, and it can be tricky to resist jumping on a really hot
stock. The even-keeled thinking necessary to be a great
investor is an extremely rare thing. Buffett, however, has
that trait in spades. He is happy when markets tank
because it means he can buy stocks he wants at a cheaper
price.
The second reason most people dont invest like Buffett
is because his methods are a lot more
complicated than they appear. When Buffett
talks about the economic prospects of apotential investment, he is talking about the
position of the business 10 years down the
road. So if he can see the business remaining
dominant for the next decade, hell consider
buying the stock. Buffett has an uncanny
ability to predict very accurately which companies will be
dominant players in 10 years a gift not many investors
can claim.
This gift may be partly based on Buffetts genius when it
Buffett-isms Only buy somethingthat youd be perfectlyhappy to hold if themarket shut down
for 10 years.
Buffett-isms
We simply attempt tobe fearful when othersare greedy and to be
greedy only when othersare fearful.
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Warren Buffett Financial Intelligence Report Page 6
comes to numbers. Accounting, he likes to say, is the
language of business. It is a language in which his own
fluency is unsurpassed, and which gives him an enormous
competitive advantage. Usually, all he needs is a quick
glance at a balance sheet to know whether hes interested in
buying a company or not because he finds meaning in
numbers that most investors are not capable ofunderstanding.
Many students of Buffettology have struggled to get
their heads around accounting ideas that are second nature
to him. A classic example is intrinsic value, which is
Buffetts way of evaluating the true worth of a company
and which he describes as the only logical approach to
evaluating the relative attractiveness of investments and
businesses. He has said, 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.
This definition may be simple for Buffett, but its clearly
not that simple for the rest of the investment community,
who bang their heads against the wall trying to play catch-
up with his successes.
What does the future hold in the eyes of this great
investment visionary? Buffett is concerned about the trade
deficit and the decline of the value of the U.S. dollar.
In a recent interview, he said: It seems to me that a
$618 billion trade deficit, rich as we are, strong as thiscountry is, well, something will have to happen that will
change that. Most economists will still say some kind of
soft landing is possible. I dont know what a soft landing is
exactly, in how the numbers come down softly from levels
like these.
On risky trading, Buffett is very clear: Minimize risk.
There are more people [like hedge-fund managers] that go
to bed at night with a hair trigger than ever before, he
says. Its an electronic herd, they can give vent to decisions
that move billions and billions of dollars with the click of akey. There will be some kind of stampede by that herd.
When you have far greater sums than ever before, in one
asset class after another, that are held by people who
operate on a hair-trigger mechanism, then they lend
themselves to more explosive outcomes. People with very
short time horizons with huge sums of money, they can all
try to head for the exits at the same time. The only way you
can leave your seat in burning financial markets is to find
someone else to take your seat, and that is not always easy.
Warren Buffetts Eight Top
Investment Plays
So here we are.
Now, thanks to our Financial Intelligence Report
special report Warren Buffetts 8 Best Investment Plays
for 2005, you know what Warren Buffett looks for inpicking great companies and great investment plays.
Its a combination of tried-and-true value selections and
some contrarian bets on higher-risk investment vehicles
like derivatives and global currencies.
Lets take a look at the most recent additions to the
Buffett portfolio and see if they dont make sense for you:
1. Brewskies and Broadband. True to form, Berkshire
Hathaways 2005 portfolio included a stable of Buffett
standbys like Coca-Cola, American Express and Gillette.Newer wrinkles include a big bet on media giant Comcast
(Buffett & Co. now own 10 million shares); a significant
new investment in Anheuser-Busch, buying 200 million
shares; and a big sell-off in sports consumer apparel
behemoth Nike.
The Anheuser-Busch play comes straight out of the
Buffett playbook. The self-styled King of Beers is a
consumer giant mainstay with a track record of strong sales
no matter how the underlying economy performs. Simply
put, people drink Budweiser in good times and bad,
roughly in the same quantities. Its the kind of well-
managed, dependable company to which Buffett is known
to gravitate. He gave no explanation for his sell-off of
Nike (cutting Berkshires holdings from 6 million to 2.5
million) he typically does not comment on specific
trades. Buffett also sold his entire 13.5-million-share stake
in hospital operator HCA and sold smaller stakes in
Wells Fargo and information management company
Iron Mountain.
Two other potential Buffett picks are iShares Dow Jones
US Utilities and Sysco. Each offers a unique sense of contrastto the standard Buffett investment philosophy. While neither
is currently included in Berkshire's portfolio, both stocks
possess the qualities Buffett generally looks for in his picks.
The iShares ETF offers shareholders steady returns from the
utility sector while Sysco, a giant in food distribution and
marketing, parallels Buffetts value philosophy. Sysco is a
well-managed company that has a solid foothold in its
market. It also has low debt and lots of cash to fuel increased
company growth.
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sink, you can easily invest in foreign currencies through
venues like Evergreen Bank. As Buffett tends to favor the
euro, a good fund thats bearish on the dollar and strong
on the euro is the Merk Hard Currency Fund, a mutual
fund that invests in a basket of hard currencies assembled
to protect against the fall of the dollar.
(www.merkinvestments.com)
5. If You Cant Beat Em, Join Em. In mid-June 2005,
shares of China Life Insurance Co., Ltd. jumped by 4.9
percent, driven by rampant rumors that Buffett had bought
a large quantity of China Life ADRs. Hong Kong media
reported that he had acquired 8.7 million ADRs in China
Life in May, and had also bought another 10 million ADRs
in early June. Buffett reportedly has plans to become a
strategic investor in China Life. Rumors are still mulling
about that indicate he will purchase an additional 6.3
million ADRs in the company, raising the total to 25million. Buffett has bought shares in Chinas oil giant
PetroChina Company Limited as well, earning over HKD
8 billion from the deal.
Clearly, Buffett is bullish on all things China.
6. The Real Estate Bubble. Buffett owns the same
house in Omaha that hes owned since the 1950s. He also
recently sold a house he owned in Laguna Beach in
Southern California.
He agrees with many of the economic gurus that the
U.S. real estate market is in a state of disequilibrium andthat it could be a dangerous place to sink your money.
The real estate matter was a topic Buffett publicly
discussed at his annual board meeting with his longtime
business partner Charlie Munger.
Heres how the exchange went:
Buffett: A lot of the psychological well being of the
American public comes from how well theyve done with
their house over the years. If indeed theres been a bubble,
and its pricked at some point, the net effect on Berkshire
might well be positive [because the companys financial
strength would allow it to buy real-estate-related businesses
at bargain prices].
Certainly at the high end of the real estate market in
some areas, youve seen extraordinary movement. People
go crazy in economics periodically, in all kinds of ways.
Residential housing has different behavioral characteristics,
simply because people live there. But when you get prices
increasing faster than the underlying costs, sometimes there
can be pretty serious consequences.
Munger: You have a real asset-price bubble in places like
parts of California and the suburbs of Washington, D.C.
Buffett: I recently sold a house in Laguna for $3.5
million. It was on about 2,000 square feet of land, maybe
a twentieth of an acre, and the house might cost about$500,000 if you wanted to replace it. So the land sold for
something like $60 million an acre.
Munger: I know someone who lives next door to what
you would actually call a fairly modest house that just sold
for $17 million. There are some very extreme housing price
bubbles going on.
Buffett: (on the trade deficit and the value of the dollar)
That really is the $64,000 question. It seems to me that a
$618 billion trade deficit, rich as we are, strong as this
country is, well, something will have to happen that willchange that. Most economists will still say some kind of
soft landing is possible. I dont know what a soft landing is
exactly, in how the numbers come down softly from levels
like these.
There are more people [like hedge-fund managers] that
go to bed at night with a hair trigger than ever before, its
an electronic herd, they can give vent to decisions that
move billions and billions of dollars with the click of a key.
We will have some exogenous event, we will have that.
There will be some kind of stampede by that herd.
When you have far greater sums than ever before, in one
asset class after another, that are held by people who operate
on a hair-trigger mechanism, then they lend themselves to
more explosive outcomes. People with very short time
horizons with huge sums of money, they can all try to head
for the exits at the same time. The only way you can leave
your seat in burning financial markets is to find someone
else to take your seat, and that is not always easy.
Munger: The present era has no comparable referent in
the past history of capitalism. We have a higher percentage
of the intelligentsia engaged in buying and selling pieces of
paper and promoting trading activity than in any past era.
A lot of what I see now reminds me of Sodom and
Gomorrah. You get activity feeding on itself, envy and
imitation. It has happened in the past that there came
bad consequences.
Buffett: I have no idea on timing. Its far easier to tell
whatwill happen than when it will happen. I would say
that what is going on in terms of trade policy is going to
Warren Buffett Financial Intelligence Report Page 8
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have very important consequences.
Munger: A great civilization will bear a lot of abuse,
but there are dangers in the current situation that threaten
anyone who swings for the fences.
Buffett to Munger: What do you think the end
will be?Munger: Bad.
So, the Sage says be careful with residential real estate. A
host of companies and sectors will be hit by a real estate
bust, so choose your investments carefully.
7. Equities, Not Bonds. In his 2005 address toBerkshire Hathaway shareholders, Buffett explained why
his portfolio exposure to bonds is minimal and why his
exposure to stocks is maximized.
If you had to make a choice between long-term bonds
at around 4.5 percent and equities for the next 20 years, I
would certainly prefer equities, he told the audience of
22,000 shareholders. But if people think
they can earn more than 6 to 7 percent a
year, theyre making a big mistake. I dont
think were in bubble-type valuations in
equities or anywhere close to bargain
valuations.
If you told me I had to go away for 20
years, I would rather take an index fund
over long-term bonds. Youll get a chance todo something extremely intelligent with
your money in the next few years. But right
now there doesnt seem to be a clear enough direction to
conclude anything dramatic.
8. Baby, You Cant Drive My Car. Buffett is extremely
bearish on auto stocks, primarily because of the heavy
pension and benefit liabilities the big American car makers
are paying to workers. Says Buffett, both GM and Ford
have a steep legacy cost structure, with contracts put in
place decades ago, that make it very difficult for them tobe competitive in todays world. Just imagine if theyd
been made to sign contracts that made them pay several
more tons per steel than their competitors have to, people
would feel thats untenable, he adds. [GM and Ford]
have to pay contracts that give them immense obligations
for health-care and retirement annuities at high cost. Their
competitors can buy steel and other commodities no
cheaper, but the competitors dont have nearly the same
level of costs for these [health-care and retirement
expenses]. Someone once asked Bill Buckley what he
would do if he actually won his race for New York mayor
back in the 1960s and he said, First thing Id do is ask for
a recount. Well, thats what Id do at GM. Youve got a
$90 billion pension fund, $20 billion set aside for health-
care liabilities, and the whole equity value of the company
is $14 billion. Thats not sustainable. Something willhave to give.
Lunch and Buffetts Latest
How about lunch with the sage of Omaha? Every
year since 2000, Warren Buffett has to ask this question
and has to wait for the gavel to come down in an auction
to find out the answer. The lunches began after Buffetts
wife, Susan, introduced him to Williams Glide Memorial
United Methodist Church. In an effort to help the churchs
Glide Foundation a San Francisco non-profit
organization that offers programs for the poor, hungry andhomeless Buffett donates a lunch to be auctioned off to
the highest bidder each year.
The billionaire Buffett hosts the auction
winner and up to seven friends for lunch in
Omaha, Nebraska, where Buffett lives and
works, or in New York City. In 2003, the
auctions were moved from San Francisco to
the ether world via eBay, where they have
become an annual online pilgrimage for the
Buffett faithful.
People looking to learn from the wise one
bid every year, like Mohnish Pabrai, a
managing partner of Pabrai Investment Funds in Lake
Forest, California, and Singapore resident Jason Choo, who
won the auction in 2004 with a $250,000 price tag. Pabrai
has bid on the lunches for three years and lost every time
and as a passionate disciple of Buffett for more than a
decade, he plans to bid again next year.
The 2005 auction, brought in a winning bid of
$351,100, all of which goes to the Glide Foundation.What does the winner get for his $350,000 lunch? Somepeople consider it a cost-effective way to get one-on-onetime with the master, and the opportunity to set theagenda for the conversation. Says Buffett about what nextyears winner can expect for their investment: Well talkabout anything you want to talk about. Except I wont tellwhat were buying. I dont tell anyone that.
So make sure youre ready to place your bid for lunchwith the master next June on eBay.
Tough Old BarnacleBuffett clung to his
value investingstrategy like a barnacleto the hull of a boat.Once he was asked to
suggest the best time tosell stock and
famously replied,Never.
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Warren Buffett Financial Intelligence Report Page 10
In the meantime, FIR can tell you about some of
Buffetts latest maneuvers.
We have been following Warren Buffett like a hawk this
year, and we will continue to closely monitor the
investment savants movements.
Heres the latest: The Oracle of Omaha is apparentlytrying to grab a piece of insurance giant Lloyds of London
and thats a controversial move considering the industry
has struggled in 2005.
So what does the visionary Buffett know that the rest of
us dont?
In this case, the details are in the back story.
Sources tell the London Telegraph that Buffett has
approached at least one managing partner at Lloyds,
offering money for a share in next years business.
Nigel Hanbury, chief executive of Hampden Agencies,
tells the paper that Buffett looks poised to pour more
money into insurance in 2006.
Premiums are expected to be very good for 2006 and
probably 2007, he says. The price of insurance for
energy risks like oil rigs is expected to soar by 400%, and
areas that have been hit by hurricanes could see premiums
up by 100%.
In addition, it was recently disclosed that Buffetts
Berkshire Hathaway holds a 5.7% stake in Anheuser-Busch, making it the largest shareholder.
As of October 2005, Berkshire held almost 45 million
shares of the worlds largest brewer, as well as close to 20
million shares in super-retailer Wal-Mart. Buffett had long
sought to keep these holdings secret in order to defend
against copycat investing.
An American Icon and a Role Model
for InvestorsThey dont make Americans like Warren Buffett anymore.
Tough, plain-spoken, and with a genuine concern
toward average investors the little guys getting a fair
shot on the stock market, Buffett is a real man of the
people, much more Main Street than Wall Street.
Hes famous for berating Wall Street on its emphasis of
churn-and-burn brokerage mindset, and has publicly stated
that every American investor would be better off if he or
she executed only 20 stock trades in their entire lives. Hehas also pounded the table a time or two on the subject of
personal liberty and the importance of Americans taking
responsibility over their own lives.
Warren Buffett is the quintessential American success
story. What makes him unique is that he genuinely believes
there is a success story in every American, just waiting to
blossom.
If, that is, the owners of those success stories spend a lot
of time doing what Buffett does: digging for those cigar
butt companies that offer value to discerning investors.To Buffett, its value that counts and hes spent the
past 40 years proving just that.
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Warren Buffett Financial Intelligence Report Page 11
A Snapshot of the Largest Berkshire Hathaway Holdings, December 31, 2004
Berkshire Hathaway portfolio
Company 2004Q3 Shares 2004Q4 +/-%
American Express (AXP, news, msgs) 151,610,700 151,610,700 0%
American Standard (ASD, news, msgs) 10,497,900 10,497,900 0%
H&R Block (HRB, news, msgs) 14,350,600 14,350,600 0%
Coca Cola (KOK, news, msgs) 200,000,000 200,000,000 0%
Comcast (CMCSA, news, msgs) 5,000,000 10,000,000 100%
Comdisco (CDCO, news, msgs) 1,489,628 1,509,433 1%
Costco Wholesale (CSCO, news, msgs) 5,254,000 5,254,000 0%
Dean Foods (DF, news, msgs) - 375,500 New
First Data Corp. (FDC, news, msgs) 8,000,000 8,000,000 0%
Gannett (GCI, news, msgs) 3,447,600 3,447,600 0%
Gap Inc. (GPS, news, msgs) 15,000,000 15,434,243 3%
The Gillette Co. (G, news, msgs) 96,000,000 96,000,000 0%
HCA Inc. (HCA, news, msgs) 13,500,000 - -100%
Iron Mountain (IRM, news, msgs) 6,935,750 5,000,000 -28%
M&T Bank Corp. (MTB, news, msgs) 6,708,760 6,708,760 0%
Moodys (MCO, news, msgs) 24,000,000 24,000,000 0%
Mueller Industries (MLI, news, msgs) 1,361,900 1,361,900 0%
Nike (NKE, news, msgs) 6,000,000 2,500,000 -58%
Outback Steakhouse (OSI, news, msgs) 1,818,800 1,818,800 0%
Petrochina (PTR, news, msgs) 659,000 659,000 0%
Pier 1 Imports (PIR, news, msgs) 8,000,000 8,000,000 0%
Sealed Air (SEE, news, msgs) 1,113,300 1,113,300 0%
Servicemaster (SVM, news, msgs) 5,611,600 5,611,600 0%
Shaw Communications (SJR, news, msgs) 22,000,000 22,000,000 0%
Torchmark (TMK, news, msgs) 2,029,379 2,036,979 0.37%
USG Corp. (USG, news, msgs) 6,500,000 6,500,000 0%
Washington Post Co. (WPO, news, msgs) 1,727,765 1,727,765 0%
Wells Fargo (WFC, news, msgs) 56,448,380 54,483,520 -3.5%
Wesco Financial (WSC, news, msgs) 5,703,087 5,703,087 0%
Source: SEC filings
* Berkshire Hathaway does not publicly announce the dates of trades until December 31 of each calendar year.
** This list does not include all companies in the Berkshire portfolio.
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Warren Buffett Financial Intelligence Report Page 12
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Issue 1 (Sept 03): Crisis Investing: Protect & Grow Your WealthIssue 2 (Oct 03): High-Yield Dividend Stocks
Issue 3 (Dec 03): Protecting Yourself Against the Next Market Decline
Issue 4 (Jan 04): Sector Investing: How To Beat the S&P Every Year
Issue 5 (Feb/Mar 04): Gold: The Ultimate Insurance
Issue 6 (Apr 04): Oil: The Critical Key To the World Economy
Issue 7 (May 04): The Other Warren Buffett: Meet Walter Schloss
Issue 8 (Jun 04): The Dangerous Dollar: Protecting Your Wealth By Investing Abroad
Issue 9 (Jul 04): David Tice: Protect Yourself From the Coming Bear Market
Issue 10 (Aug 04): Interest Rates and Bonds: What You Need to Know
Issue 11 (Sept 04): The Baby Boomer Crisis Looms: Prepare Before Its Too LateIssue 12 (Oct 04): The Coming Baby Boom Storm: Part II, The Pension Crisis Is Already Here
Issue 13 (Nov 04): Royalty Trusts Pay High Yields
Issue 14 (Dec 04):Wayne Rogers Beats the Market So Can You
Issue (Jan 05): 2005: Bushs Boomlet
Issue (Feb 05): Sir John Templeton: Reveals the Future of the Stock Market, Real Estate and Life
Issue (Mar 05): Cash In On the Commodity Bull Market
Issue (Apr 05): The Inflation Lie
Issue (May 05): Switzerland: Still the Ultimate Investment
Issue (June 05): Sector Investing: Navigate the Coming Bear with Profit
Issue (July 05): Special FIR Briefing With General Alexander HaigIssue (Aug 05):Warren Buffetts 8 Best Investment Plays for 2005
Issue (Sept 05): Sector Riches in Biotech and Healthcare
Issue (Oct 05): Goodbye, Mr. Greenspan: How You Can Profit From His Recession
Issue (Nov 05): The Coming Gold Bull Market
Issue (Dec 05): 2006 FIRInvestment Outlook
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