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Jae Jun said:

This is a pretty similar question to what I asked myself while reading his books, viewing his interviews, annual reports and trying to analyze his investments, and I came to a conclusion.

The things that Buffett teaches and preaches isn't what he always practices. Look at it this way, when you recommend stocks to your grandparents or children, you are not going to try and explain a distressed situation and explain why it's a great investment. Mention the term "bankrupt stock" to most people, and they will call you crazy and why they never invested in the market.

Instead, what do you say? I bet it's something along the lines of "invest in good companies with strong brands that make money". I believe Buffett is exactly the same. When he talks, thousands listen and try to understand, but he doesn't do what he preaches because most wont get it and never will.

This is also a reason why I no longer read books on Buffett. I believe I've learnt as much as I can from him.

Keep in mind that Buffett has evolved from when he was sitting there in New York with Walter Schloss in their gray coats at Graham-Newman.  The market has changed in many respects.  He has moved from being a pure Grahamite, succumbing to the influences of Phil Fisher and Charles Munger, and to the changes in the market as well.

Graham evolved as well from those days to what he talked about in the '70's shortly before his death.  He had lost interest in  complicated analyses in favor of selection methods that were very simple benchmarks, perusing the Stock Guide for P/E's under 10, for example, or issues selling for half the 24 month High.

Post edited 6:20 am – February 4, 2010 by jalleninvest

This is why you are a value investor.  If you are in a thinly traded issue, and it gets dumped in half, that is Mr. Market saying "Buy me!"  You have value to protect you from permanent loss as opposed to quotational loss.  People do irrational things, and you pay attention to it only as it suits your purposes, ignore it, buy more, etc.  But be sure you have value, then the price fluctuations mean little or nothing, except an opportunity to take advantage of Mr. Market's mood swings.  If the business is still operating decently, that's an opportunity!

You don't have to learn much from Buffett.  Instead learn from who Buffett learned from,  Ben Graham.

Buffett considers himself an allocator of capital.  In the Dempster case, he took under utilized assets, converted them to a higher, more efficient use.  He loves insurance ownership, because that gives him billions of capital to invest, which he does better than anyone, at almost no cost, and he gets to keep the gains in BRK.

What I have never figured out is why people want to own Berkshire Hathaway.  If I had bought $10,000 of shares on the day WarrenBuffett took control of BRK, and not sold a share all these years, it would be worth something like $100 million today, give or take, but in all those years, 45 or so, I would never have been a penny better off.  I wouldn't live in a nicer house, have a nicer car nor lower car payment, take fancier vacations or paid more income tax, or anything.  My banker would be green with envy, I suppose.

Your point of view was actually of great value (no pun intended).

I only read one book on Buffett (The Snowball) in addition to his letters. The partnership letters are very informative and communicate his perennial stewardship of other people's money. I can see how many consider them as business lessons unto themselves.

From the book instead, I did pick up the two sides you describe. A simple facade, while a much complex character deep down. Like the understanding of a business as a standalone, independently of the tool you (and most likely himself) call stock price… while in reality he tried to prove himself each and every single year against the DOW for all the years he ran the partnership. Point is, if you measure yourself against the DOW, then you need the "stock price" as your friend and there is no such a thing as "if the business is ok, it's all kosher". But I agree that focusing on the intrinsec value of a business helps keep things in perspective.

Your last thought is very enlightening. True, bad management will permeate into operations… and eventually into figures and books. The tricky part would be to have enough insight not to buy into a business before the bad smell floods the room. It is always easy to avoid an elevator if you happen to smell fart.

Post edited 8:55 pm – January 24, 2010 by rros

I know. I am not too original.

But I have been struggling to undertsand some of his original ideas for a while and perhaps someone can offer some light. When he bought Dempster, it appears he did some cleaning. In todays market, his actions would have been closer to what we sometimes see as a turnaround. He appointed a manager who in turn, sold assets, paid down debt and allocated the additional cash generated by the sales. In fact, the newer balance sheets looked more like a financial improvement than anything else with its newest securities in the portfolio. So instead of turning around the business, he used it as a cash generator (not even from operations) to reallocate capital where he felt he could achieve higher returns.

Given his other ventures after Dempster including Berkshire, am I mistaken in thinking he really never cared about any of the businesses he tried to control except for the cash he could milk or squeeze out of them? And that he would only look at this businesses with that one purpose in mind? No doubt he has been the greatest investor of all times. But on second thoughts, much of his success seems to have been due in great part to his stunning ability to find new money, new sources of fresh cash that he could put to work helping him fix his mistakes or at least smooth out some bad business decisions (many of the businesses he bought originally were not very good).

Another issue I have struggled with was his original buying of shares of extremely thinly traded stocks. Sometimes, he had to wait for stocks to become available or take months and months of accumulation. If today I come across companies that could be the equivalent, I would be terrified in establishing a position given that too many games are being played and a stock that doesn't trade every day could be easily dumped in half quickly.

Finally, I have seen him trying to study businesses beyond the mere data found in Moodys, like visiting the factories and such or placing a great deal of trust on businesses he probably heard about for decades when he was growing up, like National indemnity or Nebraska Furniture… How does that stack up to today's market where upper management of most publicly traded companies behave in a way that is conducive only to protect their own jobs, where things change so that nothing change? Any insights on this outstanding character are appreciated.