7 Questions Every Investor Ought to Ask About Warren Buffett

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7 Questions Every Investor Ought to Ask About Warren Buffett Source: Work of Mark Hirschey

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The $64 Billion Question: What’s Buffett Worth? As of March 21, Warren Buffett’s estimated net worth of $64.2 billion, almost all of which is concentrated in Berkshire Hathaway stock, is greater than the market capitalization of nearly 90% of the companies in the S&P 500, including Caterpillar, Ford, Hewlett-Packard, and Costco. Buffett is the third wealthiest person in the world, trailing only Bill Gates and Mexico’s Carlos Slim. Source: Bloomberg Billionaires ranking

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How Has Berkshire Hathaway Performed? Compounded annual gain, 1965-2013 Berkshire book value per share 19.7% S&P 500 9.8%

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What Are Berkshire Hathaway’s Top 5 Holdings? (Psst -- Check no. 5) Wells Fargo $21.9 billion Coca-Cola $16.5 billion American Express $13.6 billion IBM $12.8 billion Bank of America* $10.9 billion *Strictly speaking, Berkshire does not yet own Bank of America’s stock; instead it holds warrants to purchase 700 million shares at any time before September 2021 for $5 billion. However, as Warren Buffett highlighted in his most recent annual letter: “In the meantime, it is important for you to realize that Bank of America is, in effect, our fifth largest equity position, and one we value highly.” As of Dec. 31, 2012. Source: Berkshire Hathaway 2013 Annual Report.

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Is Warren Buffett a Value or Growth Investor? Warren Buffett is a “value investor” -- he’s arguably the greatest practitioner of this craft -- but his best-known and most successful stock investments have been growth names (think American Express in 1963 or Coca-Cola in 1988, for example). How does one square these two observations? Answer: The dichotomy between “growth” and “value” is a false one that Buffett explicitly rejects.

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Is Warren Buffett a Value or Growth Investor? (Part 2) “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.” -- Berkshire Hathaway 2000 Chairman’s Letter

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Has Buffett’s Investment Approach Changed? As an investor, Warren Buffett was first a disciple of his teacher, employer, and mentor, Ben Graham, the father of value investing and modern security analysis. As such, he was initially focused on special situations and “cheap” stocks one would buy in the hope that the gap between price and intrinsic value would close, perhaps thanks to a catalyst. The quality of the underlying business was not a primary consideration.

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Has Buffett’s Investment Approach Changed? (Part 2) Under the influence of Philip Fisher and particularly of Berkshire Vice Chairman Charlie Munger, whom he met in 1959, Buffett began to focus much more closely on the quality of the business. Instead of simply picking stocks that were cheap relative to their intrinsic value, the idea was now to identify stocks belonging to businesses that were well positioned to compound their intrinsic value over long periods of time. As Buffett once quipped: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

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What Is Buffett’s Biggest Investment Mistake? Before it became his investment vehicle, Berkshire Hathaway was a textile company that Warren Buffett acquired in 1964. In 2010, Buffett told CNBC that decision was a $200 billion mistake: I had now committed a major amount of money to a terrible business. And Berkshire Hathaway became the base for everything pretty much that I've done since. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. … But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. [If] instead of putting that money into the textile business originally, we [had] just started out with the insurance company, Berkshire would be worth twice as much as it is now.

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What Is Buffett’s Biggest Investment Mistake? (Part 2) The worst aspect of Buffett’s acquisition of Berkshire is that it was the product of an emotional reaction, rather than rational thinking. Buffett had struck a gentleman’s agreement with Berkshire Hathaway’s then-CEO, Seabury Stanton, according to which the company would repurchase Buffett’s shares at $11.50 per share. When Stanton made a formal tender offer, the price was $11 3/8. As Buffett recounts: “[T]his made me mad. So I went out and started buying the stock, and I bought control of the company, and fired Mr. Stanton.” Source: CNBC.

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Is Copycatting Buffett a Viable Strategy? In a 2008 paper, two academics from the American University and UNLV concluded: A hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index. The study period was 1976-2006. Will this anomaly/strategy remain profitable going forward? An educated guess: Yes, but the margin of outperformance will fall -- Buffett is better known for focusing, and is now forced to focus, on mega-cap names in order to move the needle on Berkshire’s investment portfolio.

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Bonus: Does Buffett Enjoy Japanese Cuisine? Did you know? Warren Buffett once left untouched every plate of a 15-course Japanese meal prepared by four chefs and hosted by Sony chairman Akio Morita. The dinner, held at Morita’s Manhattan apartment, had been arranged by Buffett’s friend, Kay Graham. In addition to Buffett and Graham, there was only one other guest. Of the meal, Buffett said: “It was the worst. I've had others like it, but it was by far the worst. I will never eat Japanese food again.” Source: The Snowball, Alice Schroeder.

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The Motley Fool’s special report, Warren Buffett’s Greatest Wisdom