Buffett FAQ

373 Pages·2017·2.42 MB·English

by  Nick Webb

Table of Contents
Question Sections
Question List
Investing Approach
Valuation
How to Think About Businesses
Alternatives to Common Stock
Accounting, Corporate Finance & Investing
Foreign Investments
The Investment Industry
Industries
Specific Businesses
Berkshire
The Market
Management
Technology
Education
Personal
Advice
The Big Picture
Thanks and Credits
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BUFFETT FAQ
A compendium of Q&As with Warren Buffett.

Sections
Investing Approach
Valuation
How to Think About Businesses
Alternatives to Common Stock
Accounting, Corporate Finance & Investing
Foreign Investments
The Investment Industry
Industries
Specific Businesses
Berkshire
The Market
Management
Technology
Education
Personal
Advice
The Big Picture
Thanks and Credits
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Investing Approach
1. Have you ever bought a company where the numbers told you not to? How much is quantitative and
how much is qualitative?
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2. What is it that really piques your interest in a stock? What tells you that it could be interesting?
3. What is your investment process?
4. What's your acquisition criteria? What has made you successful in this area where most others have
failed?
5. What's your acquisition strategy? How do you get deals?
6. Deal flow?
7. What sources of investment ideas are available today?
8. Do you have any investing tips?
9. How do you build your investment knowledge?
10. Is there an organizational model that allows you to deal with all the information?
11. Do you have advice for the individual investor to help them narrow the stock universe?
12. What advice would you give to new investors?
13. Advice for getting into investing?
14. Where is a good place for new investors to invest right now?
15. What advice would you give to non-professional investors?
16. Are investors more or less knowledgeable today compared to ten years ago?
17. How to approach index funds?
18. If you were today 20-something years old would you primarily be searching for: a) Situations
reminiscent of 1957 – akin to Daehan Flour Mills, or b) Situations reminiscent of 1987 – akin to
Moody’s Corporation?
19. What's your opinion of cigar butts vs quality businesses?
20. If you were starting out again today, what would you do the same or differently?
21. First, would you say 'I could make you 50% a year on $1 million' again today? Second, what else would
you do differently?
22. Do you believe that we'll have significant mispricings again? And if you were 26 today how would you
generate the 50% returns that you said you might do with smaller amounts of capital?
23. Where Can I Find 50% Returns?
24. Could you describe the capital allocation process you follow? How do you determine the charges for
capital to your different managers?
25. What filters do you use when looking at companies?
26. How would you recommend an individual investor who follows the Graham and Dodd philosophy to
allocate their capital today?
27. What impacts have Graham/Dodd and Phil Fisher had on your investment philosophy? What
percentage of your investment philosophy would you attribute to each of them?
28. Since Ben Graham isn't around anymore, what money managers do you respect today? Is there a Ben
Graham today?
29. If you were to teach an investment course, besides works by Ben Graham and Phil Fisher and your
book on the instalment basis, what would be on the syllabus
30. What's the temperament of successful investors?
31. Do you agree with Philip Fisher's two reasons to sell?
32. What tells you when an investment has reached its full potential?
33. Could you explain more about the circle of competence?
34. What two industries are the first you should learn when developing your circle of competence?
35. Is there a moral connection to who you invest in?
36. Who do you think will be one of the next greatest investors and are you partial to favoring someone
with a similar investment style as yours?
37. What do you think of discounted cash flow (DCF) models?
38. Could you explain your opportunity cost decisions of the past year?
39. What are your views on diversification?
40. Would you consider spinning off some companies to realize value?
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41. Why would you hold stocks forever, if the fundamentals change permanently? (Buy and hold)
42. Why do you think more people don't follow your advice?
43. Why do you think that despite making your methods publicly available, that relatively few people have
been able to emulate your success?
44. What have been your best investments ever?
45. Could you give us your definition of stock market risk?
46. How much and how does risk factor into your investment decisions? Would you invest in emerging
markets?
47. What do you think of setting an asset allocation?
48. How often do you review each position in your portfolio?
49. What are your expectations for future returns on stocks?
50. Do you expect the stock market premium to continue to be 6.5% over bonds?
51. You have espoused a constant ROE on the stock market of about 13%, over time. Do you think that
such an expectation is reasonable if you factor into equity and ROE the effect of stock options granted
to managements? When option programs are present in a company, what do you think is a realistic way
of valuing them on a cash basis?
52. Do you think investors expect too much?
53. What's your investment hurdle rate?
54. Do you prefer public or private investments?
55. Investors eventually repeat their mistakes. How can you prevent this--through fast growth or safety?
56. Why do large caps outperform small caps?
57. What is the definition of Value vs. Growth stocks?
58. From the partnership letters in 1964, you had a strategy called ‘generals relatively undervalued.’ We
have recently begun to implement a technique where we buy something at 12x, when comps sell at 20x.
Comps go to 10x. Is this pair trading?
59. Importance of filtering out the noise?
60. What is the benefit of being an out-of-towner as opposed to being on Wall Street?
61. There is always mention that some of your success could be attributed to not buying in to the Wall
Street mania b/c you are in Omaha—what importance do you give to balance as it pertains to work
and life and what do you do to maintain your appropriate balance?
62. There are a record number of ‘value’ investors here this year. Are there fewer $100 bills? Should I go to
run a business instead of being a value fund manager?
63. Do you ever change your investing standards?
64. Have there been instances in your career where you have been tempted to deviate from your strategy
and if so, how did you handle that?
65. When did you know you were rich?
66. How important is conviction in investing?
67. How do you avoid misjudgement?
68. How do you improve independent thinking?
69. What are the key traits needed to correct the crowd mentality?
70. Don't you have a lot of competition to buy great businesses? For example, from private equity funds?
71. How do you learn who to trust and who not to trust?
72. What's your philosophy on partnering with others?
73. We know that you are a big bridge player. Do you think that bridge correlates to investing? Are there
any traits or characteristics that might carry over from one to the other?
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Valuation
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74. How do you think about value?
75. How do you calculate intrinsic value?
76. What do you believe to be the most important tools in determining intrinsic value? What rules or
standards do you apply when using these tools?
77. Could you comment on the matter of intrinsic value as it applies to some of the Inevitables?
78. When you estimate intrinsic value in capital intensive companies like McDonald's and Walgreens
where a very healthy and growing operating cash flow is largely offset by expenditures for new stores,
restaurants, etc how do you estimate future free cash flow? And at what rate do you discount those
cash flows?
79. Is the skill of judging risk just as important as calculating intrinsic value?
80. What valuation metrics do you use?
81. What do you think of the use of book values in making investment decisions?
82. If you can’t talk with management, and can’t read the annual report, and didn’t know the price, but
could only look at the financial statements, what metric would you look at?
83. How do you think about growth rates when you value businesses?
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How to Think About Businesses
84. What's your philosophy in buying businesses?
85. What is the ideal business?
86. What makes a great business?
87. When you are looking at a business in which to invest, what are your priorities?
88. What makes a company something that you like?
89. What types of businesses have the highest ROIC?
90. What businesses should we avoid?
91. What have been your business mistakes?
92. How do you determine what is the proper price to pay for the business?
93. What do you do if business changes are recognized?
94. Do you know of any examples of companies that have lost and regained their competitive advantage?
95. Impact of regulation on businesses?
96. Would you comment on the quality of earnings in capital-intensive businesses, like utilities?
97. Please talk about the shift to investing in capital intensive businesses and the ultimate impact on
intrinsic value. Help us understand the time value of the necessary capital expenditures.
98. How do you place a value on intangible assets? What are the signs of great “moats” around a business
and great managements? Do you place a dollar value on this? What discount rates do you use?
99. Not too long ago, a reasonable person might have concluded that Kellogg and Campbell Soup had big
moats around their businesses, but that has proven not to be the case and their stocks have languished.
What might we learn from this?
100. What's your opinion of downsizing and outsourcing?
101. Can you comment on the impact of rising commodity prices on margins?
102. Could you explain a little more about the mind of the consumer and the nature of the product? And
explain how you actually apply these concepts to find the companies with the best potential?
103. What do you think the best quality is in a business or a person?
104. How do you grow a small business into a big business?
105. How do you build the culture of a new organization or change that of an existing one?
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Alternatives to Common Stock
106. Your opinion on derivatives? (2003)
107. What are your views on derivatives and how do you think they have affected the global market?
108. What's your opinion of stock options?
109. Would you use stock options to enter a position in a public company?
110. What's your opinion of gold as an investment?
111. When would you exchange shares for gold?
112. What is your opinion on exchange-traded funds and how to do you accurately judge them?
113. Muni bond defaults you described in 2008 -- they haven’t materialized. Should investors worry about
getting higher returns?
114. Experience with junk bonds?
115. There are discounts in the fixed income market. Will you take advantage?
116. Can you give us your insights on the oil and silver markets?
117. Investing in ethanol?
118. Any comments on commodities?
119. What are the future trends in coal? Does the cost advantage outweigh the environmental impact?
120. Could you comment on your currency position?
121. Do you hedge and what are your thoughts on the U.S. dollar?
122. What are your views on the dollar?
123. Early on in you career you bought some land and then rented this out to some local farmers? Why
didn’t you pursue this type of investment in real estate?
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Accounting, Corporate Finance, & Investing
124. What adjustments to reported earnings do you make?
125. Recommendation of a book on accounting?
126. What can be done to improve the accuracy of financial statements of financial institutions? What can
be done to improve the integrity of financial statements?
127. Would you comment on companies you say use questionable accounting practices to make their
operations look good?
128. What does it mean to own stock in a company?
129. Where can you buy stock with the cheapest commissions?
130. How do you know when you are going to lose money and when you aren't? Since the stock market
changes every minute.
131. What's the role of the board of directors?
132. Your thoughts on EBITDA?
133. Opinion on share buybacks? and dividends?
134. Why do you not believe in dividends when Benjamin Graham believed in them?
135. Your thoughts on inflation?
136. Do you see deflation as a threat to our investments?
137. What's your opinion of Enron and creative accounting?
138. What's your opinion of day trading?
139. What's your opinion on asbestos liability?
140. What are your thoughts on short selling?
141. Opinion on IPOs?
142. Are corporate jets a waste of shareholders’ money?
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143. Can you forecast the continuing debate between Efficient Market Theory (EMT) proponents and
value investors? Are your designated successors “outliers” as well?
144. How did you get to be so rich?
145. What is your unified principle?
146. Thoughts on banks willingness to deal with shady characters?
147. Risk of holding assets at banks or brokerage houses?
148. Any comments on the behaviour of accountants in tax avoidance schemes?
149. Does protection of the banking system warrant the lack of public disclosure in Bank of America’s
purchase of Merrill Lynch?
150. What is the main contribution to the stock market crash of this century?
151. Are investment banks so complex that the head is not aware of the risks?
152. What are the risks in the financial system?
153. What can we learn from past blow-ups?
154. Do you think the bankruptcy process should be reformed?
155. Insurance pricing and risk?
156. How do you manage insurance risk?
157. Can you comment on the consolidation taking place internationally in the insurance industry?
158. How do you price super cat insurance policies?
159. Could you comment on fraud in the insurance industry?
160. Opinion on the likely housing bubble? (2005)
161. How do you feel about the current real estate environment?
162. Your views on the securitization of real estate?
163. Where do you see the residential real estate market going in the next year or two?
164. Can you comment on the subprime market?
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Foreign Investments
165. What's your opinion on investing in foreign stocks?
166. What are your requirements for investments outside the U.S.?
167. When looking at other countries Mr. Buffett, do you look at the country’s overall financial status or do
you look at the financials of that specific company in a foreign country? You mentioned investing in
Korean companies – do you ever look at the state of the country you are investing in?
168. 1/8th of world is in India. Why aren’t you investing in India?
169. How large is the universe of companies whose intrinsic value you know? Why invest in South Korea or
China?
170. Investing in Brazil?
171. Investing in Russia?
172. Investing in Africa?
173. May I ask you your reasons for coming to Germany?
174. Are you concerned with the effects of foreign economies and their weak currencies? These have played
a role in Coca-Cola’s profitability recently - and Coke is trading at P/E multiple of 75. (1999)
175. Do you foresee Berkshire buying any businesses in India or China in the near future?
176. Please talk about Greece, the future of the Euro and fiscal discipline in the world. Greece and other
countries are clearly in trouble and BRK has investments in Europe. How is BRK positioned for
currency failures? What is your advice to investors regarding the future of the Euro?
177. What is most important thing you learn from China?
178. How will Buffett invest in China in the future? What will happen to the purchasing power of China’s
large holdings in U.S. Treasuries?
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179. Why is car insurance business not expanding globally? Why not China?
180. What are your thoughts about Japan?
181. Does the Japanese economy affect your outlook?
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The Investment Industry
182. Is the individual investor even capable of assessing the riskiness of securities given the large number of
institutions/hedge funds in the market?
183. What do you think about all the money flowing into private equity and hedge funds? And do you see
the future of buying businesses changing based on the considerable increase in private equity activity?
184. What do you think about how most money is managed?
185. Advice for finding good investment advisors?
186. Comments on the mutual fund scandal? (2004)
187. Why don't you start a mutual fund?
188. Opinion of money management as a job to aspire to?
189. What's your opinion of the wider money management industry?
190. What effect does large institutional ownership have on stock price volatility?
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Industries
191. Do you invest based on trends or sectors?
192. What do you think about the utility industry?
193. What do you think of utilities?
194. In the domestic soft drink model, is it winner take all, or is there room for three competitors?
195. What do you think of the airline industry?
196. What do you think of the banking business model?
197. You’ve recently invested in Goldman Sachs and GE. Is the financial sector a good buy right now?
198. Opinion on the gambling industry?
199. Opinion on the healthcare industry and its costs?
200. Berkshire has invested in several insurance companies, would you go into the health insurance
business?
201. Have you ever considered concrete as an understandable business for investment purposes?
202. What do you think of the telecoms industry?
203. Your opinion on the auto industry?
204. What's your view of the newspaper industry? versus other media?
205. What are your views on the railroad industry?
206. When do you expect to see a return on investment in wind farms and other alternative energy sources?
207. What industry will be the next growth driver in the 21st century and what do you see that supports
that?
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Specific Businesses
208. What was your thinking behind the purchase of Berkshire Hathaway?
209. What is your analysis of Coca-Cola?
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210. Is it really a good idea to buy stocks in unhealthy products? e.g. Coca-Cola
211. How do you distinguish the Cokes of the world from the Proctor & Gambles of this world?
212. Opinion on Coke and Gillette? (2002)
213. Coke and Gillette are off something like 30% from their highs. Do you still consider them exciting
businesses?
214. What did you think of the Calpers/ISS proposal that you should not be on Coke’s audit committee?
215. Does McDonald's have the ability to dominate like a Coca-Cola or a Gillette?
216. Would you buy McDonald’s and go away for twenty years?
217. Could you comment on more on McDonald's.....how does it stack up on the inevitables?
218. Opinion of Procter & Gamble?
219. Reasoning behind the PetroChina investment?
220. Reasoning behind the National Indemnity investment?
221. Reasoning behind the HomeServices investment?
222. Reasoning behind the Geico investment?
223. Reasoning behind the Iscar acquisition?
224. Update on NetJets?
225. What was the thinking behind the McLane purchase?
226. How did the Clayton Homes purchase come about?
227. Thinking behind the investment in Anheuser-Busch?
228. Could you talk us through your thinking of the acquisition of Larson-Juhl?
229. BYD [Buffett’s recent Chinese investment] seems like a speculative or venture capital investment,
instead of a “value” investment. Could Buffett explain?
230. Why did you invest in Harley-Davidson?
231. Opinion of Fannie Mae and Freddie Mac? (2001)
232. Opinion on Fannie Mae, Freddie Mac and Other Highly Leveraged Financial Institutions? (2003)
233. How did you decide to invest in Salomon?
234. Is it true that Salomon almost caused a global financial crisis?
235. You were rumored to be one of the rescue buyers of Long Term Capital, what was the play there, what
did you see?
236. I cannot buy See’s Candies in Bonn Germany. See’s Candies vs. Lindt. Sees’ has a 20% profit margin;
their growth is okay. Lindt does 14%, but is now global. Which is better, high profits with low growth,
or high growth with lower profits?
237. Could you give a post-mortem on the Gen Re acquisition?
238. General Electric and Goldman Sachs: GE has a history of trying to manage earnings. Do you regard GE
and Goldman as attractive businesses or attractive securities?
239. Swiss Re - I'd like to know about its float and risks. How can you be comfortable with the situation?
240. Goldman Sachs - Every year you use clip from Solomon Crisis where you warned Solomon’s employees
that you will be ruthless if reputation if the firm stained. Clearly GS has lost reputation. What is your
reaction to the lawsuit, its affect on your GS investment, and what advice you have now for GS based
on your experience at Solomon?
241. On Goldman, if Lloyd Blankfein had to leave, who would you like to see run GS, were you made aware
of the Wells notice, was it material, and would you have disclosed it? Have you been contacted
regarding Galleon investigation?
242. BNSF deal. You have discussed the certainty of allowable returns in the industry. How are these
calculated?
243. Moody’s had potential conflicts of interest. Why do you retain Moody’s in Berkshire’s portfolio? Why
didn’t you use your influence to address Moody’s perceived problems?
244. The tobacco industry has been under fire recently for its unhealthy products. Does this potential exist
for Berkshire Hathaway holdings of Coca Cola, Dairy Queen and See's Candies? Is there a potential
risk of loss of intrinsic value of these companies due to the current health concerns?
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