Buffett’s Bites

Chapter 1

CEO’s either write their own letters, get others to help them write the letter or CEO’s who barely contribute to the construction of their letters

The average stock holding period for stocks used to be around three years, in today’s society the average holding period is 9 months. Which causes question into why a shareholder would read CEO letters in the first place if they exit the stock within the same year on average

Warren buffet contains a golden rule for investors; tell investors what you would want to hear if you were in his place and as an investor you should expect the CEO of your chosen business to treat you with this same mannerism.

Always analyse and assess CEO letters of companies from a 5 year standpoint, this can be done through delving through annual reports to spot the consistency of CEO message’s to track if he has lived up to what he’s promised investor’s and accounting numbers are readjusted*

CEO constructs a shareholder letter; this will reveal more than you expect. It can convey the strength or weakness of the leadership which also indicates the strength or weakness of the inherent corporate culture. Look for detailed shareholder letter which will most likely convey a strong company culture.

Chapter 2

Located in the annual report, shareholder letters are a way for investors to gain insight into the key events of the business that year, a perception of how the company’s results and an estimated outlook for the years going forward. Don’t forget the letter’s can convey more than this to a shareholder.

The perception of the general market on the allocated CEO can have up to 40 to 60 % correlation with how the stock market prices that particular company. Meaning quality of CEO is imperative to the amount the company is worth.

Look for CEOs who are straight forward and don’t over or under exaggerate results and predictions of the future. A CEO who has substantial knowledge of the business, which can be reflected in how much content and description he has compared to hsi competitors are most likely better executing business strategies and ideas over competition. This is how CEO can build more trust with investors.

Investors can gauge at what type of CEO they are as some CEO’s choose not to comment on previous promises and events while other CEO’s choose not to acknowledge this and only focus on the current year. Warren Buffett refers back to previous promises and events.

Accounting can be misreported and manipulated very easily. Accounting will involve judgements by the company culture in order to identify how they choose to create their accounting. Accounting is a reflection of the norms and values company culture. A honest CEO will most likely result in honest accounting. While a dishonest CEO will result in most likely dishonest accounting.

Chapter 3

Warren Buffett constructs his own letters; he feels like if the CEO can’t communicate to shareholders clearly, its because they haven’t thought through the concept enough with clarity. Be Careful of investing in companies run by CEOs who have tendency to mislead investors chances are they will mislead you in accounting

Warren Buffett writes the longest shareholder letter in america; this is a benchmark for determining the level of his willingness to communicate his business efforts in a descriptive manner to shareholders

Buffett treats his investors like his own family, he writes in a manner which communicates to each individual investor and invites them to the berkshire hathaway shareholder weekend

Buffett uses economic parables to communicate complex situations to investors in a simplified manner; dumbing down information

Buffett always refers to the past events, present events and future events of berkshire hathaway.

Chapter 4

Non cash earnings can be manipulated easily as they are subject to interpretations of accountants because they can be used for money owed in the future similar to deferring taxes. They can be manipulated to boost earnings of the company which will boost stock prices. Be wary of this.

Many management teams focus on profits and growth of the company rather than focusing on cash and balance sheet growth which is a better measurement for company growth. Cash in economic downturns
is one of the most important assets a company can possess; this is because banks are hesitent to lend at these times and assets are much more cheaper when times are bad. Warren Buffet will keep cash for these circumstances to buy bargains when no one else can.

Intrinsic value is the estimate of the company’s future cash and earnings power. To determine this evalue the company’s assets (both tangible and intangible) and predict how much cash they can generate over the business lifetime. Then factor in a rate to discount these cash flows due to inflation which will reduce the companies cash flows over time. Next deduct extra points as a method of margin of safety according to the level of risk or uncertainty the business. Now divide this number by the number of outstanding shares the company has to arrive at the estimated intrinsic value of the company.

Its important to invest in a company where the CEO doesnt dilute the the earnings per share in order to purchase assets or make acquisitions. The CEO has the ability to choose to pay for these assets or acquisitions by selling shares in the company by diluting the shares outstanding. This can be very detrimental to the investor

Chapter 5

Warren Buffett spends most of his time reading and thinking. He enjoys delving through data and information from newspapers, annual reports, books and any other sources which produce information. His job ultimately is to look for value which wall street and the general public miss.

Warren buffett uses a criteria for selecting potential investment opportunities; it consists of paying the correct price, the company must possess a long lasting competitive advantages, it must be a business which buffett can understand how it makes its money and how it operates and finally managed by a management team who is motivated, passionate and honest in order to achieve business success.

Chapter 6

Buffett and his business partner charlie munger owns a large amount of their own company stock, he is one of the largest shareholders of berkshire hathaway. This proves to investors that growing his own company is in his best interests. Not all CEO’s own stock of the company they run. If the company declines, warren buffett and charlie munger’s net worth declines.

Company compensation at berkshire hathaway is allocated according to growth per share value. Which is compensation only on the basis that the individual investor derives more value. Unlike other companies who allocate compensation too easily or for easily manipulated reasons.

The key to investment is to buy when the economy hits all time lows, spot companies with durable competitive advantages ran by motivated and honest managers creates substantial wealth for the investor.

Chapter 7

Warren Buffett likes to have substantial amounts of cash on hand have substantial benefits when market downturns occur; this means the company can purchase other assets for bargains. Not many companies do this.

Buffett likes to purchase companies who keep their promises, companies which avoid over leveraging the business through the use of debt, avoiding companies who consist of unusual self governing and finally having the ability to hold his investments through the good and bad times in the market cycle.

Buffett likes to invest in companies who have capable, honest and motivated CEO’s and management teams as these factors will lead to healthy corporate cultures, honest accounting and fair compensation for performance.

Buffett likes to invest in companies who confess their mistakes to shareholders; which is a sign of honesty and truthfulness. The CEO must als understand and explain the accounting records of the companies financial statements in a simplified manner so it is easy for the investor to understand and interpret.

Chapter 8

As investors we are told how to think because of the news outlets influence on general society. In 2009 when the economy crashed. Buffett made a statement that “the economy will be in shambles” which spread through all the news platforms; which is deceiving as warren buffett was selectively quoted by the news platforms and wasn’t a clear reflection of what Warren Buffett had to say. Although misdirected and misleading; this quote caused much drama in the market just so they could boost ratings.

Warren Buffett has learnt to treat market pessimism; particularly in downturns as his friend. As in these downturns are the best time to buy businesses at undervalued and bargain prices. He refers to market pessimism as his friend, but optimism as the enemy when it comes to paying for companies on the market.

When market downturns occur, the professionals are hit just as hard as the average retail investor. Berkshire in 2009 was down 14% which means it lots billions of dollars. Even the best and smartest investors in the market share the same agony retail investors have in downturns.

Chapter 9

As an executive there are inherent fiduciary requirements to ensure the company puts aside its personal agenda and act in good faith for all of its shareholders.

Warren Buffett treats all shareholders as partners he has created an ownership manual with xxxx
Buffett owns his own company; putting him in the same position as shareholders
Buffett highlights that the long term goal for berkshire is to grow the business in intrinsic value per share
Buffett owns a diversified group of companies that generate cash and higher than average returns on the capital he invests.
Buffett likes to have low debt but high levels of cash

Buffett acknowledges that in the twenty first century our individual brain wiring makes us unpredictable, emotional and irrational at times. When we are facing volatility in the markets investors tend to act with emotional tendencies which can cause irrationality in our decision making process. We panic when the market falls, but buy when the market climbs. Buffett’s success is accredited to his ability to regulate override this sense of wiring by monitoring his own emotions; which keeps his perspective and decision making rational.

Chapter 10 & 11

Efficient market theory is a theory which business students are led to believe. The theory presumes that the market always efficiently prices companies; meaning that all available information of the company is fairly and accurately priced into the companies share price. This means it is impossible to profit as there are no discrepancies between value and price. Warren Buffett denies the reality of this concept.

Warren Buffett has openly indicated the prevalence of excess CEO compensation from 2002 to 2007 in his annual report letters. This highlights to the investor that these issues exist in the market; and to be wary of the type of CEO who exercises these type of unfair compensation payments. This tells you a lot more about the CEO and management team then you think,xxxxx