Until six months ago, I knew only vaguely of the man commonly named “The Oracle of Omaha”. What made me want to pick up Buffett: The Making of an American Capitalist, was sheer intrigue about the world of investing and a bit of history. Marketing may be my love, but Finance and Investment are fields which I greatly admire, not for the numbers (boring) but for the principles of identifying high value and confidently placing large amounts of investment dollars into securities that will win big, in a sustainable manner.
In 1974, the U.S. experienced both a recession and an inflation rate of 11 percent. Oil prices were high as OPEC was gaining strength and 3rd world nations were organizing into cartels. Between Jan. ’73 – Dec. ’74, the DOW lost 45% of its value. Since ’68, the average stock had fallen 70%. Buffett’s response was to look for companies that could progressively raise their rates, and which didn’t have big capital costs; inflationary times mean capital-intensive firms need more dollars to replenish equipment and inventory. Buying and selling based on macroeconomic conditions was out of the question and outright silly. P/E ratios, historic earnings gains, EPS projections, and other analytical tools still greatly mattered…that is IF you’re in it for the long term. As quoted on pg.159:
He could not size up how the country’s problems would influence the shares of the Washington Post [of which he owned a controlling interest]. His genius was in not trying. Civilization is too variegated, its dynamics far too rich, for one to foresee its tides, let alone the waves and wavelets that affect securities prices. Wars would be won and lost; prosperity would be hailed as everlasting and bemoaned as ne’er recurring, as would politics, hemlines, and the weather enjoy their seasons. Analyzing them was Wall Street’s great game—and its great distraction. In its floating salon, everything was interesting and nothing was certain—the President, the economy, the effect of OPEC on sales of Pepsi-Cola.
For Buffett, the times were eerily exciting because as stocks dropped across the board, many great fantastic long-term buys were up for grabs. Forbes magazine asked him in October ’74 how he felt, and remarked “Like an oversexed guy in a whorehouse. This is the time to start investing”.
While purchasing securities based on long-term business value and cheap prices are hallmarks of Buffett’s investment strategies, the following additional principles should be noted:
- Only take interest and invest in stocks within your “circle of competence”. Know the industry and understand the company’s business well. If you can’t do that, there’s no way for you to value the stock. Most stocks aren’t interesting anyway. Be selective with your time and don’t bother forming an opinion on industries or securities outside your scope.
- Seek out managers who exercise care with shareholders’ capital. Example: Don’t sell part of a company (through shares) to acquire another firm.
- Study prospective companies and competitors in great detail, by examining raw data and NOT analysts’ summaries. Only your opinion matters. Extreme examination though isn’t necessary; look for big indicators.
- If you have a strong conviction about a stock, show courage and invest BIG. The returns are better.
I can only imagine that a similar feeling is going through him now, as “the market” is unstable and our economy is in a unique recession. Energy is big business, hence his recent $4.7 billion takeover of Constellation energy (4 nuclear plants, an energy trading firm, and other goodies for the price of 1 plant). Additionally, Buffett placed $5 billion into General Electric (with an option to buy $5b more within 5 years at $22.25 each). For reference, the last time GE traded below $30 was Dec. ’03; its high a year ago was at $41. Currently it’s at about $21.50. While nearly half of their profits come from their credit business, GE’s Ecomagination program and large energy assets make it a very worthwhile long term investment.
Now that’s what I call a true Maverick. Someday I aspire to study and invest like Warren (once I have much more discretionary income). While I may not pick up another finance/investment book for a while, the principles I’ve learned will stay with me for a long time.
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Sources:
“Buffett – The Making Of An American Capitalist”, by Roger Lowenstein
Yahoo Finance
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