Sunday, November 13, 2005

Warren Buffett's Wealth

Notes from Robert P. Miles presentation in October to an audience at the National University of Singapore

"Warren Buffett's Wealth: Principles and Practical Methods used by the World's Greatest Investor"

Robert Miles is a critically acclaimed author of three books on Warren Buffett. He has also spoken extensively on the billionaire to international audiences. Miles is currently working on his next book. It will yet again be on the man who transformed US$100 to US$100 billion. The book will be titled "E = mc2". The title is a play on what Miles believes are key tenets of Buffett's investments: (i) E is earnings (ii) m is management (iii) c is character raised to the power of 2 to signify its weightage.

He started by speaking about the importance of character - one's inner moral compass and reputation - it takes years to build a reputation but minutes to ruin it. These are attributes which he believes Buffett will cover when he talks to a young audience.

Miles says Buffett thinks of a share to represent an ownership of business. One must also make "Mr Market" your servant, not your master. He adds that intrinsic value of a business is the present value of future earnings discounted back to today.

He also reiterated two important aspects which Buffett says that a student of investment must know: (i) How to value a business; (ii) How to think about market prices.

Unlike conventional finance theory which defines the measure of risk as volatility of prices, Miles offered that risk is not knowing what one is doing. He stressed that it is pertinent to know what you own and ignore the madness of crowds.

Criteria supposedly important to Buffett:

  • Earnings;
  • ROE;
  • No debt;
  • Management;
  • Simple.

It was noted that Buffett's holding period is forever.

Miles also touched on the five investment principles of Lou Simpson. Lou is the chief investment officer at GEICO and is reportedly the heir apparent to the Berkshire's investment portfolio after Buffett. As disclosed in Berkshire's annual report, Lou's current track record tops even that of Buffett.
Principles of Lou Simpson:

  • Think independently;
  • Buy high return business run for the benefit of shareholders;
  • Pay a reasonable price even for an outstanding business;
  • Invest long term; and
  • Do not diversify excessively.



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