Monday, December 19, 2011

Diary: Phases of Buffett

In a post on 07-Dec-2011, "Can Turtles Fly?" talked about the three investment styles of Warren Buffet. Sketch notes below.

Phase I - Classic Value - 1950's and '60's

strongest return period. during period 1957, Dow compounded at about 7.4%. Buffett managed 29.5% pa nad 23.8% pa in two separate partnerships. focuses on balance sheet instead of income statement or earnings power. buys assets at below (33-55%) intrinsic value. sells at IV. higher diversification. companies often secondary/weak or small (although this was not necessary in 30's and 40's). also did things like risk arbitrage.

Phase II - Buffet Prime - 1970's to '90's

bought large dominant companies like Washington Post, American Express, and Geico. influenced by phil fisher and munger - growth investing. look at earnings power and qualitative elements. moats. great companies at reasonable prices, and hold them for long periods of time. concentrated bets.

Phase III - Modern Buffett - 1990's to date

needs to deploy large amounts of capital, within circle of competance, at attractive valuations. now looks at capital-intensive businesses (e.g. utilities and railroads), foreign companies, accepts lower return on equity (e.g. from ROEs of 15-20% to ROEs of 10%). more willing to inject emergency capital in which he doesn't have a long-term interest (Tiffany, harley Davidson, Bank of America)


choose to emulate phases 1 & 2 as your goal. don't try phase 3 unless you have little time, don't want to put in the effort, or can't handle too much risk. author reckons most amateur investors are persuing phase 3, which he classifies as a "mistake"


in phase 1, buffett sent people out with cash to collect stock certificates of blue chip stamps, so his success might not have been due to stock picking in the marketplace. it also coincided with a big economic and stock market boom, particularly after 1954. the boom became increasingly concentrated.

in the 1970's, public companies were very cheap due to adverse macro factors. he made his moneywhen stocks were cheap. they have been expensive since about 1994 (except of 2008/9), so it was almost impossible to replicate the earlier returns.

the float on his insurance company had a layer of financial engineering to i. it is not clear if assets were so badly priced for OPMIs

very small stocks are often cheaper, but more prone to big mistakes (competitive strengths, hard to unlock value, corporate governance, etc.)

6(?) investments account for 70% of berkshire's lifetime returns

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