I am about to write a controversial area that divided the world of investing. Sometimes it is like we have to take side when the father and mother are quarrelling-accusing one another speculator, gambler, etc. Does it have to be that way?
Buffet's fans will always insist he is closely linked to Ben Graham. Fair enough, he has attended his classes and worked for him. Buffet always says he is 80% Graham and 20% Fisher. For those who are open minded, upon closer examination he is truly a controversial man. He will not hesitate to break conventional rules when there is money to be made. Let's see some his transactions:
(1) He paid 3 times book value for See's Candy in 1972. They also paid 1.2 price/sales, 20 millions for 30 millions sales. The sales growth has been unspectacular of 2%. The earnings were less than 5 millions and required 8 millions capital to run the business. How would you define margin of safety while he is paying for hefty premiums in this case?
(2) He bought metal commodity stocks like Kaiser Aluminium & Chemical Co. and Cleveland Cliffs Iron, Aluminum Company of America and etc in the late seventies to early eighties to combat stagflation.
(3) He is constantly looking for opportunities for arbitraging such as merger, recapitalization, reorganization, liquidation, etc. He was pretty active during the 80s merger manias. He is constantly evaluating probability to profit from likelihood of an event that is going to happen. He was even willing to average up beyond the announced acquisition price in Arcata Corp take-over by KKR in 1988. Do you know he played arbitraging game on soft commodity like cocoa while working for Ben at the age of 24 year old? Do you also aware that Ben himself involve in arbitraging?
(4) The disciples of Buffet will continue to advocate to buy simple businesses. He has publicly confessed that he does not understand how to value technology companies. However, he bought Amazon junk bonds at 57% par value for Euro 130 million in 2001 and 2002 after the technology bubble bust. How did he manage to estimate future cash flows of a tech company? Was he not speculating and betting US $ depreciation like Soros?
(5) Buffet is also betting on emerging markets like buying Brazilian real, he asked us to hold our breath while reading his annual letter to shareholders. Many probably know he made $ 3.5 B profit by selling off Petro China which he bought the stock a few years back. He also bought Posco and Iscar for example.
(6)He wrote 92 derivatives contracts involving high yield bonds default indices and also put options on stock indices. The swing of profits and losses could be in $ 1 billion range in any quarter.
(7)He is of course famed for buying simple yet great businesses like Coca-Cola, Gillette, American Express and etc.
(8)He has been buying a lot of main street businesses for a while when he find no great values in Wall Streets. His latest large purchase was Marmon group for $ 4.5 billions.
(9)Contrary to popular belief he does not leverage, his greatest leverage is coming from floats. If one trace his early partnership, he has made use of floats from Blue Stamps and Geico. He and Charlie will even take controlling stakes in closed-end funds to take control of investment decisions.
Buffet's fans will always insist he is closely linked to Ben Graham. Fair enough, he has attended his classes and worked for him. Buffet always says he is 80% Graham and 20% Fisher. For those who are open minded, upon closer examination he is truly a controversial man. He will not hesitate to break conventional rules when there is money to be made. Let's see some his transactions:
(1) He paid 3 times book value for See's Candy in 1972. They also paid 1.2 price/sales, 20 millions for 30 millions sales. The sales growth has been unspectacular of 2%. The earnings were less than 5 millions and required 8 millions capital to run the business. How would you define margin of safety while he is paying for hefty premiums in this case?
(2) He bought metal commodity stocks like Kaiser Aluminium & Chemical Co. and Cleveland Cliffs Iron, Aluminum Company of America and etc in the late seventies to early eighties to combat stagflation.
(3) He is constantly looking for opportunities for arbitraging such as merger, recapitalization, reorganization, liquidation, etc. He was pretty active during the 80s merger manias. He is constantly evaluating probability to profit from likelihood of an event that is going to happen. He was even willing to average up beyond the announced acquisition price in Arcata Corp take-over by KKR in 1988. Do you know he played arbitraging game on soft commodity like cocoa while working for Ben at the age of 24 year old? Do you also aware that Ben himself involve in arbitraging?
(4) The disciples of Buffet will continue to advocate to buy simple businesses. He has publicly confessed that he does not understand how to value technology companies. However, he bought Amazon junk bonds at 57% par value for Euro 130 million in 2001 and 2002 after the technology bubble bust. How did he manage to estimate future cash flows of a tech company? Was he not speculating and betting US $ depreciation like Soros?
(5) Buffet is also betting on emerging markets like buying Brazilian real, he asked us to hold our breath while reading his annual letter to shareholders. Many probably know he made $ 3.5 B profit by selling off Petro China which he bought the stock a few years back. He also bought Posco and Iscar for example.
(6)He wrote 92 derivatives contracts involving high yield bonds default indices and also put options on stock indices. The swing of profits and losses could be in $ 1 billion range in any quarter.
(7)He is of course famed for buying simple yet great businesses like Coca-Cola, Gillette, American Express and etc.
(8)He has been buying a lot of main street businesses for a while when he find no great values in Wall Streets. His latest large purchase was Marmon group for $ 4.5 billions.
(9)Contrary to popular belief he does not leverage, his greatest leverage is coming from floats. If one trace his early partnership, he has made use of floats from Blue Stamps and Geico. He and Charlie will even take controlling stakes in closed-end funds to take control of investment decisions.
His insurance floats could be in the range of $ 40 to 50 billions. This is almost like taking loan at 0% interest as he collected the money in the form of premiums and payout later when ever there are claims. As long as he underwriting conservatively, he makes profits and grow his wealth incredibly.
By now some readers will wonder what are the points that I am trying to make. I feel most people have over-emphasized Buffet is closely associated with buying simple businesses and Benjamin Graham. Most have largely overlooked that he is such a versatile investor that put the money where the mouth is. To borrow from Deng Xiao Peng, “seek truths from facts and it doesn't matter if a cat is black or white, so long as it catches mice. “ This has many implications for those who want to improve our investing skills. As usual, I will expand this when ever I can find time. By just a preview, I agree with him : Intelligent Investing.
By now some readers will wonder what are the points that I am trying to make. I feel most people have over-emphasized Buffet is closely associated with buying simple businesses and Benjamin Graham. Most have largely overlooked that he is such a versatile investor that put the money where the mouth is. To borrow from Deng Xiao Peng, “seek truths from facts and it doesn't matter if a cat is black or white, so long as it catches mice. “ This has many implications for those who want to improve our investing skills. As usual, I will expand this when ever I can find time. By just a preview, I agree with him : Intelligent Investing.
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