Dan Sweet

Warren Buffett on the best investments for young investors now? (12 of 12)

This is the final post in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

What do you see as the best investments for young investors now?

Do the internet equivalent of what I did with Moody’s books.  I found 15-20 companies in an afternoon looking through a 2004 guide to Korean companies published by Citi.

Example: Dehan Flour Company.  Earnings of 12k historically and 18k most recently.  200k book  value with 100k in marketable securities.  Selling for 38k won.  (2x earnings!)

Look for good fundamental businesses.  Selling for 2-3x earnings.  As long as you choose companies with great balance sheets you can’t lose.  In the U.S. I’d just choose 2-3 companies.  In emerging markets I’d probably diversify a little more.  A 5x return in 3 years would be doable.

Read Graham’s Chapter 8 of The Intelligent Investor on Mr. Market.  The market is the best place to make a lot of money without being very smart—and that’s what I was looking for.  If you bought a farm for $600 an acre you wouldn’t get upset if another farm sells for $550 an acre.  The farm doesn’t know what I paid for it.  Mr. Market is the best partner to have.  He’s psychotic, he’s drunk.  Sometimes its ridiculous.

The idea that the market is there to serve you and not to instruct you is the most important idea to keep in mind.

Liquidity should not suck you in.  Ask yourself, “would I be happy with this purchase if they closed the market tomorrow for two years?”

What you need is the right business, run by the right people, at the right price.

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Warren Buffett on derivatives (11 of 12)

This is the eleventh in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you feel about derivatives?

Derivatives create big positions people don’t understand.

Classic case is detailed in the Brady Report from October 19, 1987.  130/30 is the new hot thing.  Portfolio insurance was the thing then.  “Dynamic Hedging”  Basically the lower it goes the more you should sell.  Institutions had to sell at certain levels and everyone knew it.  Less than 2% of the market was on this kind of auto-pilot program-yet crashed the whole market.  Derivatives have created huge amounts of capital that are forced to move automatically.

They offer opportunity to me but a lot of people can get hurt.

A greater portion of the market is poised on a hair trigger to respond to given messages.

Federal Reserve margin requirements are 50% for you and me.  So many ways around that. “total return swap” for example.  Long Term Capital Management had a $6 billion position with no capital put up.  Whatever happens in the market is exacerbated by derivatives.

Banker’s Trust screwing P&G—like 8 variables those companies didn’t understand.

We will make a lot on derivatives but I will know every position.

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Warren Buffett compares railroads to the Cubs (10 of 12)

This is the tenth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Which railroads do you like and why?

Rails had a bad century—just like the Cubs.  Rails used to have 1.5 million employees.  They are getting more done now with only 200k employees.  Competition ruined the business.  Excess capacity is a terrible thing.  Rising oil prices hurts truckers 3-4x more than rails.

RR business just eats up capital (not good).  Coke vs the bottlers.  I’m in the right one.  RRs use too much capital to ever be great.

There is a slight advantage for the West Coast in terms of future growth prospects.  I like them because they are bigger and easier to put more money in.

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Warren Buffett’s thoughts on the Fed in October 2007 (9 of 12)

This is the ninth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Is the Fed doing a good job?

They can’t solve everything.

Dropping the rates a lot is less of an option with the dollar situation—$2B/day flowing out.  Bernanke’s hands are somewhat tied.  Brazilians have been supporting the dollar recently as their currency has become worthless.

Perceptions lag reality.

Gold and oil are up a lot but much of that is just our perspective and the result of the weak dollar.

Current account deficit is unsustainable.  Bernanke just said it. Greenspan said it in 2003.

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Warren Buffett on being “ungodly rich” (8 of 12)

This is the eighth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Do taxes in the US favor the rich?

Look at line 63—tax due.  Compare that to taxable income.  Berkshire Hathaway office average is 33%.  I follow the rules and pay 17% on my 46 million.  Payroll tax quits at 90k.  I bet that the average member of the Forbes 400 pays less than their receptionists.

50:1 odds against being born in the U.S.  This market system we have has made me “ungodly rich.”  U.S. Congress plans my taxes and treats me better than laborers.  Deck is stacked against the have-nots.  There are no longer any good opportunities for people with an IQ of 80.

The rich will always have lobbyists.

We have the opportunity to influence things in a democracy.

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