Warren Buffett Explains How to Pan for Gold

Warren Buffett Explains How to Pan for Gold

Excerpted from a recent talk Buffett had with students from the University of Kansas. (Read the whole thing… he talks about gold as a long-term investment, China as a place to invest, the importance of choosing a spouse and raising children, etc.

“Back in the 1950s the Moodyand S&P manuals were a good source of information. [Buffett then showed the students the actual copy of the 1951 edition of Moodys Banks and Finance manual. He then proceeded to flip through the pages and then turned to page 1431, which listed Western Insurance Securities.] This is panning for gold. Western Insurance Securities had EPS of $21.66 in 1949, EPS of $29.09 in 1950. The price range in 1950 was $3-13. I personally went to check out the company and found nothing wrong. I ran an ad in the Fort Scott Newspaper to find shares. [Buffett then flipped to page 1443]. Now I flip a few more pages to 1443. I was in gold territory! Here is National American Insurance. It had EPS of $29.02 and traded in a range of $27-28. This company was located a block and a half from where I was working at the time in Omaha. Again, I went to check it out and there was absolutely nothing wrong. Of course, a professor would say the markets are efficient so these stocks must have been priced right!

So the question is can you still do this today? [Buffett then pulled out the 2004 Korean Stock Guide compiled by Citigroup]. My broker at Citigroup told me to look through this Korean version of the Moodys guide. He said it would look just like 1951. He was right. I began flipping through the pages and found a lot of good companies trading at very low multiples. In 5-6 hours I put together a small portfolio of 20-25 stocks — about $100 million total. One example was DaeHan Flour Mills. It has a 25% market share in wheat flour in South Korea. Book value was 206,000 Won and the company had 201,000 Won in marketable securities and was trading at 2x earnings. The market is clearly not efficient all the time. There are certain opportunities that can make you fabulously rich.

You can increase your sources of investment ideas by widening your circle of competence. I have widened my circle over the years. I only needed to understand insurance in 1951. There were enough opportunities in that sector alone.”

Contributed by Soumen.

Meeting on 4/9

We generated many new ideas ( also action items) in this meeting. With our progress, we should be able to locate some good candidates for value investment. As usual, those who are on the "To" list attended the meeting.

Meeting Summary:
* A-has:
Excellent biz investment is hard to find.

* New Ideas:
- find better service airline ( or better quality companies in a specific industry)
- Find great 20, wait for them to drop and then buy.
- how to differentiate the impact of the company value decent ( differentiate rational vs irrational reasons)
- Study the failures of Warren Buffet investment
- Identify New great 20.

* Action:
- Find great 20 together
Every one of us will study a company he/she likes and bring the company #s to the meeting and share. We will together study/decide if it's a great 20.

Please share your thought at our BLOG. http://viclub.blogspot.com/
Many Warren Buffet related articles and biz analysis 101 to download at
http://groups.google.com/group/value-investment-club/files

Announcement: Next Meeting
Date: 4/22, Tuesday
Time: 12pm
Place: 1630 Oakland Rd, A105, San Jose CA

Home work:
1. Please read ch 16 to ch 20
2. Be available to share your A-has, new ideas or actions which you will take.
3. Bring a "potential" great 20 deal to the meeting.

Copy Warren Buffett and Beat the Pros

From Soumen referral, http://www.fool.com/investing/value/2007/11/26/copy-warren-buffett-and-beat-the-pros.aspx

Copy Warren Buffett and Beat the Pros

By Sham Gad November 26, 2007

Any doubts regarding Warren Buffett's mastery of investing can now be laid to rest. A recent study by two professors should confirm that Buffett is one heck of an investor -- possibly the greatest of all time. It showed that merely mimicking Buffett's purchases after he made them delivered almost twice the return of the S&P 500 Index during the past three decades.

According to Profs. Gerald Martin and John Puthenpurackal's study, "Imitation Is the Sincerest Form of Flattery," investors would have earned an average annual return of 24.6% for 30 years, simply by buying what Buffett bought. Better yet, this annual rate of return came from buying the stocks after Buffett had disclosed them in regulatory filings.

Don't cry for Buffett, though. The company through which he made his investments, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), generated an even higher return of 27.7% per year! Compare that to the S&P's very respectable 12.8% return in the same period. In an industry where three out of four mutual fund managers fail to beat the market, you could have crushed Wall Street by more than 11%!

To really bring the point home, $10,000 compounded at 24.6% for 30 years becomes more than $7 million. In the words of Mohnish Pabrai, "[a] monkey would have beaten the pants off the S&P 500 by following Warren's buying and selling."

Nothing fancy
Buffett's investing philosophy, as the investing world knows, is to bet big on simple, wide-moat businesses. Over the past three decades, the study showed that an average of 73% of Berkshire's equity portfolio was invested in just 5 stocks. As Buffett has often said, and the study seems to confirm, "Diversification is an excuse for ignorance."

Buffett's home runs include Washington Post in 1973, turning an $11 million investment into $1.3 billion by the end of 2006. Wesco Financial (NYSE: WSC), run by Buffett's longtime friend and business partner Charlie Munger, was also a smash hit, having returned nearly 200 times its investment over the past 31 years. More recent examples of Buffett's success include USG (NYSE: USG) and PetroChina (NYSE: PTR).

Never too late to start
Berkshire's most recent regulatory filing showed that the company purchased roughly 14 million shares of used-car dealer CarMax (NYSE: KMX). Earlier this year, Buffett began scooping up Burlington Northern Sante Fe (NYSE: BNI), subsequently accumulating at least 15% of the company. It's no secret that some Berkshire investments are made by Lou Simpson over at GEICO Insurance, an accomplished investor in his own right. Buffett has repeatedly said that Simpson could go out on his own and earn multiples of his current salary, but chooses to stay at GEICO.

It might be wishful thinking to assume that Berkshire can compound its returns at rates remotely close to those of the past 30 years. A victim of its own fantastic returns, it must deploy far more capital than during its salad days. Yet I believe that Berkshire can still beat the market's annual rate of return for years to come. Fortunately for us, in investing, it pays to be a copycat.

Pinnacle Airlines, INC. PNCL

Mohnish Pabrai who manages a 600 million fund is a Buffett follower. He spent about 650K just to have lunch with Buffett. He keeps on buying PNCL since last year. You can click here to check it out.

Below are some of the financial statements about PNCL:

1) PNCL is not consumer monopoly.

2) ROE 134%(2006), 44.74%(2007)( I only can find 2 years)

3) ROA 27%(2003 & 2004), 13%(2005), 29%(2006) and 6.86%(2007)

4) Total cash=213.6M; total debt=279.49m

5) Net income(EPS) 1.60(2003);1.86(2004);1.17(2005);3.54(2006);1.5(2007)

With skyrocketing of oil price, the stock price won’t move up for quite some time. If you go through the nine questions on chapter 16 from the book, it just not an excellent investment. So wait for more on sale if you like it.