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.
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