30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting

Recently I have read a book called University of Berkshire Hathaway, here is the summary on what I have learned from two world-class investors, Warren Buffett and Charleie Munger.

Buffett’s Framework
* The difference of price and value
* Price is what you pay and value is what it is worth.
* Stay in the circle of competent.
* 8-10 stocks in a lifetime are probably enough.

Three Categories of Investment
* Investment denominated in a currency: beg on how the government would behave, all currency reduces in value
* Investment that doesn’t produce anything but you hope to sell at a higher price
* Investment in assets that produce something: success depends on the cash provides

Intrinsic Business Value (IBV)
* Cost a penny, sell for a dollar
* Present value of future cash flow to eternality
* Difficulties on estimating future cash flow
* Some industries’ cash flow is easier to estimate. Some are more difficult.
* Value should be the only concern of economic decisions.
* Investing in businesses is like buying a bond with no maturity and blank coupons. The job of the investors is to estimate and write down the number on the coupon.
* Don’t invest if you cannot guess the coupon.
* Long term government bond rate is the appropriate discount rate.
* If the valuation is X, buy at X/2.

Buy Wonderful Business
* Wonderful business at fair price > fair business at a wonderful price
* Buy assets below liquidating value may need to wait a long time until they are liquidated or adjusted in price.
* Buy earning power instead. High return on equity will ultimately become shareholders’ return.
* Business castle: the barrier of entry.
* Companies that need to be smart once V.S. need to stay smart.
* Business that an idiot can run.
* Understand the cost structure (people, capital, raw materials, etc) of a business and why it is sustainable and competitive.
* Overseas competitions

Evaluating Management
* How well the managers run the business: compare to other peers, capital allocation
* How well they treat the owners
* Focus management
* Start a business at an early age

Business Risk
* Capital Structure: debt
* Nature of Business: capital requirements, competition
* Seek for business with sustainable advantages and good capital structure

Filters
* Opportunity costs (Compare to other options)
* Quality people
* Good business: understandable, and sustainable
* The pond u choose is more important than how well you swim

Opportunity Costs
* Concentrate on best ideas out of all options

Permanent Holders
* Good economic characteristics
* Managements who are able and have high integrity.
* Like what the company does

Brand Name
* Create barrier fo entry

Acquiring 100%
* Seller would demand a fair price
* People will use other people’s money to do so, resulting in a higher price

When Not to Sell
* Panic mode
* Force to sell by using too much leverage

Performance Measure
* Gains in operating income
* Gains in book value
* Gains in intrinsic value

Inflation
* It is political, not economic.
* Significant inflation is inevitable since printing money is easy.
* Not unique to the United States
* CPI understates inflation (House, food, energy)

Inflation Hedge
* Buy great businesses with excellent management in a fair bargain.
* Businesses that use little capital, generate a lot of cash and have pricing flexibility.
* Improving earnings

Trade Deficit
* Huge problem
* Passing out IOUs and giving up productive assets

National Debt
* Debt is meaningless without looking at the ability to repay
* As long as the United States is able to repay the debt, it is not a concern.

On the market
* Don’t predict a decline
* Stocks can outperform business
* Anything that can’t go forever, will go down

Market Cycle
* Can’t jump in and out of a business because of the cycles.
* Predict how people swim against the current, but not the current itself.
* Identify good swimmers (Businesses)

Economic Forecast
* Pay no attention to the economic forecast
* Focus on IBV

Past is not necessarily prologue
* If past represents the future, the richest will be the librarian.

Diversification
* Doesn’t make sense to put an equal amount on number 1 stock and number 100 stock
* Diversification is for ignorance