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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Archive for the ‘Warren Buffett’ Category

Buffett, Bacteria & Compounding

Posted by Muthu on February 26, 2015

It’s 50 years since Warren Buffett has been running Berkshire Hathaway. Soon, he would be publishing his 50th annual letter. I thought of sharing with you some portions from his 25th annual letter written in 1990.


We face another obstacle: In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor.

Carl Sagan has entertainingly described this phenomenon, musing about the destiny of bacteria that reproduce by dividing into two every 15 minutes. Says Sagan: “That means four doublings an hour, and 96 doublings a day. Although a bacterium weighs only about a trillionth of a gram, its descendants, after a day of wild asexual abandon, will collectively weigh as much as a mountain…in two days, more than the sun – and before very long, everything in the universe will be made of bacteria.” Not to worry, says Sagan: Some obstacle always impedes this kind of exponential growth. “The bugs run out of food, or they poison each other, or they are shy about reproducing in public.”

Even on bad days, Charlie Munger (Berkshire’s Vice Chairman and my partner) and I do not think of Berkshire as a bacterium. Nor, to our unending sorrow, have we found a way to double its net worth every 15 minutes. Furthermore, we are not the least bit shy about reproducing – financially – in public. Nevertheless, Sagan’s observations apply. From Berkshire’s present base of $4.9 billion in net worth, we will find it much more difficult to average 15% annual growth in book value than we did to average 23.8% from the $22 million we began with.


Imagine that Berkshire had only $1, which we put in a security that doubled by year end and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000.

The sole reason for this staggering difference in results would be the timing of tax payments. Interestingly, the government would gain from Scenario 2 in exactly the same 27:1 ratio as we – taking in taxes of $356,500 vs. $13,000 – though, admittedly, it would have to wait for its money.


We hope in another 25 years to report on the mistakes of the first 50. If we are around in 2015 to do that, you can count on this section occupying many more pages than it does here.

(Source: http://www.berkshirehathaway.com/letters/1989.html)

Posted in Warren Buffett, Wealth | Tagged: , | Leave a Comment »

Our Sales Principles

Posted by Muthu on January 2, 2015

Any profession or business needs selling. We’ve been selling for the last 8 years and these are the principles which guide us. We are intelligent enough from the beginning to make these principles cornerstone of our selling and never digressed from the same. By doing this, we are able to really create win-win relationships. The results are there to see.

Thanks to each one of you as you are the buyers of our services.

We are grateful to Warren Buffett and Charlie Munger for providing these guiding principles:

1) ”I don’t want to be on the other side of the table from the customer. I never was selling anything I didn’t believe in myself or own myself.”- Warren Buffett

2) ”Decide early in life to make your money by selling things that you really believe are good for the customers.”- Warren Buffett

3) “Don’t sell anything you wouldn’t buy yourself.”- Charlie Munger

4) “We will only do with your money what we would do with our own.”- Warren Buffett

5) ”Having integrity is the safest way to do business.”- Warren Buffett

6) “We don’t get paid for activity, just for being right.”- Warren Buffett

7) “You want to deliver to the world what you would buy if you are on the other end.”- Charlie Munger

8) “We will not equate activity with progress.”- Warren Buffett

9) “We will not trade reputation for money.”- Warren Buffett

Posted in General, Warren Buffett | Leave a Comment »

Buffett: Why Liquidity is important?

Posted by Muthu on February 18, 2014

“A little personal history may partly explain our extreme aversion to financial adventurism. I didn’t meet Charlie (Munger) until he was 35, though he grew up within 100 yards of where I lived for 52 years and also attended the same inner-city public high school in Omaha from which my father, wife, children and two grand children graduated. Charlie and I did, however, both work as young boys at my grandfather’s grocery store, though our periods of employment were separated by about five years. My grandfather’s name was Ernest, and perhaps no man was more aptly named. No one worked for Ernest, even as a stock boy, without being shaped by the experience.

On the facing page (given below) you can read a letter sent in 1939 by Ernst to his youngest son, my Uncle Fred. Similar letters went to his four other children. I still have the letter sent to my Aunt Alice, which I found- along with $1000 of cash- when, as executor of her estate, I opened her safe deposit box in 1970.”

(Letter written by Warren Buffett’s grandfather Ernest Buffett in 1939 is given below)

Dear Fred & Catherine,

Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time.

For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.

For a number of years I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, with out disturbing the money I have in my business. There have been a couple occasions when I found it very convenient to go to this fund.

Thus, I feel that everyone should have a reserve. I hope it never happens to you, but chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund by placing $200.00 in an envelope, with your name on it, when you are married. Each year I added something to it, until there is now $1000.00 in  the fund.

Ten years have elapsed since you were married, and this fund is now completed.

It is my wish that you place this envelope in your safety deposit box, and keep it for the purpose that it was created for. Should the time come when you need part, I would suggest that you use as little as possible, and replace it as soon as possible.

You might feel that this should be invested and bring you an income. Forget it- the mental satisfaction of having $1000.00 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something you could not realize on quickly.

If in after years you feel this has been a good idea, you might repeat it with your own children.

For your information, I might mention that there has never been a Buffett who ever left a very large estate, but there has never been one who did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well.

This letter is being written at the expiration of ten years after you were married.

(Signed – Ernest Buffett, “Dad”)

 

“Ernest never went to business school- he never in fact finished high school- but he understood the importance of liquidity as a condition for assured survival. At Berkshire, we have taken his $1000 solution a bit further and have pledged that we will hold at least $10 billion of cash, excluding that held at our regulated utility and railroad business. Because of that commitment we customarily keep at least $20 billion on hand so that we can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina, the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities, even during times of financial turmoil.

We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few more basis points, a policy we adhered to long before the frailties of commercial paper and money market funds became apparent in September 2008. We agree with investment writer Ray De Voe’s observation, “More money has been lost reaching for yield than at the point of gun.”. At Berkshire, we don’t rely on bank lines, and we don’t enter into contracts that could require postings of collateral except for amounts that are tiny in relation to our liquid assets.

Furthermore, not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running about a $1 billion per month. Our net worth has thus increased from $48 million to $157 billion during those four decades and our intrinsic value has grown far more. No other American corporation has come close to building up its financial strength in this unrelenting way.

By being so cautious in respect to leverage, we penalize our returns by minor amount. Having loads of liquidity, though, let us sleep well. Moreover, during episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense when others scramble for survival. That’s what allowed us to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.

(Source: Warren Buffett- 2010 annual letter to shareholders- http://www.berkshirehathaway.com/letters/2010ltr.pdf)

Posted in Basics, Warren Buffett | Leave a Comment »

Mr.Market

Posted by Muthu on February 9, 2014

This is one of the very important learning for all investors.

This ought to be read, re-read and internalized.

It’s from Warren Buffett’s letter to his shareholders in 1987.

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?

The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.

Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”

(Source: http://www.berkshirehathaway.com/letters/1987.html  )

Posted in Basics, Stock Market, Warren Buffett | 1 Comment »

Time is the key

Posted by Muthu on December 13, 2013

“Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.”

(Source: http://www.fool.com/investing/general/2013/05/24/the-5-most-important-finance-rules.aspx)

Posted in Basics, Warren Buffett | 1 Comment »