Wednesday, March 5, 2008

Wisdom Buffett

Warren Buffett, the head of financial juggernaut Berkshire Hathaway (NYSE: BRK-A) is quite literally the smartest business man on earth. He is famous for his earthy quips and his willingness to poke fun at anything. While I don't own stock in Berkshire Hathaway (you can get a share for only US$139,000!) I love reading his Letter to Shareholders.

If you want a good chuckle, I recommend his 2007 Letter to Shareholders. My favorite line is when he quotes John Stumpf, the CEO of Wells Fargo, who commented about subprime lending:
“It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”
But he also peppers the document with some of the most incredible financial wisdom you can imagine. These simple statements belie the power of the information they convey, such as:
  • I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.
  • It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.
  • But if a business requires a superstar to produce great results, the business itself cannot be deemed great.
  • It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.
  • The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines...Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
  • But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
  • We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours.
  • The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S.
  • In developing a sensible trade policy, the U.S. should not single out countries to punish or industries to protect.
  • Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.
  • Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.
The rest I leave to you to discover. Make sure to add anything written by Warren Buffet to your reading list.

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