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Berkshire-Hathaway annual meeting 2012

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Nobody who's been a bigger influence on my investing style than Warren Buffett - I religiously listen to what he has to say. In fact I know Buffett so well that there was little that was new to me when I read a transcript of the Berkshire Hathaway annual meeting. Here's my summary of the interesting bits:

Investing in businesses

"If you know which businesses you can and cannot value, you're going to make money...Stick with businesses that you think you can value. It's a marvelous game". I suspect that the businesses Warren thinks he can value are those with strong competitive moats & the right leaders.

Businesses with strong competitive moats are more valuable

WB: "The mistakes we've made are where I misjudged the competitive position of the business". Warren stays away from businesses where he doesn't have a reasonable fix on what the "earnings power and competitive position will be in five years".

Competitive moats may come about as a result of:

Watch out for businesses which face competitive headwinds. As Charlie Munger said, "The internet (Amazon) will hugely affect a lot of people (retailers)."

Look for businesses with extraordinary people

"I think I've learned more about people over the years. I'll make mistakes in people inevitably, but I'll recognize the extraordinary ones more easily than I would have 40 or 50 years ago."

Make sure the price is right

I wonder whether this is the first time that Warren has mentioned specific valuation multiples: "Thinks an appropriate multiple for a business with strong competitive advantages is probably 9 or 10 times pre-tax earnings." It's interesting that Warren mentioned pre-tax earnings - this gels with my feeling that tax paid in any year can be distorted by tax credits, and therefore may not reflect the sustainable future rate of taxation. I'm glad my recent purchases in Conduit Capital & Combined Motor Holdings, meet Warren's multiples requirements, at least according to me.

Declining businesses

WB: "Generally speaking, it pays to stay away from declining businesses. We are invested in several declining businesses. We think we understand them pretty well. There's a price that we will pay to invest there - but that's not where we make our real money. I would never spend a lot of time studying a declining business. The same amount of energy and intelligence devoted to other businesses will work out better".

Don't overplay macro effects

"In 53 years, I don't think that Charlie and I have talked about macro effects (when deciding whether to buy or sell a business). When we find an attractively priced business that we understand, we buy it."

Consider worst case scenarios

"We think about worst cases all the time, then we add a big margin of safety. I enjoyed tossing newspapers, but I don't want to go back to that again. We won't take a risk (even a favorable one) if the downside means that Berkshire will go broke...In terms of financial history, I've always been absolutely absorbed by reading about disasters.

Paying out dividends

WB: "By and large we feel (so far justifiably) that we can create more than a dollar of value by reinvesting every dollar we retain. For 47 years, that's been the case. If we'd paid out dividends, our shareholders would be worth less money. I think that will continue to be the case."

Joe Magyer (Motley Fool): "Here's the thing with dividends -- you only want them paid out to you when management can't earn a return on that dollar greater than its cost of capital. In Berkshire's case, Buffett is able to do that. Most companies can't. In fact, professor Damodaran mentioned yesterday at the Value Investing Conference that 45% of global public companies are generating returns on equity below their costs of equity. In other words, they're destroying intrinsic value."

Avoiding US medium-term or long-term government bonds

WB: "When the government is operating with a deficit that is 8% or 9% of GDP, that is huge fiscal stimulus. We don't call it that, but that's what it is. We've been living with that for a long time...I would avoid medium-term or long-term government bonds. I think that's the obvious answer

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