By Justin Beeton
Australian investment expert Justin Beeton takes a look at the most successful investor of all time, Warren Buffett, and explains how you too can replicate the consistent high returns the 'Oracle of Omaha' has achieved for over half a century.
Warren Buffet is arguably the greatest investor of all time. Without a doubt he certainly has the best long term track record in creating massive wealth for himself and the shareholders of his investment holding company, Berkshire Hathaway.
According to Forbes magazine, as at July 2008 Buffett was the world's richest man with a whopping $62 billion. Currently Buffett sits in second place behind Bill Gates.
Buffett is the CEO, chairman, and chief investment manager of Berkshire Hathaway, but does not have any quirky products as Bill Gates does, nor was he born into wealth like James Packer. Buffett simply understands a few simple investment principles.
If there is one thing I have learnt about Buffett in the last 15 years studying his genius is that Buffett buys businesses, he does not buy sectors, ideas or fads.
Buffett's principles:
1. Buy outstanding companies with a proven management team—“If a business does well, the share price eventually follows.”
2. Buy below intrinsic value—“When you buy below intrinsic value you have a margin of safety as well as a high profit opportunity.”
3. Adopt a focused investment philosophy—“If you believe the share price will increase, then why not have a large investment in that company.”
Buffett's principles are simple and what he describes as 'merely common sense' yet most who have attempted to replicate his success have failed. “There seems to be some perverse human characteristic that likes to make easy things difficult,” Buffett says.
The reason that the majority of investors fail to replicate Buffett's consistent long term returns is that overlaying all of his investment principles is his patience and discipline to stick with what he knows. He never deviates away from his investment formula even when faced with short term market volatility.
Another reason Buffett has continually provided high returns to the shareholders of Berkshire Hathaway is because he is the world's most successful investor, Buffett receives more opportunities than all other professional fund managers and the terms of which those opportunities are offered or negotiated are always skewed in Buffett's favour.
Buffett is a big believer in exploiting freak conditions that lead to even great companies being sold cheaply.
In 2009 Buffett stated, “We have a lot of cash and we are now seeing things that give us the opportunity to use that cash sensibly.”
Warren Buffet Facts
In October 2008, at the height of the American banking crisis, when the majority were fleeing the banking system in a frenzied panic, Buffett injected $5 billion into US investment bank Goldman Sachs.
"When all others are being fearful, be greedy," Buffett says.
He did not buy ordinary shares that all others were offered but Perpetual Preference shares that provided Goldman Sachs did not go completely broke, meant his entire $5 billion investment was protected.
Yet Buffett has the right to convert these units to ordinary shares at any time over a five year period at a price of $115 per share. Which means shareholders of Berkshire Hathaway can enjoy all the upside profit potential if Goldman Sachs share price trades above $115 per share, yet are without the risk of losing capital if the price falls (provided the company stays in business).
Buffett also negotiated for Berkshire Hathaway to be paid 10% per annum in interest on the $5 billion investment. Currently Goldman Sachs share price is trading at $170 meaning Buffett is sitting on a paper profit of almost $US3 billion accumulated in just over 12 months.
Buffet says, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the share price to be undervalued."
Since the share market lows reached in early 2009 many of Berkshire Hathaway holdings have recorded what can only be described as extraordinary performance (Goldman Sachs +60%, American express + 325%, Wells Fargo +265%, Coca-Cola + 49%, H&R Block +59%, Moody Corp+70%, Washington Post +52%) yet Berkshire Hathaway shares have significantly underperformed the market. What this means according to my analysis is that the best opportunity in the globe which meets Warren Buffett's investment principles perfectly is his company itself—Berkshire Hathaway.
Berkshire Hathaway has a proven track record of providing returns to shareholders (27.7% annual returns since 1977), solid management team (Buffett himself), and according to the current book value is trading below intrinsic value.
If you would like to gain access to the same deals as Buffett does, and to replicate the consistent high returns Buffett achieved then there is no need to reinvent the wheel, all you need to do is simply buy shares in Berkshire Hathaway.
Now here lies the problem. One A class share in Berkshire Hathaway will set you back $99,000 at the time of writing. As you need US dollars you will also face an additional risk of currency fluctuations. There is also the obvious fact Buffett is pretty old being almost 80, so what will happen to the share price of Berkshire Hathaway when he does eventually pass away?
These are all questions Australian investors must consider when analysing whether to invest in Berkshire Hathaway.
Warren Buffett has been the world's most successful investor, his investment principles have created the foundation to ensure he has consistently provided extraordinary returns to shareholders of Berkshire Hathaway for over 50 years. These principles are still relevant today and throughout 2008 and 2009 gave Buffett the opportunity to again wave his magic wand.
Justin Beeton is the managing director of the highly regarded stockbroking firm JB Global.
www.universalwealthcreation.com
