Monday, March 16, 2009

Wisdom from the Guru

The following is taken from the latest Berkshire Hathaway Chairman's letter.

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In good years and bad, Charlie and I simply focus on four goals:

(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash

(2) widening the “moats” around our operating businesses that give them durable competitive advantages

(3) acquiring and developing new and varied streams of earnings

(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.
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Undoubtedly good advice for retail value investors as well. In this post, I shall add my two cents brief commentary on each of the following points raised from the guru. (The link here: Just in case you are new here and wondering which guru we are talking about.)

1. As individuals, how much cash should we have in hand? There are many rules to live by. Going by portfolio construction, 5-10% in cash. In times like this, some would say 100%. But I would live by Graham's rules of not trying to time markets, ie maintain a fixed proportion in certain asset classes regardless of what happens, and rebalance that ever yr - ie if it becomes 20% bring it back down to 10% or vice versa. However, one other rule that I live by would be 6-12 mths of living expenses. Unemployment rate can hit both the headlines and us! So for me, it would 10% of portfolio or 12 mth living expenses whichever is more.

2. For this, since small time retail investors like us can't really help to enhance the moat of our companies, we should focus on buying co.s ALREADY having a durable competitive advantage. This would be big brands, strong companies. In Singapore, as mentioned in my past posts, probably less than 30 of them around. However, as individuals, we can and should focus on expanding our personal moat: something that we can do exceptionally well, much better than most people. This takes great effort and a hell lot of time, and most people never achieve anything of significance. Well, still need to try though, just be the best that we can be!

3. This came as a surprise. Buffett is not known for diversifying his bets. Anyways, I have always advocated not to put all our eggs in one basket. This, I think is a universal truth. Of course it does not make sense to have 100 bets as well. Probably a dozen of new and varied streams of earnings will earn the praise from the Guru himself!

4. Again as individual investors, we cannot really get to know top management well enough. We can only get to know them from media and from their actions (like whether they suka suka do RIGHTS issue! - which btw is super duper bad for existing shareholders, and not a free treat to buy stocks cheap as most aunties and uncles would like to think). In the context of personal networking, this means to mingle with people with the correct mindset, with honesty and integrity.

Well always refreshing to read letters from the Guru himself. Hopefully Berkshire's stock price can recover soon!
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