Friday, March 07, 2008

Hurray! Buffett is World Richest!

This is a time for the world's value investors to rejoice. Our hero, Warren Buffett has become the world's richest man, overtaking Bill Gates, Founder of Unpopular Vista and Insecure Windows and Carlos Slim, Monopoly Tyrant oops Tycoon of Mexico. Of course, Lady Luck has got a lot to do with this, here are a few facts to support the thesis:

1) Microsoft has eaten full full and got nothing better to do, so decided to launch a bid for Yahoo! which aggrevated a lot of investors bcos it's quite a stupid move given that Yahoo! is like yesterday's darling (ie like Demi Moore or Alicia Silverstone, does anybody remember them anyways?). Hence Bill Gates lost like 20% of his net worth in a couple of days and got relegated to No.2. Or was it No.3?

2) Thanks to the sub-prime crisis, investors are desperately looking for safe haven to park their money to hide away from the storm, and where's a better to place than to hide with the Guru? So Berkshire stock rallied like nobody's business and our hero became No.1.

So that's that, fellow value investors buck up and follow your idol and the road to riches will be short ride.

Er, wait a minute, although this blogger believes that value investing is a good way to help you grow your wealth, there are a few things that Buffett can do while most of us cannot. So the road ahead is always not that short I'm afraid. The philosophy is important, but it may not reach the same destination depending on the execution. Here's a few tricks that Buffett can use but we cannot:

1) Buffett can buy over whole co.s and ask mgmt to pay out excess cash to Berkshire. This is a very powerful tool as we all know that mgmt simply cannot be trusted to handle shareholders' money. We have seen so many examples of good co.s generating good cashflow only to see it squandered away on useless ventures. I think the most aped example would be Microsoft. Bill Gates must be cursing Steve Ballmer to death now for doing the Yahoo? deal. Shareholders are so much better off if Microsoft just generate cash and return them to shareholders.

Well this trick is something that you and I cannot do. But it is a good philosophy to bear in mind and remember to apply this, if it is ever applicable in our lives. I guess one example would be property. If you are holding a property that can generate rental yield of 15%. I guess you should never sell this property unless it's like a super real estate bubble in which your property will fetch as much price as the whole of Bintan or something. Except for that scenario, you should never sell something that gives you 15% yield bcos in 6 yrs you get back your principal and the ppty will continue to generate 15% per yr for as long as you own the property!

2) Buffett's investment actions follow the self-fulfilling prophecy. There are websites, blogs, analysts, TV programs, cell groups following Buffett's every investment moves and hence whenever Berkshire makes a move, a lot of people will simply charge and buy with the Sage of Omaha. So is it a wonder why whatever Berkshire buys always goes up? Of course, this is also due to Berkshire's brand name. ie whenever Berkshire buys something, it is a stamp of recognition that the stock or investment is undervalued and money is to be made.

In other words, at a certain stage when a famous investor or fund manager becomes so successful, his success will simply feed onto itself bcos a lot mindless followers will simply support him and validate his investment decisions. Again this is something that we cannot do, yet. You see, this blog will become a sensation in time and start recommending stocks which will then send its own army of mindless followers to buy and the early birds here will reap the rewards. Haha fat dream right?

Well hope is a good thing, and all good things never die. (taken fr Shawshank Redemption by Stephen King) So keep hoping!


  1. Hi 8percent,

    Firstly, I think the ranking of the richest by Forbes is somewhat very superficial - it is very much like how the market capitalization measures the valuation or worth of a listed business. Take for example, in 1988 (plus or minus), the richest man then was a Jap. He was the richest because of the run-up in property bubble that was happening in Japan in the 1980s and then it came all tumbling down and in Buffett words, "when the tide is out, we can then see who is swimming naked."

    Think it is thus important to be able to differentiate between value and price. Price as it is is similar to how Forbes rank the richest in the world. But whether a billionaire really has any net worth that is close to even what it appears to be is really questionable - at least for those who is supported by stock value that appears to be in a bubble.

    Anyway, that is for that. Secondly, what Buffett can do in terms of gettin the cash from the companies are only for his wholly-owned businesses - not from those that are listed. And for those wholly owned ones, it is not as easy as one think it is because it is not easy to buy out a business that has the same kind of thinking as Warren does. I think he is a visionary in this particular field whereby he is able to purchase a great businese outright with management intact, willing to continue to operate it just like they did before when they are the owners. As Buffett states, he is only willing to buy a business who is in the same path as he is. He will not supply any management nor will he operates the business. He relies on the existing management who think likewise like him. Any business which is not friendly to his type, regardless how great the business is, he will not buy it. In fact, this trick is something seems difficult to replicate but then actually, it is a pretty logical one and quite simple - just that as Buffett puts it "people seems to like to make easy things difficult."

    As for stocks which Berkshire buys and the price goes up, it is true to a certain extend but not really. In the early days when Berkshire reveals a new holding, the stock will usually surge by a little (sometimes 3%, other times, 5%, at other perhaps 10%) but the time between the day of it being reveal gets longer, the stock price at times get back to where it was before the day the new stock is reveal or even under. A few example are Sanofi Aventis (now $36 versus $40 to $44 at the time he accumulated), Kraft ($31 versus the whole of last year of between $30 to $34), Johnson & Johnson (now $62 versus $60 to $64 at the price he accumulated), Carmax (now $18 versus $22 when he bought), Bank America ($35 versus $48 when he bought).

    Anyway the price of what he got at is not as important, more importantly is the reason why the price is worth paying for and the only reason to buy is if one is buying at a price below intrinsic value or all the cash that over the lifetime the business will produce is lower.

    Cheers/ BC

  2. Very good points from the first post. Agreed.

  3. Happen to read your article.

    Fat dream? Dreams are realities. Dream on... it doesn't cost a penny and eventually if reach that stage you can look back and enjoy. Nothing wrong there.