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Investing in 2015

August 23, 2014

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I don’t invest based on macro economics, I prefer fundamentals on a company-by-company basis. Nonetheless, this is interesting. Credit to PH&N / RBC Wealth Management.

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I always enjoy listening to Michael Campbell’s Moneytalks show on Saturday mornings. He’s very good. However, today I heard an ad from an investment advisor who is a regular advertiser. The advisor said with great confidence and authority, “now is not the time to buy and hold”.

I couldn’t disagree more.

If you buy great companies at fair prices there should be no reason to sell. In fact if there’s a general market sell off that causes a downturn in the price of a great company it’s not a trigger to sell, it’s a trigger to buy more!

Benjamin Graham, Warren Buffett’s mentor, says in his book The Intelligent Investor, “the real money in investment will have to be made – as most of it has been in the past – not out of buying and selling but of owning and holding securities, receiving interest and dividends and increases in value.”

Now that is good advice!

Return on Equity

February 23, 2014

Only five ways to increase ROE:

(1) increase turnover
(2) cheaper leverage
(3) more leverage
(4) lower income taxes
(5) wider operating margins.

Warren Buffett has a talent at diluting important things down to their fundamentals.

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The master who trained the master.

This month we discussed business failures. Failures are an important part of the business process. Successful entrepreneurs pick themselves up, dust themselves off and learn from their failures. Often times the most successful entrepreneurs have had the most spectacular failures.

Warren Buffett estimates that his biggest failure has cost him $100 billion. I discuss this and others on today’s CFAX 1070 show at 2:30pm.

Click this link and fast forward to about 32 minutes: http://www.cfax1070.com/Media/CFAX-Podcasts/Ian-Jessop/November-4-2013-2pm.

Class 1 and 2 Truths

June 15, 2013

I am reading The Snowball by Alice Schroeder. It is an excellent read about Warren Buffett.

Buffett’s mentor Benjamin Graham had a concept called Class 1 and Class 2 Truths.

A Class 1 Truth is an absolute truth, like the intrinsic value of a company. A Class 2 Truth becomes a truth by conviction, or what people believe to be the worth of a company.

If enough people believed a company to be worth X then it was worth X until enough people thought otherwise. All of this did not affect a company’s intrinsic value.

Where a Class 2 Truth view of a company’s value is less than its Class 1 Truth there may be an opportunity for substantial gains to the investor.

In other words, buy companies that are trading at less than they’re really worth.

Harder said than done!

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I am in Omaha, Nebraska and attended the annual general meeting of Berkshire Hathaway yesterday. I have been an investor in BRK for six or seven years. I am most definitely a value investor and follow the principles espoused in Benjamin Graham’s “The Intelligent Investor”.

I dabbled in penny stocks in the 1998 – 2000 period and then bought another junior technology stock in or around 2005 / 2006. None of them provided a return commensurate with the risk.

A number of things struck me at yesterday’s AGM:

(1) Warren Buffett has made this event a profit centre for Berkshire’s businesses. For example, today Warren Buffett will be working in Borsheim’s selling jewelry. He personally sold $1.5 million worth of jewelry last year. This year his target is $2 million. I bought a BRK tie yesterday and the exhibit hall was packed with shareholders spending a lot of money – all at Berkshire owned companies.

(2) His principles don’t change. His messaging yesterday is precisely the same as his messaging ten, twenty or thirty+ years ago. Watch a YouTube video of him from 2001 and you’ll essentially hear what I heard yesterday.

(3) Charlie Munger is the silent giant in that partnership. Seeing the two of them interact on the stage provided real insight into how a functional and complementary partnership can work. These two are incredible individually, but together they are the best. The numbers prove this fact!

(4) The biggest challenge facing BRK going forward is its size. Its operating businesses produce so much cash that the holding company is having trouble finding acquisitions large enough to duplicate its returns of the past. This doesn’t scare me.

(5) Some shareholders are calling for dividends to return capital to us and to release some of the company’s cash hoard. I’m not one of these shareholders. Read pages 20 – 21 of Berkshire’s 2012 annual report (find it on-line) to find out why.

(6) Succession planning is a concern for shareholders. Berkshire’s board has been thinking about this for many years and the plan is in place. While I’m sure there will be some self anointed pundits who will scream loudly about BRK’s demise when our Chairman passes away. I’m confident the company is in great shape and that the succession plan will ensure its continued success.

There are more lessons, but I’m going to head out and absorb some more of Omaha before returning home.