from Buffet....
....we warn you that there is nothing symmetrical about surprises in the insurance business: They
almost always are unpleasant.
...Our growth will be slow, however, if State Farm elects to continue bearing the underwriting losses that it is now
suffering.
...In 2000, we sold nearly all of our Freddie Mac and Fannie Mae shares....
...Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the
formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by
a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).
The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in
the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain
are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the
risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three
questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now
possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.
Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays
for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam
engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the
Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital
throughout the universe.
Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth
rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash
flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a
project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.
Market commentators and investment managers who glibly refer to “growth” and “value” styles as contrasting
approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component ¾
usually a plus, sometimes a minus ¾ in the value equation.....
...The line separating investment and speculation, which is never bright and clear, becomes blurred still
further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses
of effortless money......
...What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly
merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the
public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed
the creation of bubble companies, entities designed more with an eye to making money off investors rather than for
them. Too often, an IPO, not profits, was the primary goal of a company’s promoters. At bottom, the “business
model” for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers
acted as eager postmen....
...I’ve warned you in the past that you should not believe everything you read or hear about Berkshire ¾
even when it is published or broadcast by a prestigious news organization. Indeed, erroneous reports are
particularly dangerous when they are circulated by highly-respected members of the media, simply because most
readers and listeners know these outlets to be generally credible and therefore believe what they say....
berkshirehathaway.com
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