The Oracle of Omaha Warren Buffett is part of most value investors daily indulgence. And while he’s not the founder of the strategy, Buffett’s made it part of his makeup.
Biznews founder Alec Hogg is a huge fan of his, and usually travels to the annual pilgrimage to Omaha for the annual shareholders meeting. This year he’s not but it’s the first year it’ll be digitally transmitted around the world, so in effect, everyone’s invited.
Alec’s also the author of How To Invest Like Warren Buffett and in the interview below he talks to local value academic Adrian Saville, on investing the Warren Buffett way. – Stuart Lowman
ALEC HOGG: How do you invest? How do you actually play in these times? Remember Nenegate – extraordinary developments. We are now unpacking what happened there. I’ve done a lot of work on that and I’m sure you guys have done lots of reading on it as well.
However, when you wake up one morning and there is a change, which has taken banking shares that you might have invested in down 20% in two days…that’s what happened. If you were in bonds, you would have lost (collectively) ten percent of the value of the bonds, which are supposed to be as safe as houses.
This is the reflection of a developing market and a developing market is where politics trumps economics. What do you do in a situation like that? Well, a lot of the advice in this book…and I’ve written it in a very easy, readable manner. I’ve tried not to complicate anything. Buffett is a ‘homespun wisdom’ kind of guy.
When you go to Omaha (and I urge you to do this at least once in your lifetime. Make the trip. Go and listen to Warren who’s now 85 and Charlie who’s now 92. They hold forth for 5-and-half hours, answering spontaneously posed questions by people in the audience and people who sent emails.
This year, for the first time ever, they are webcasting so we can all watch it. As a result, I’m not going. I have a young business and at R150, 000 to go to Omaha and back, you need sponsorship and unfortunately, we didn’t get sponsorship this year.
I’ll be watching the webcast with you and I strongly recommend that you do that because Buffett talks in terms that we can all understand. It’s like the great professors. You (Dr Adrian Saville of GIBS) were very highly rated in one of those recent surveys because people understand what you talk about.
ADRIAN SAVILLE: I’ll give you what I think is a quaint recollection, which is the launch of that radio station 20 years back. I would very often record that if I were out at meetings into the early evening etcetera. Those were the days of specialized outsourcing, computer configuration holdings, amalgamated appliances (Max Tech and House of Busby).
I make that point because I think what you bring to this conversation is this incredible ingredient called experience and that’s what Buffett displays – these acres and acres of experience.
One of the things that I hear you expressing in this experience is that my intro, which says ‘inflation is 7%. Producer price inflation is 9.71. The interest rate is up 75 basis points)… Your suggestion might be that this is ‘noise, not news’.
ALEC HOGG: Totally. That’s what Buffett tells us. He says he can’t (and he’s clever). This is a really, smart guy. The smartest man whose books you’re probably ever going to read is Charlie Munger (his partner), but Buffett is right there and I think their IQ’s are off the charts. Where people get it wrong though, is when Buffett says, “I don’t invest in technology because I don’t understand it.”
He doesn’t mean that he doesn’t understand it as in ‘I don’t understand how to dig a hole for a stadium’. He means ‘I don’t know where the earnings for the next five years are going to come or what they’re going to be’. His best pal is Bill Gates who he plays online Bridge with every week.
Bill’s on his Board and so is the former COO of Yahoo!, and he still doesn’t buy technology shares. What he did say a couple of years ago though, was that he can’t poke a hole in Google’s business model. He doesn’t know well enough what Google’s going to earn in the next five years, but he can’t poke a hole in the business model and as a consequence of that, value investors worldwide went and bought Google – just because Buffet said so.
He says, “Forget the noise.” He says, “I can’t call the big picture. I can’t call the big trends.” What I do is invest (and this is really what the basic story of my book). It really talks to you in a very easy fashion about Buffett’s life and how he has applied his investment knowledge. The basic thing is, how do you work intrinsic value for a company? You’re buying the company and not the shares to work out the intrinsic value and it’s not difficult.
He says, “Don’t try and get to the second decimal point. In fact, you have a range for your intrinsic value.” The way he puts it is that if somebody walks through the door (weighing 310 or 30 pounds), you don’t need to know their exact weight to know they’re fat. It’s a similar situation with investing. You get the intrinsic value and that rarely changes.
It changes as you get the new financials in there. You’re doing your estimate on what you think the company can earn over the next 10 years and work that into your numbers. It’s pretty easy and I’ve gone through in some detail on how to work that out because that’s where you begin.
Once you have an intrinsic value of a company, you then find what the margin of safety is that you would be comfortable with. Let’s just say the intrinsic value is R1.00. Your margin of safety would be 20% so you don’t buy those shares unless they’re 80 cents.
Then you let Mr Market (the manic-depressive who doesn’t have any medication) get manic and depressive but primarily, you want for him to get into one of his depressive phases so that the share price gets below your margin of safety. That’s when you buy and the period you hold on for is…forever.