Warren Buffett & Jay-Z on Success

Warren Buffett and Jay-Z were interviewed on Forbes on the discussion of success. The contents is much like a 'mash-up' of ideas between finance and rap music in which the commonalities between the two breeding success is answered.

Disclosure: 'Empire State of Mind' was played full volume as these notes were compiled.

Much of what Buffett said was already posted on this blog. Nevertheless, the key points are posted below. My emphasis is in bold.

• Buffett had a 15 year jump ahead of others
• Need emotional stability
• Need to think independently, think on own facts and act on it – few are able to do this
• Stay within your circle of competence 
• It’s like tennis: few of us will get to play in Wimbledon, but in tennis, get ball over the net and you will be fine
• Investing is not about not having brilliant decisions, it is about avoiding the bad ones (it’s like baseball: hit singles and doubles)
• Read Benjamin Graham’s book (The Intelligent Investor) at 19, started at 7 and read all he could in stocks by age 12
• Buffett was never grounded to anything and but was never profitable – it was not until after reading Graham’s Intelligent Investor did he start to succeed
• The two key ideas?
1. Think of stock as part of a business, not as a stock price or ticker
2. Margin of Safety

Jay-Z

• How did he break out of the pack of the other rappers?
• Within all that chaos you are searching for the truth – his first album at 26, so had more maturity
• What did he do when faced with fork-in-the-road moments? ...
• Consistency: he did not fade away. Music is like stocks. Instead of jumping on that next hot thing, he had discipline and confidence in who he was
• He treated music as a business
• The greatest trick in music that people ever pulled was they convinced artists they can’t be an artists who can make money. It was set-up!
• Hip hop broke that thing. At end of day, you need to separate music from the business. For example, it has to be about making music in the studio
• Genius approach was about not giving up, created own buzz, and music recording company came back to them

About Luck

• Buffett was born 1930 in US, odds 30:1 he would succeed. He had decent genes, but was wired for capital allocation
• Buffett was turned down by Harvard which gave opportunity to study under Ben Graham

Business Models

• Everything you do is cumulative: what was learned by Buffett at 20 is still useful now
• Principles do not change – it is much like physics – know what makes a good manager, product – there is transference
• Knowing what to leave out is as important: how do you beat Bobby Fisher, the great chess player? Play him in anything else besides chess
• Napster was an opportunity to embrace: shutting it down and having arrogance resulted in million more “napsters”
• Would have been better to have opened yourself up to change. Landscape changes, the way you go about business needs to change. You don’t necessarily need to change yourself

Business Moats

• Buffett likes having a business that has moats, where competitors cannot get to you
• The best moat to have is your own talent: taxes, inflation can’t take that away from you
• When Buffett talks to student he asks if you’re a $1 million asset he’d pay 10% ($100,000), how do you make yourself worth 50% more?
• Answer: Improve yourself, (ie) learn to communicate better might increase your worth 50% which equates to $500,000
• Develop habits of success – look around you and list talents of others and follow

Making Mistakes

• Discuss what went wrong, face up to it
• Have ability to discuss an opposing position comfortably
• Learn why and how poor decisions were made
• Don’t expect perfection in yourself – it is too demanding to do so

Final Thoughts on Success

• Buffett: Almost everyone who was successful had a teacher that has affected him – if you can pass that along, that is better than passing along money

• Jay-Z: Apply yourself, stay true to who you are, how far where you come from. Hope.

Conclusion:  Take control of your destiny by learning about business, so you won’t lose what you’ve created

Video Link: http://video.forbes.com/fvn/forbes400-10/jay-z-buffett-forbes-success-giving

h/t Marketfolly

Free MBA Lessons from Warren Buffet: Pt. 10

Skipping ahead for the moment, in the lecture series with Warren Buffett, Buffett gives much insight for investors in navigating through the noise in finance.

The bottom line is that Buffett evaluates an investment as a business, and cares little about daily changes in its stock price:

I have no idea where the market is going to go...the market knows nothing about my feelings.


The stock doesn't care what you pay, it doesn't care that you own it. Any feeling you have in the markets are not reciprocated. It's a very cold shoulder.

Needless to say, Buffett gets more interested the lower prices on stocks go. Better buys are made when stock prices fall.



Finally, Buffett provides insight on how he thinks his life would have played out if he were born at a different time, and with a different set of opportunities:

If I'm lucky, then the way to do it is to play out that game and do something you enjoy throughout your life with people you like. If I could make $100M dollars by buying a business from some guy that made my stomach churn then I'd say no, because that's like marrying for money...which isn't a good idea under any circumstances but if you're already rich then it's crazy.

Free MBA Lesson from Warren Buffett - Pt. 2

Lessons on LTCM
Continuing with the MBA lecture series with Warren Buffett, Buffett discusses Long-Term Capital Management (LTCM), a fund run by very, very smart people, but which collapsed in 1998. LTCM needed to be rescued, after a chain reaction of panic resulted first with Russia defaulting on its debt.

With respect to the managers of LTCM, Buffett comments:

To make money they didn't have and didn't need, they risked what they did have and did need... and that's foolish. (Re-enforced)  

If you risk something that is important to you, with something that is unimportant to you, it just does not make any sense...I don't care if the odds are 100:1 that you'll succeed, or 1000:1 that you'll succeed.

Things to know: Buffett owned Dairy Queen and held a position in Coca-Cola.

Free MBA Lesson from Warren Buffett - Pt. 1

In the first of a series of videos with Warren Buffett at an MBA school, Buffett discusses the kinds of people to choose for hiring. Intellect, Energy, and Integrity are important, but what is the type of person to choose in a leadership role?

The person to choose for such a leadership role would be one whom you respond the best to.

The person to "go short on" (to bet against) would be the person who had a quality that turned you off. Ego and dishonesty are examples.

How to Be Admired 

The qualities you choose and that which you do not want are traits of your choosing. Behaving like those whom you admire is a way you can be admired too. The habits you choose govern what you become:

"The change of habit is too light to be felt until it is too heavy to be broken."

When it comes to finance and investing, quality of management through leadership must be assessed, almost before anything else (although balance sheet analysis might come first). Shareholders would not want a company run by liars, as written in this article from The Economist (How to tell when your boss is lying - It's not just that his lips are moving).

Essential Warren Buffett on Passion, BP, iPad

Warren Buffett is worth an estimated $62 billion in 2008. He is the second richest man in the United States, after Bill Gates, and net of Buffett's philanthropic activities.

Buffett shares his wisdom in the following assortment of interview clips.

On the best advice he received - Knowing you can always come back; that you can tell a guy to "go to hell" tomorrow:


Link here

On passion: spending on things that enrich his life, why prospects are better now for students than in his time, and on thinking "outside the box."



Link here


On British Petroleum (BP), and on why the BP CEO should be fired:


Link here

On YouTube and iPad (why Buffett spends more time on the computer than Bill Gates):




Link here

On why Buffett thinks the economy is coming back (contrary to views of Krugman):


Link here

On George Soros - Taleb's Perspective

There are two ideas in Nassim Nicholas Taleb's Fooled by Randomness worth addressing. They are highly pertenant states of the mind that is necessary in navigating through the markets.

The first is on the idea of changing one's mind:

An old trading partner of Taleb's, a man named Jean-Manuel Rozan, once spent an entire afternoon arguing about the stock market with Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed. Two years later, Rozan ran into Soros at a tennis tournament. "Do you remember our conversation?" Rozan asked. "I recall it very well," Soros replied. "I changed my mind, and made an absolute fortune."

Speculating how or why Soros could change is mind would be a fruitless exercise. Taleb's interpretation was that George Soros knew how to handle randomness by keeping a critical open mind and changing his opinions with minimal shame. (Which carries the side effect of making him treat people like napkins.)

The second ideas is on the idea of knowing...nothing:

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.

When managing money, especially one's own, the first rule above everything else is, as Warren Buffett said it best:

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

Soros, for whatever reason, knew when to change his mind, but he did not do so on a whim or a guess (as it sounded in the book). There was detailed work done when an investment strategy was developed. However, when an strategy and investment thesis is carried out but is not working, even more work is needed to make up for losses.

The second idea is about being in a state that frees our mind from trying to control or model the unknown. Not everything may be forecast or predicted, and that which is unexpected to take place can take place. Knowing this (without actually knowing the unexpected) is something investors need to account in the analysis of stocks and the stock market.

Questions that Need Answering:

Here are a few things happening in the market that need resolution:

1. The U.S. 30-year Treasury prices are rising (yields are falling), and yet the stock market is rising. Is U.S. debt not the "safest haven" for investing? How are the debt auctions doing well if China is said to be buying metals instead of U.S. debt?

2. The S&P 500 rally since March was on declining volume, was without conviction, and sentiment was that of complacency (as indicated by the volatility index). Is there a risk of big players stepping in (or out) of the market in the next few weeks?

3. Will there be more government stimulus packages? Once the current programs run out, will markets ask for more?

4. If insiders are heading to the exits (insider selling is 95:1) why would ordinary investors be buying?



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Buffett says Economy in Shambles

"The economy will be in shambles throughout 2009 -- and for that matter, probably well beyond." - W. Buffett

This entry is lengthy, because Buffett, and his teacher, Benjamin Graham ("The Intelligent Investor" and "Security Analysis") forms the core fundamentals in my overall investment strategy. Although the market is currently working on a new set of unknown and changing rules, not all of the core fundamentals are applicable at least for the short term. Still, Buffett has returned 362,319% since 1965. In 2008 his company lost 9.6%. The S&P 500 lost 37%. On a relative basis, I would say that Buffett did very well (almost four times better).

Summary of Warren Buffet's Berkshire Hathaway results for 2008:

• Revenue fell 12 percent to $24.59 billion.
• Lost $4.61 billion in junk bonds, derivative contracts
• Profits was $3,224 per share for 2008 against $8,548 in 2007
• Investments fell from $90,343 per share of Berkshire to $77,793

CNN noted that Berkshire's profits stemmed mainly from interest and dividends on its investments and the earnings of its 70 operating subsidiaries. Berkshire has extensive holdings in two industries, insurance and utilities, whose earnings are not closely correlated with those of the general economy."During 2008 I did some dumb things in investments."

Buffett's Investment Strategy

• The paradox of Buffett's investment year will be evident: To put Berkshire's pile of cash to work at prices he considered attractive -- "I like those preferreds," he said recently -- he had to endure a terrible stock market that savaged many of the stocks the company already held. He has always declared, though, that he is perfectly content to see Berkshire's stocks fall in price, because that allows him to buy more of them cheaply.

Buffett's Investment Goals:

"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."

The Good News:
For objective #4, Buffett is referring to the solid management in their utilities business. In the insurance business, Berkshire made $2.8 billion just to "float" $58.5 billion of insurance.

Notable comment about insurance:

"GEICO grows because it saves money for motorists. No one likes to buy auto insurance. But virtually everyone likes to drive. So, sensibly, drivers look for the lowest-cost insurance consistent with first-class service."

The Bad News:

"I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action."

Comment:
Having little to no reaction is like being a rock that won't change. The economy today needs investors who are more fluid and more reactive to the facts that matter. The challenge, of course, is knowing which facts matter and which ones do not.

On Housing:

Foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay.

...

Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.

Comment:
I am a part-time real estate in Toronto. The first thing I do is check and counsel buyers about how much they can and should spend on a home.

On Clayton, the home lending unit for Berkshire:

At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.

Comment:
I find this situation troublesome. The government is stepping into the home lending business, and creating a level of competition that hurts healthy lenders.

Buffett Steps It Up a Notch Too:

When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.

Comment:
I do not agree that buying $14.5 billion worth of fixed income from GE, Goldman Sachs, and Wrigley is worth trading in the well-run J&J and P&G. These companies may fall due to declining consumer spending. However, low energy prices will keep costs down, and "recession-proof" items will ensure sales don't fall that much.

...But the U.S. Treasury bond bubble of late 2008 may be regarded as almost
equally extraordinary.

Comment: I am short TLT, long TBT.

On Cash:

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted.

They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Comment:
I fit in this category. My investment thesis lies squarely on protecting principle, and acting when there is clear evidence that the economic implosion experienced in Q4/2008 and in the foreseeable future abates. I am sure that Castlemoore Inc. would agree with this thesis, since I have re-modeled my strategy to be "aggressive" than in the past (Castlemoore currently recommends a 30% equity holding and 70% cash).

Admittedly, one thing I am cognizant of is being paralyzed from taking action when the time is right, because there can never really be a way to predict when that time is right.

On being part of the herd:

"Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

Comment:
I interpret this as an investors need to be objective, separate, and independent in thought from others.

A Red Flag:
Berkshire has $37.1 billion in put contracts. This means that if the major indices are below a certain level in 2019 - 2028, Berkshire could in theory lose $37.1B if the indices were 0. This is unlikely, so a more reasonable target loss would be a 25% decline in the indices (from inception of each contract). This translates to a $9B loss payable between 2018 and 2028.

To-date, Berkshire has a paper loss of $5.1B (loss is reported due to changes in accounting rules).

The Bad News (Results)

Buffett bought large amount of Conoco Phillips stock when oil prices were near their peak and in no way anticipated the dramatic drop in prices that subsequently occurred.

Buffett said he still thinks the odds are good that oil will sell in the future at much higher prices than the $40 to $50 per barrel. Even if prices should rise, he said, "the terrible timing" of the Conoco purchase has cost Berkshire several billion dollars (paraphrased from CNN Money; link is below).

Other Losses:

• American Express (AXP, Fortune 500) shares fell by $5 billion
• Coca-Cola (KO, Fortune 500) stake sank by $3 billion
• Wells Fargo have lost well over half their market value, falling from $9 billion to $3.65 billion.
  
• Holdings in U.S. Bancorp (USB, Fortune 500) is down by around $800 million

Final Comment:
I had thought that Berkshire would reduce or eliminate its holdings in banks, but in doing so the paper losses become real ones.

Links
Full Letter Here
CNN Money's on Berkshire

Other Links
Hedge Fund (Thanks Dan, from KaChing)

Mr. $62B's Company

Warren Buffett's Berkshire Hathaway
Is Warren Buffett losing his touch? Investors and the media have started to take notice of Buffett's performance for his holding company. CNN Money noted that the company is at a 5 1/2 year low.

One investment mantra advocated by Buffett is to "buy and hold...and hold forever." I do believe this attitude is required for intelligent investors, but am strongly against it for the time being. The enomity of problems in de-leveraging still has not played out, the investment rules governing valuation have been temporarily irrelevant (due to the monetary intervention to the markets), and there is little ability for anyone to remotely attempt any form of forecasting.

History: During the Internet bubble mania in 1999-2000, many investors (sounded loudly through professional analysts and the media) questioned Buffett's investment "old" style. They ignored the risks of high valuation and thought Buffett's rules (Benjamin Graham's teachings are discussed in his books "Security Analysis" and "The Intelligent Investor.")

Berkshire has some similarities to GE, in that it has exposure to both the insurance and the banking sector.

From CNN Money:

• "Much of the worry over Berkshire stems from derivative contracts that could force it to make big payments if the Standard & Poor's 500 and three other stock indexes were to be lower at various times between 2019 and 2027. Berkshire has said it could owe as much as $37.04 billion, in the unlikely event that the indexes were to fall to zero."
• Exposure to Wells Fargo & Co, where it is the largest investor, American Express Co and U.S. Bancorp - fall in value of financials would justify a fall in Berkshire
  

Analysis:
I created a group called "Intelligent Investing" on kaChing.com. The group's purpose is to apply and to discuss the investment method from Benjamin Graham's "The Intelligent Investor." It now has over 120 members. It might seem odd to be critical of Buffett, a disciple of Graham and the second richest person in the world.

Questioning Buffett's investment positions and actions is akin to a grasshopper teaching its master. Is one right to wonder if Buffett is losing his touch this time around?

I believe that investors reject the buy and hold approach at this time, because a defensive position is required. Defense is best obtained by preserving assets through a high cash position. Buffett hates cash. Graham did too. Cash rots with inflation. Yet, a high cash position would enable the investor to seize great opportunities.

I also believe that the financial sector is too dangerous to hold right now.

Opportunities have continued to present themselves each time the stock market declines. The investor just ought not to confuse opportunities in great companies with opportunities filled with risk.

On kaChing

kaChing hosted an "API" (technical jargon that is an abbreviation to "Application Programming Interface") Garage Event on Saturday. Slide Show on Technical Developments at kaChing:

kaChing's API garage event
What do these slides mean? kaChing has built a decisively large user base. It has 363,318 users. As such, it is embracing the social networking structure and "web 2.0." How? It is reaching beyond its stock trading application as a stand-alone website or as an application within facebook.

In plain English, it means that kaChing has expanded its reach to grow far larger than where it is at now.

Assessing Impact of Proposed U.S. Stimulus Package

The unemployment figures for January in the U.S. was startling. Despite these figures, the stock market rallied. From past patterns in stock activity, this is a bullish signal, to a limited degree. The bullishness last week signals that a "bottom" may have been reached.

I would contend that a market bottom won't be known yet, because it cannot ever be predicted. Bottoms are only known after the fact. It would also be more prudent for the investor to wait for a S&P 500 re-test of the bottom @ 741.02 reached last November.

This current blog entry by Chris Lau was sponsored by ProfessionalStockTraderLive.com. ProfessionalStockTraderLive.com is your source for learning how to become a better and successful trader and for following trades in real time.



The market is pricing in the stimulus package. It is almost impossible for the market to refuse to rally, since both the allure and the injection of a massive amount of money into the economy will necessarily result in a higher market index. Investors would be wise to remember that when money is printed, U.S. debt must be sold. There must be a buyer. That buyer is China and Japan, along with other foreign countries.

Being bearish on TLT would be one of many investment ideas I have discussed in past entries.

Is the Stimulus Package Enough?

The stimulus spending bill in Congress is supposed to create 3.7 million new jobs. However, the assumption is that each new dollar of government spending will generate $1.50 to the economy. This calculation is made with a GDP multiplier of 1.5. This multiplier was estimated by the Federal Reserve’s FRB/US model.

See this article.

To paraphrase:
"Production and work create GDP, so it is more accurate to say that 1 million more jobs produce 1 percent more GDP.”

If a GDP multiplier of 1.5 is a constant for all government spending, then why don’t they propose spending $10 trillion to make us $15 trillion richer?"

Analysis:

The stock market is assuming that the flow of funds from the stimulus package will result in an increase of 150% in economic output.

The market fails to do is recognize:

1) Who is consuming the added debt
2) The funds will not result in 1.5x, because the funds are being used for an assortment of investments that will not impact GDP output (example: covering bank losses)

Calculation of Lost Wages

Below is a line table of lost income based on total and monthly unemployment of 7.6% in the U.S. Assume the figures provided by Bloomberg are appropriate, in that average wage would most accurately represent lost annual wages.

Note:
- Severance has not been factored in.
- Cost reductions for companies have not been factored in.

Title:
Item Number)
Value
Details

1)
3,570,000
Total Unemployment, U.S.

2)
$614.72
Weekly Average Wage, @39.8/hrs

3)
598,000
January Unemployment, U.S.

4) $114,116,620,800 - ie $114B/yr
Total lost income (annualized) @7.6%

5) $19,115,333,120 - ie $19B/yr
Total lost income (annualized) for jobs lost in January 2009

6)
Spending Multiplier = GDP / Change in Investment - What good is this? There are too many unknown variables!

7) 6,570,000 Unemployment, Dec 2009 (estimate, based on Bloomberg.com article)

8) $210,012,940,800 i.e. $210B / yr
Total lost income if 6,570,000 jobs are lost by December 2009

I haven't applied a GDP spending multiplier to it yet, for the reasons mentioned previously. There are too many assumptions that will make economic cost estimates accurate. In addition, the impact on GDP will be higher since income has a direct impact on the economy. This will make any impact estimates very inaccurate.

So, in the above I used only the calculation, annualized over 12 months:

# Unemployed x Average U.S. Income x 52 weeks

...and for item #8, calculated the cost to the economy by December 2009.

The point of this calculation is to illustrate that investors must monitor the unemployment rate in the coming months. Investors must then weigh it against current and future stimulus policies. Investors must not look at US$827B and assume that amount will result in US$827B consumption. The banks remain the known unknown "black hole" in this equation. Just how much government money is still required to shore up bank balance sheets remains largely unknown.


Blog Site Update and Creation of kaChing Discussion Groups

First, I have created two groups to help readers become better investors.

• Beginner's Guide to kaChing Trading Unauthorized beginner's starting point for new kaChing users.

• Intelligent Investing - Benjamin Graham taught Warren Buffett how to invest. He was worth $62B as of December 2008. While he employs a "buy and hold forever" approach, this group will focus on the securities analysis approach for holdings worth to make that list. The goal for members here will be to make the elite list and to perform above the average user on kaChing. Concept and practice is based on the book "The Intelligent Investor" by Benjamin Graham.
  

kaChing has created an API (Application Programming Interface) to allow bloggers and sites to link their portfolio. See top of page. This will give more freedom and transparency to not only the users on kaChing, but for bloggers such as myself. With 145 followers, users will want openness in the rationale between an evolving investment thesis and the actions taken to achieve an investment goal.