PHIL TOWN

CRIBBED NOTES FROM BUFFETT'S ANNUAL MEETING

Mr. Buffett and Mr. Munger have just held forth in Omaha again.  Thank God.  I love these guys.  I didn't get to go because I was hung up in a negotiation but in between contract readings and phone calls I read the notes as they posted.  Its all good stuff and worth the read through.   I have unashamedly stolen these posted notes from the Wall Street Journal and some other website and filted out the noise.  Here's Warren and Charlie:

 

Question is about business school. It is "astounding" how schools have focused on "one fad after another in finance theory, usually very mathematically based," Mr. Buffett says in a comment that offers at every meeting and in many annual letters to shareholders. "Investing is not really that complicated," he adds.

         "I don't think any solar or wind would be working without subsidies," says Mr. Buffett. Just because the wind isn't blowing "doesn't mean everybody wants to have their lights off," he adds, pointing to one of windpower's minuses, economics aside.

                              Question on sustainable energy policy. Mr. Buffett says MidAmerican Energy has been doing wind power for some time, and that the federal subsidy "makes wind projects work" where they otherwise wouldn't. "If there had been no subsidy, I don't think any of our projects would make sense," he says.

"The future is subsidizing oil and natural gas production right now, in a sense," Mr. Buffett adds, suggesting we aren't paying the full freight on fossil fuel use now given its side effects (pollution for one) and the high cost of replacement methods.

A 26-year-old who works in private equity asks what Mr. Buffett would do in his shoes if he were to start over. Mr. Buffett says he would do what he did in life but would have done it faster. Develop an audited record of performance as early as possible, he says.

Question is on Berkshire's hunt for a big acquisition to put its massive cash hoard to work. Mr. Buffett says the company, which had $33.5 billion in cash on hand at year-end,  prefers not to go below $20 billion in cash on hand -- at that level he "starts squirming a little bit." But cash is going up as insurance premiums and other sources of flow come in, and he would gladly do "the right $20 billion deal."

 

Mr. Buffett says patience is the key virtue in investing, and that those who understand the market is a tool rather than an adviser will do well over time. The market is often wrong for a variety of reasons, he says, and those who bear that in mind can take advantage of the market's pluses, such as transparent prices and liquidity.

 

Carol Loomis presents a question from a shareholder who asks why Berkshire shares have been undervalued for so long. Mr. Buffett responds by taking an even longer view.

“We’ve run Berkshire for 47 years. There have been four or five times where we thought it was significantly undervalued,” he says. “The beauty of stocks is they do sell for silly prices from time to time. That’s how Charlie and I have gotten rich.”

Then he turns to his usual speech about investing in stocks, giving a shout-out to Ben Graham’s idea of Mr. Market, which he says investors should think of as their partner.

The beauty of having Mr. Market as a partner, he says, is that sometimes Mr. Market behaves like “a psychotic drunk.”

 

 

Valuing businesses based on Ebitda, a cash flow measure, "is nonsense," Mr. Buffett says. "I don't even like hearing the word," Mr. Munger adds.

 

I don't own your stock for the glamour, a questioner says, pointing to the outperfomance of gold in recent years. Mr. Buffett replies that Berkshire Hathaway stock has vastly outpaced gold, as have common stocks as a group, over longer time periods. He urges people not to give in to the urge to "caress" gold even though it has gone up for the past 12 years.

 

 

Asked why he bought J.P. Morgan Chase stock for his personal account but not for Berkshire Hathaway, Mr. Buffett explains that he prefers Wells Fargo -- of which the company owns 400 million shares worth $11 billion or so at year-end -- better. "My best ideas are all in Berkshire," he says. "That I can promise you." "I know Wells better and it's easier to understand," he says, adding that he bought Wells Fargo in the first quarter.

 

Questioner asks if Berkshire shouldn't be more aggressively buying back shares, paying dividends and using its richer stock for acquisitions. A run-up in the stock "is likely to occur in the future," Mr. Buffett says. But he doesn't "think the dividend would be a plus ... and might be just the opposite," unless the company finds it can't invest the funds profitably. "What you've suggested is a very conventional approach," Mr. Munger tells the questioner, making it clear that he views that approach as nonsensical.

 

"What you've suggested is a very conventional approach," Mr. Munger tells the questioner, making it clear that he views that approach as nonsensical.

 

That said, if all Mr. Buffett did was invest his own money, he'd own some Wells Fargo -- a simpler investment story that's more easily understandable -- but also JPMorgan.

 

“There could be circumstances under which we would buy a lot of stock but I don’t think they are highly likely,” he says. One thing the buyback price indicates, according to Mr. Buffett: “I do think it signals to a lot of people that don’t have a lot to lose” by investing at the current price.

Asked about investment managers Todd Combs and Ted Weschler, Mr. Buffett says they are "perfect" for Berkshire. Each makes $1 million in annual salary plus 10% of the sum by which their portfolios beat the S&P 500, on a three-year rolling basis. Each one gets paid 80% based on their performance and 20% on each other's. "I don't think you can have a better structure," Mr. Buffett says, likening it to the one he used to pay Geico's Lou Simpson, who recently retired after several decades of investing for the auto insurer. Each has $2.75 billion under management and little oversight from Mr. Buffett, he says, adding that when they buy a new stock he likes to know what stock it is.

 

Question on investing fads. "We try to stay away from things we don't understand," Mr. Buffett says, saying he needs to have "some notion" of what a business' earning power will be in five or 10 years. "You end up looking at a pretty small universe" when you rule out businesses that you don't understand, he adds.

 

Again, it comes down to the simplicity of the business and the investing story. Mr. Buffett says that "the chance of being way wrong about I.B.M. are probably less than being way wrong in Apple or Google."

 

The chances on being "way wrong" in IBM are "probably less" than the chances of being way wrong on Apple Inc., says Mr. Buffett. "We wouldn't have predicted" what happened at Apple, he said, and he didn't buy the stock -- which has been one of the market's strongest performers -- because he couldn't "get to a level of conviction" about the value of the business.

 

At the low current rates, "I would totally avoid buying" government bonds other than short-term bills, Mr. Buffett says.

 

I GOT YOU A SORT OF FREE BOOK FROM MY FRIEND BRENDON BURCHARD

Brendon Burchard is a good friend of mine.  He's clearer about how to create a a great business and a great lifestyle and how to use internet marketing than anyone I know.  And he's just written a new book that he's letting me get out to you guys for free so you can report to the world what you think about it.

If you haven't figured it out by now, let me just tell you straight out that Melissa and I are all about living a life, not just accumulating wealth.  We enjoy things like competing our horses in 3-Day Eventing, having our horse Can't Fire Me and our friend and trainer Becky Holder in the running for the 2012 US Olympic Team, playing a bit of polo in Jackson Hole (badly but with enthusiasm), fly-fishing with our son, Hunter, in Uruguay and hanging out with our kids wherever they are in the world.  Sure, this takes money.  But more important, it takes time and time is what busy entrepreneurs and executives have the least of.  

How to set yourself up with a thriving business AND a wonderful lifestyle is what Brendon is a world expert at.  He is phenomonal at explaining how you get yourself set up to have a life like his or mine.  Which is why I got excited enough about his new book to actually write something about it when he said he'd give it to the first 1000 of my readers who responded.  I've been horse-crazy lately what with the Rolex 4-Star 3-Day Event last week where we should have gotten 6th place but ... well that's another story.  But this thing Brendon is doing with us is cool enough to get me back at the computer.

Here's what's so cool about it:  Brendon is giving away hardcover copies of his new book.  Right now. 1000 copies. First come, first served.  And we get first shot.  

The price is zero which is cool, however, we gotta pay for shipping and I think it totals up about $6 or so. I know that's not the same as FREE but as an author who has shipped thousands of books I can tell you shipping costs are killer on a one-off basis so I understand why we have to pay that.  (I still don't know how Amazon does it for nearly free.  They must have a bulk deal going with carriers.)  To make up for the shipping costs, Brendon is throwing into the deal a couple of things that are definitely worth about 50X the shipping charge: 

1. Three videos on how high-performing millionaires maintain their internal charge and energy, manage their time, influence others, and achieve more.  (I watch his stuff and think 'I gotta get on that'.)
2. The Charge Life Assessment which will help you zero in on your areas of passion and competence and design a challenge plan that will help you reach your dream life faster.  (The key to my success has been a relentless pursuit of what God put me on this earth to do better than anyone else in the world.  Find that and you will love your life.)

This deal is a solid Rule #1 investment.  Go do it.

Brendon's book is called "The Charge: Activating the 10 Human Drives that Make You Feel Alive".  Click here before they're gone (seriously, they're gonna go like, today):

http://www.thechargebook.com

A bunch of friends of mine agree with me that the book is INCREDIBLE (and Yes, I am still friends with David Bach even though we beat each other up on TV):

"There hasn't been a game-changing book on personal development in a long time. The wait is over. The Charge confronts our very notions of what drives us as humans, and it brilliantly illuminates the path for how you can feel more alive, productive, and fulfilled. After reading this book you'll find a new internal charge that's stronger and more energized than you ever imagined possible."
--Jack Canfield, co-author of the Chicken Soup for the Soul series
and author of The Success Principles

"Every once in a while you read a book that completely changes how you think about your life, igniting within you a new internal drive to be more, do more, and give more. This is that kind of book."
--David Bach, #1 New York Times bestselling author of
The Automatic Millionaire and Start Late, Finish Rich

"I look for authenticity and proof when I learn from someone, and I can share that Brendon Burchard is one of the most engaged, energetic, and enthusiastic people I've ever met. I've always wanted to know how he developed such a remarkably strong internal charge. This book reveals his secrets. If you too want to perform at higher levels of joy, engagement, and productivity--buy this book. It's a must-read for any serious student of success and high performance."
--Darren Hardy, Publisher of SUCCESS magazine and
New York Times best-selling author of The Compound Effect

Get the book now while Brendon is giving them away before the official release. You can definitely see in the video on the link that he's EXCITED and when Brendon gets excited, its hard not to get all cranked up right with him.

Let me know what you think about the book and what Brendon teaches. 

Now go play!

Phil

HOW WARREN BUFFETT CREATES 35% ANNUAL DIVIDEND YIELDS

Warren Buffett has a secret: His portfolio delivers gigantic cash flow which he reinvests into other long-term gigantic cash flow yields that compound billions at 20% per year or higher, year after year after year.  

The power of compounding yields is often discussed but rarely understood.  For example, every fund manager out there knows about compounding but almost none use an investment strategy which has compounding as an integral part of the strategy and therefore, almost no fund managers beat the market rates of return much less achieve 20% or higher annual cash flow.  So how does Buffett do it and why can't the other Big Guys follow his obviously successful lead?

The first reason is that Buffett has an iron grip on his capital and fund managers don't.  Buffett doesn't have to deal with investors pulling their capital out of his fund because they don't like the short term, quarterly results compared to other fund managers.  This is why Buffett dumped the Buffett Partnership in the 60's and created Berkshire Hathaway as his investment vehicle.  Limited partners and investors in mutual funds can take their money out and force a fund manager to sell off 'long-term' investments at bad prices.  Investors in Berkshire can only drive down the price of the stock when they sell.  They can't take the capital of the company like partners and fund investors can. With total control of his capital, Buffett can think long-term.

You and I have the same exact ability.  We don't have to answer to investors whose emotional reactions to market swings can screw up a long-term strategy. We can do what Buffett does - buy with a focus on a ten-year time span.

The second reason is that Buffett focuses on cash yield.  Fund managers focus on stock price.  Cash yield is the flow of cash from the investment to the investment owner.  Buffett owns companies through Berkshire so that the excess cash flow of the investments can flow up to Berkshire without taxation.  Fund managers aren't in the investments for cash flow.  They are looking to increasing prices for their returns.  The difference is amazing in terms of compounding growth rates.

Let's say a Buffett investment produces a 4% cash yield from excess cash flow after he makes the investment and that the company is growing earnings at 10% a year.  What that means is that the cash yield is growing at 10% per year.  In 10 years the cash yield will be 10% on the original investment.  However, the actual cash yield is much higher than that because each year the cash flow to Buffett returns a small part of his original investment, meaning that 10 years later he has received back a big chunk of his original investment and his actual basis (remaining investment) in the business is much less than the original.  

This is what actually happens: Year 1 he gets back 4.4%.  Year 2 he gets back 5%.  Year 3 he gets back 5.5% and so on.  By the 10th year, this business will have returned about 70% of the original investment and it will have grown its cash yield on the remaining investment capital to a return of almost 35% per year and still growing.

Rule #1 investors do the same thing Buffett does.  We buy with a high yield because the company is on sale.  We take the dividend and reinvest it elsewhere at the same high yield and the recovery of capital from the dividend reduces our basis and increases our cash on cash yield.

This is the biggest secret to getting rich that I know of.  Buy a wonderful company on sale.  Reduce the basis with the dividend.  In ten years achieve yields of 20% to 35% per year on remaining basis.  Reinvest the returned capital in other, similar investments year by year.  Eventually your entire portfolio will have a yield of 20% per year and every year that yield will grow far in excess of inflation and you can sit on a beach someplace doing whatever you want forever.  

Now go play.