Even Buffett Isn't Perfect

Well..here is another book I just picked up during a random walk through the library. It is moderately interesting but holds no compelling information that I have not already read and reported on before.


Even Buffett Isn't Perfect (What You Can’t—Learn from the World’s Greatest Investor)”, Penguin Group, 2008, Pages 218
The author is vice president and executive director of the Forbes Investors Advisory Institute. Generally the author is a fan of Buffett’s only disagreeing on Buffett’s position which advocates substantial personal income taxes and estate taxes, as well as the elimination of quarterly earnings guidance from companies.

There are three things about Buffett that are constant:
1. Buffett clearly loves the insurance business. His personal success is largely due to just one industry: the insurance business. By steering Berkshire into the insurance business, he was able to get his hands on a tremendous amount of float. That is, a constant flow of premiums in excess of immediate claims.

2. Buffett places extreme emphasis on acquiring companies with good management and keeping them in place. He does not engage in hostile takeovers.

3. Buffett relies heavily on discounted cash flow (DCF) analysis to find stocks and companies that can be purchased for less than intrinsic value. DCF analysis is used t find undervalued stocks—not value stocks. An undervalued stock is a stock that can be purchased forless than its intrinsic value. A value stock is simply a stock that has low price multiples.
Buffett does not believe in Modern Portfolio theory, particularly the Efficient Market Hypothesis. Yet, he believes that 90%+ investors should invest in index funds.

My Notes:
Pg. 21: Interestingly, finance theory considers a stock to be risky (volatile) if it shows a tendency to go up or down by a large amount. Buffett thinks it is silly to equate risk with a stock going up and not just the risk of going down. Duh!!

Pg. 36: Asset allocation is much more important than security selection. One of the first and most widely cited studies was conducted by Gary Brinson and others where they studied pension funds and concluded that more than 90 percent of the variation in quarterly return over time was explained by asset allocation. Less than 10 percent was explained by market timing or security selection.

Pg. 40: The key to diversification is finding uncorrelated assets. Yet a simple commonsense approach often works just as well as a more complicated quantitative approach that requires the computation of correlation coefficients. When adding stocks to your portfolio, avoid those that are exposed to the same risks. A properly constructed portfolio that contains just a few stocks can often provide as much risk reduction as a poorly constructed portfolio that has a much larger number of stocks. Buffett says a six-stock portfolio provides sufficient diversification for those who know what they are doing.

Pg. 153: In 2003 the NYSE stipulated that a majority of a company’s directors must be independent. Buffett feels the rule is in error. For instance, a director who receives a significant portion of her income from her directorship may oppose a value-maximizing sale of the company if it means losing her directorship and the regular fees that go along with it. Buffett wants directors with a substantial investment in the company on the boards. Therefore, read the proxy statement to find out how much stock each director owns.

Pg. 176: To find out how much the top executives at any public corporation are getting paid, go to www.sec.gov and look for Form DEF 14A (a.k.a. the proxy).

Pg. 196: The SEC promulgated Regulation Fair Disclosure or Reg D), which mandated that corporations release nonpublic material information simultaneously to everyone. Companies can no longer just release this material to financial analysts.

Pg. 198: A University of Washington study found that on average eliminating earnings guidance results in a statistically and economically significant loss of shareholder wealth. Not all companies managements have the reputation for integrity that Warren Buffett has. Generally, companies only eliminate this guidance when they are hiding something.