"With
a wonderful business, you can figure out what will happen; you can't figure out
when it will happen. You don't want to focus on when, you want to focus on
what. If you're right about what, you don't have to worry about when."
In
Berkshire Hathaway's 2013 Annual Report, Buffet suggests some fundamentals of
investing.
» When
promised quick profits, respond with a quick "no";
» Focus
on the future productivity of the asset you are considering;
» If you
instead focus on the prospective price change of a contemplated purchase, you
are speculating; and
» That a
given asset has appreciated in the recent past is never a reason to buy it.
Sometimes,
"a great investment opportunity occurs when a marvellous business
encounters a one-time huge, but solvable, problem," he suggests. This
"marvellous business opportunity" was American Express (Amex).
In 1963,
a "salad oil scandal" triggered panic selling in Amex shares, causing
its price to plunge by 50% to US$35 per share. A vegetable oil company had
secured huge loans from an Amex subsidiary by using falsified documents, a
debacle that cost the credit card company about US$58 million.
To
determine whether the imbroglio would prompt Amex cardholders to stop using
their credit card, Buffet spent the evening with the cashier at Ross' Steak
House in Omaha, his hometown. Realising diners weren't bothered by the
impropriety, Buffet bought 5% of Amex for US$13 million.
Berkshire
Hathaway's 2013 Annual Report shows it currently owns 151.6 million Amex shares
purchased at a cost of nearly US$1.3 billion against a market value of US$13.76
billion.
Another
example of contrarian investing is Berkshire's purchase of a railroad company
called Burlington Northern Santa Fe (BNSF) in 2009 amid the recent recession.
Buffet said buying America's second-largest railroad company was an
"all-in-wager on the economic future of the United States."
Buffet's
reasoning was simple. As the US economy revived, so would demand for goods to
be shipped by train. Furthermore, railroads are a more fuel efficient form of
transport than trucks.
Buffet's
analysis has been validated. Five years after buying BNSF, the railroad is now
Berkshire's single-biggest profit driver, contributing US$1.65 billion in
pre-tax profits in the third quarter last year.
Like all
investors, Buffet has made major investment mistakes. However, these missteps
haven't had a catastrophic impact on Berkshire's entire portfolio.
Ironically,
one big mistake was buying a controlling stake in Berkshire, then a struggling
textile mill, so that Buffet could fire the then CEO who had tried to undercut
an offer the Sage of Omaha had made to sell his initial stake in Berkshire.
"And
for 20 years, I fought the textile business before I gave up. If instead of
putting that money into the textile business originally, we just started out
with the insurance company, Berkshire would be worth twice as much as it is
now," Buffet said.
Another
miscalculation was acquiring a stake in Tesco. In 2006, when Buffet first
started accumulating Tesco shares, the UK's leading supermarket chain was
expanding worldwide, including into the US where it opened new stores called
"Fresh and Easy".
Although
Tesco issued a profit warning in 2012 and investors were abandoning the stock,
Buffet remained unfazed and continued buying more shares.
Last
year, Tesco admitted it had overstated its profits by £263 million, UK
regulators began a full-scale investigation and eight top executives were
suspended. Only then did Buffet concede he had been wrong about Tesco.
Nonetheless,
for those who are discerning and bold, severe downturns in the stock market
offer singular buying opportunities.
"A
climate of fear is your friend when investing; a euphoric world is your
enemy," Buffet says in Berkshire's latest annual report.
source : http://www.thesundaily.my/node/292774
