Warren Buffett is one of my investment heroes. He’s famous for several reasons:
–early on in his career, he did a friends-and-family round of raising money. After early success with these funds, he realized there were no more obvious bargains that he could see. So he liquidated his fund and returned the money to his investors. No one does that!! The management fee income is too hard to give up
–he was one of the first to understand the value of “intangible” assets, like brand names and sales/distribution networks. For him, the model is Coca Cola. The overall idea is this: Company A spends $10 million a year for a decade on marketing to establish its brand name. That’s $100 million. This appears on the income statement as a reduction of earnings over that period. Ex the special case of acquisitions, it appears nowhere on the balance sheet or in book value. Yet if Company B decides to enter Company A’s market, it’s reasonable to assume that it would need to spend an equivalent amount to have a chance to reach anything near the level of customer awareness that A already has.
Everyone knows this today, but this is because of Buffett’s insight and pioneering work in the 1960s-1970s.
–he created the legend of Berkshire Hathaway–basically that formerly low PE multiple companies by being acquired/endorsed by the Sage of Omaha are worthy, post-acquisition, of much higher multiples. The most recent instance of this is his foray into the trading arms of the giant Japanese samurai-era industrial conglomerates.
The Financial Times raised in interesting point the other day, motivated I presume by the recent death of Buffett’s long-time business partner, Charlie Munger, and speculation that Buffett is thinking of retiring.
The newspaper’s point is that over the past ten years, Buffett has underperformed the S&P 500 by a considerable amount and the two professional money managers working directly under him have underperformed Buffett. My point: due, I think, to the Berkshire Hathaway legend, this has not hurt the stock. I wonder how long this can continue? Of course, I’ve been wondering the same thing for most of my investing career.