Fosun - The Case for BRK.CN

I. Thesis: 

Fosun is a privately owned Chinese conglomerate headquartered in Shanghai. It was founded in 1992 by four Fudan University (a top-five university in China) graduates. Fosun moved into pharmaceutical, steel, mining, real estate and most recently and perhaps more importantly to Fosun’s future, insurance and asset management. Fosun is striving to transform itself into an insurance-oriented investment group and effectively implementing its philosophy of value investing, thereby enabling Fosun to make strides towards its vision of becoming a “premium investment group with a focus on China’s growth momentum.” Investing in Fosun also will benefit from the long term trend of RMB appreciation against the dollar (The RMB has been appreciating against the USD at about 2.8% per year compounded annually for the past 10 years). 

II. Segments 

(i) The pharmaceuticals and health care segment comprises the business of Fosun Pharma and its subsidiaries. Fosun Pharma, established in 1994, and its subsidiaries are mainly engaged in the research and development, manufacture, sale and trading of pharmaceutical and healthcare products. The Pharmaceutical segment generated revenue of RMB 7.3 billion (about $1.16 billion), profit before taxes of RMB 2.1 billion (about $337.4 million) and spent RMB 962 (about 152.7) million on capital expenditures. From 2007 (the year Fosun went public in Hong Kong and started presenting annual reports) to 2012, this segment generated a total revenues of RMB 33.3 billion (about $5.3 billion), profit before taxes of RMB 6.7 billion (about $1.06 billion) and spent RMB 3.84 billion (about $610 million) on capital expenditures. 

(ii) Property segment comprises the business of Shanghai Forte Land Co. Ltd. (Forte) and its subsidiaries, excluding its investment in the insurance business. Forte, established in 1998, and its subsidiaries mainly engage in the development and sale of properties in China. Forte operates property business mainly in tier 1 and tier 2 cities including Shanghai, Beijing, Tianjin, Nanjing, Chongqing, Chengdu, Xi’an, Wuhan, Datong, Wuxi, Hangzhou, Taiyuan, Changsha and Changchun. During 2012, the Property segment generated revenue of RMB 10.5 billion (about $1.67 billion), profit before taxes of RMB 2.61 billion ($412 million) and spent RMB 39 million (about $6.2 million) on capital expenditures. From 2007 to 2012, this segment generated a total revenues of RMB 44.4 billion (about $7 billion), profit before taxes of RMB 13.5 billion (about $2.1 billion) and spent RMB 455 million (about $72 million) on capital expenditures. 

(iii) The steel segment comprises the business of Nanjing Iron & Steel United (Nanjing Nangang) and its subsidiaries. Nanjing Nangang and its subsidiaries mainly engage in the manufacture, sale and trading of iron and steel products. Fosun first invested in Nanjing Nangang in 2003 for RMB 1.65 billion. During 2012, the Steel segment generated revenue of RMB 32 billion (about $5 billion), losses before taxes of RMB 862.4 million ($137 million) and spent RMB 3 billion (about $476 million) on capital expenditures. From 2007 to 2012, this segment generated a total revenues of RMB 196.8 billion (about $ 31.2 billion), profit before taxes of RMB 7.4 billion (about $1.2 billion) and spent RMB 17.5 billion (about $2.78 billion) on capital expenditures. 

(iv) The mining segment comprises the business of Hainan Mining Co. Ltd. (Hainan Mining) and its subsidiaries. Hainan Mining and its subsidiaries mainly engages in the mining and ore processing of various metals. Founded in August 2007, with a registered capital of RMB1.5 billion, Hainan Mining is jointly established by Fosun and Hainan Iron and Steel Company, owning 60% and 40% interest, respectively. Hainan Mining owns a zonochlorite mine with polymetallic and nonmetallic ore. The mine has rich reserves of high-grade iron-rich ore, and is known as “China’s largest iron-rich ore producer.” Hainan Mining’s open-pit mining system is highly mechanized. It is capable of mining, beneficiating, tailings recovery, nickel and copper smelting and equipment maintenance. The mine has an annual overburden removal capacity of 16 million tons, raw iron ore mining capacity of 4.6 million tons and final iron ore products capacity of 3.3 million tons. Main products include blast furnace lump, fine ore, iron ore concentrate, electro deposited copper, cobaltous oxide, etc. Its customers include a number of domestic iron and steel enterprises such as Wuhan Iron & Steel, Shao Gang, Nanjing Iron & Steel and Anhui Iron & Steel and so forth. During 2012, the Mining segment generated revenue of RMB 1.95 billion (about $310 million), profits before taxes of RMB 1.1 billion ($172 million) and spent RMB 529.7 million (about $84.1 million) on capital expenditures.

(v) The asset management segment engages in the asset management business through the platform such as corporation funds, partnership funds and trusts. Fosun established its asset management practice in 2010 with the launch of Fosun-Carlyle Shanghai Equity Investment Enterprise (Carlyle-Fosun), Prameria-Fosun China Opportunity Fund L.P., Shanghai Fosun Capital Equity Investment Fund L.P. and Shanghai Star Equity Investment L.P. (Star Capital), etc. The asset management segment is still in the early stage. As of Dec. 31, 2012, the asset management of the group raised funds amounting to RMB 16,658.1 million, the revenue from the management fee of the asset management business amounted to RMB 159.74 million . In 2012, the asset management business of the group invested in a total of 28 additional new projects and increased investments in five existing projects with an accumulated investment of RMB 4,435.2 million. Fosun also prepares to launch a new RMB-denominated Weishi Fund and a new fund denominated in USD in 2012, which it claims may eventually start operation during 2013. 

(vi) The insurance segment engages in the operation of and investment in the insurance business. Fosun’s insurance segment mainly includes Yong’an P&C Insurance, which is a property and casualty insurance company headquartered in Xi’an with a nationwide presence, Pramerica Fosun Life Insurance, which commenced its operations in October 2012 and focused on providing life insurance, health insurance, casualty insurance and all other kinds of personal insurance products approved by China Insurance Regulatory Commission and related services, and Peak Reinsurance, which obtained its certificate of authorization in respect of reinsurance business from the Office of the Commissioner of Insurance in Hong Kong in December 2012 and focused on providing reinsurance services and investing its investable assets. 

(vii) The investment segment comprises, principally, the investments in strategic associates, private equity investments, secondary market investments, limited partner investments and other investments. Fosun’s investments in strategic associates include Yuyuan, Jianlong Group and Shanjiaowulin. Yuyuan is mainly engaged in commercial retail and gold and jewellery wholesale and retail; Jianlong is a steel manufacturer in North China and Northeast China and Shanjiaowulin is a joint venture between Fosun and Shanxi Coking Coal Group Co. Ltd. It is a new coal mine with raw coal reserves such as prime coking coal. After years of construction, Shanjiaowulin has initially formed a complete industrial chain covering from coal production to coke processing, further to the deep processing of methanol and other coal chemical industrial chains. Fosun’s investments in the P/E include enterprises such as Zhaojin Mining, a large conglomerate with exploration, mining, processing and smelting operations focusing on the gold production business. Fosun’s investments in the secondary market include Focus Media (culture and media industry), Club Med (luxury resort), Folli Follie (fashion resort) and Minsheng Bank (commercial banking), etc. Fosun’s Investment Segment has generated profit before taxes of approximately RMB 7 billion (about $1.1 billion) from 2007 to 2012. 

Fosun adheres to the value investing philosophy in making investment with very solid investment track record. For example, Fosun’s investment in Minsheng Bank totals 2.19% of ownership as of Dec. 31, 2012. Fosun bought one-third of the volume at HK$5.729 per share when Minsheng reached low of HKD 5.39 on Sept. 5, 2012. Total Investment in Minsheng Bank totaled 2.965 billion RMB since 2011 with realized profit of 876 million RMB, and dividends income of 182 million RMB. 

III. Management Team: 

Fosun was founded by a team of four Fudan University graduates led by Guo Guangchang. Mr. Guo, who is considered to be the “Warren Buffett of China," graduated from Fudan University with a degree in philosophy in 1989 and later obtained his MBA degree from Fudan University as well. Fosun’s management quartet possesses the rare combination of superior intellectual capability, extremely imperturbable temperament and outstanding foresight. The track record speaks for the high caliber of the management team. Fosun captured opportunities arising from consumption and services upgrade, urbanization and industrial upgrade brought by the restructuring of China’s economy towards domestic demand. At the same time, Fosun seeks to capitalize on structural changes in the global economy, implementing its unique investment model of "combining China's growth momentum with global resources" and reinforcing its position as a China expert with global capacity, with a view to constantly creating value for the society and its shareholders. 

The management team also sticks to Graham and Buffett’s philosophy when making investment decisions. The most famous investment made by Fosun is the purchase of Minsheng Bank, a well-fun non-government-owned commercial bank. Fosun was greedy when others were fearful. As noted earlier, Fosun bought one-third of the volume at HK$5.729 per share when Minsheng reached low of HKD 5.39 on Sept 5, 2012. Investment in Minsheng Bank totaled 2.965 billion RMB since 2011 with realized profit of 876 million RMB, and dividends income of 182 million RMB.

IV. Value Gap
The market is undervaluing Fosun mainly because of the following reasons: 

1. Under-appreciation of the transformation that is currently undertaken by Fosun’s management team. The transformation is very likely to create long term value for Fosun’s shareholders. See the next section for a detailed discussion. 

2. The prevalent pessimism against China’s stock markets in general (Heng Seng Composite is closely related to the Shanghai and Shengzhen Composites). Although the concerns over China’s overheating real estate market and burgeoning local government debt may be valid, it is likely that the market has priced in those concerns. 

3. Concern over Fosun’s exposure to the real estate bubble, and the slowdown of mining and steel industries in China. Forte’s operation is concentrated mostly in tier 1 cities such as Beijing, Shanghai and Chongqing, where demand for real estate still outweighs supply. The “ghost cities” portrayed by Western media are all tier 2 and tier 3 cities such as Ordos, where supply vastly outpaced demand. Furthermore, Forte’s exposure to residential real estate is mitigated by its diversified revenue stream. It also develops urban complexes which are intended for use by non-state-owned enterprises, commercial and tourism properties, senior housing properties and Industrial parks with the support of local government. Fosun is also determined to cut its exposure to the mining and steel industry through the aforementioned transformation. 

4. As Fosun’s business portfolio spans across many different industries and each industry has unique operational characteristics, it is difficult to value the whole business. While the last three reasons contribute to Fosun’s under-valuation based on current business conditions, the first reason may very well prove to be creating the largest value gap as the market has not properly priced in the potential value creation unlocked by Fosun’s transformation. 

V. Business Transformation and Potential Massive Value Creation 

Inspired by Berkshire Hathaway’s business model, Fosun is making strides towards its vision of becoming “a premium insurance-oriented investment group with a focus on China’s growth momentum.” Previously, Fosun’s business operation was concentrated in capital-intensive businesses such as mining and steel. The steel segment accounted for more than 75% of Fosun’s revenue in 2007 and only 61.3% of the company’s total revenue in 2012. The steel segment is very capital intensive with low profit margin. From 2007 to 2012, Fosun had to spend more than the profit before taxes on capital expenditure on the steel segment. By shifting from industrial operations to Insurance and Asset Management, Fosun can better utilize its strength, which lies in the management’s unusual discipline and ability to generate superior returns on investments. 

Asset Management:
Fosun has also tapped into the asset management business recently. It retains in the asset management business through the platform such as corporation funds, partnership funds and trusts. For the fiscal year ended December 2012, the Asset management segment reported revenue of RMB 159.74 million, reflecting an increase of 184.46% over the revenue of 2011. The segment only accounted for 0.3% of the company’s total revenue in 2012. Fosun engages in asset management business through raising and managing funds from third parties and collects management fee revenue and shares investment gains. Fosun acts as a general partner of the funds Fosun manages. Fosun manages the following funds as of Dec. 31, 2012: 

• Pramerica-Fosun China Opportunity Fund (USD denominated)
• QFLP Fund (Carlyle-Fosun) 
• RMB Private Equity Fund 
• Star Capital, and 
• Real estate series funds of Forte. 

Fosun has an enviable investment track record with ROI averaged 38%. As Fosun’s investment capability has been well recognized both in China and in foreign market, Fosun should be able to expand the asset management rapidly during the next few years with AUM well over RMB 100 billion and management fees and incentive fees in the billions of RMB. 

Insurance:
Fosun had contemplated entering the insurance business a long time ago but the management did not know enough about the insurance business. They kept learning about the business everyday and made the investment in Yong’an Insurance in 2007. Yong’An is an established business with proven success in China’s property and casualty market. Fosun’s investment in Yong’An insurance gives Fosun almost 20% ownership. Fosun is very likely to increase its ownership percentage or even acquire the whole insurance business in the future. 

Fosun’s investment in the insurance business remained almost “dormant” until late 2011 when it announced to partner with Prudential to establish a life insurance joint venture in China called Pramerica Fosun Life Insurance with registered capital of RMB 500 million. Pramerica Fosun Life Insurance commenced its operation in October 2012. If Pramerica is successful in the long run, Fosun should be able to create substantial value for shareholders. Although 2012 was a difficult year for China’s life insurance industry, long-term industry prospects remain bright due to: 
• An aging population that will spark stronger demand for health and retirement income products. 
• Continued increase in the size and wealth of middle class that will transform into higher demand for life insurance market. 
• The continued loosening up of constrains on investments allowed by life insurance companies that will offer more flexibility and availability of the products offered and thus better meet customer demands. 
• The potential implementation of a taxed-deferred pension program that will likely boost the demand for savings and retirement-related products in China. According to GlobalTimes, “under the program, the insured are allowed to buy 1,000 yuan ($157.35) of commercial pension insurance, a certain sum of which can be deducted from the amount the income tax is levied on, and pay income tax after they begin to draw their pensions.” The program has been postponed multiple times because implementing the program means lowering the fiscal income of local governments, but it is expected to be rolled out eventually. 

Fosun also teamed up with International Finance Corporation and established Peak Reinsurance Company Ltd., which started its underwriting operations on Dec. 28, 2012, with an initial capital of US$550 million in Hong Kong. With an initial focus on property and casualty treaty reinsurance solutions, Peak Re is specialized in developing modernized risk management solutions for the Asia-Pacific community. According to Peak Re’s website, “Peak Re believes that Asia Pacific has been underinsured in general. For instance, in the aftermath of a series of natural catastrophes in Asia Pacific in 2011, including Thai flood, Tohoku earthquake and tsunami, New Zealand earthquake and Australian floods, less than 22%; of the total economic loss registered was insured, significantly below the ratio of insured loss to economic loss seen in the US and Europe in the same period, which stood at approximately 63% and 50%, respectively. In 2010 China suffered its most devastating floods in a decade causing around US$50 billion economic loss, of which only US$1 billion was covered by insurance5 – another example illustrating the low insurance penetration in Asia. In view of the situation, beyond providing general reinsurance solutions, Peak Re also invests significantly in the research and development of risk management solutions tailored for demand by households and business in the region. In cooperation with IFC and Fosun, Peak Re aims to enter into emerging Asian markets including China, India, and Indonesia in the next five years.” The future of Peak Re is much harder to evaluate than Pramerica Fosun. 

Fosun’s management is actively trying to arrange a meeting with Warren Buffett. It is very likely that Fosun’s management team will ask him a lot of questions regarding running the reinsurance business. Buffett’s letters to shareholders have discussed the reinsurance business extensively. Berkshire's competitive advantage in the business includes its unmatched financial strength, its ability to supply a quote faster than anyone in the businessand the ability to issue policies with limits larger than most competitors can be prepared to write. With Fosun’s strong financial position and given the discipline and intelligence of the management team, Fosun’s investment in the business may very well prove to be value-added. 

VI. Risks: 

1. The macroeconomic situation gets much worse in China, which will have a wide effect across Foson’s segments, especially steel and mining. It is likely that this is partially priced in. 

2. The insurance transformation is not successful. This is a risk that can either have a minimum impact on the valuation or create huge value for Fosun going forward. If the transformation is not successful, Fosun can simply drop the insurance business. 

3. The transformation and continued diversification of business may create too much distraction for management. Although historically this has not been a problem, the expansion of asset management and insurance business requires a significant amount of management’s time and effort. 

VII. Valuation and Conclusion: 

Fosun is in the process of its multi-year transformation geared towards focusing more on asset management and insurance. The company’s goal, to quote Wang Qunbin, executive director and present of Fosun, is to “become more and more like Berkshire Hathaway.” The company has the capacity to suffer from short-term operating losses resulting from the newly launched insurance businesses (insurance businesses can take many years to show operating profits). Fosun has also been deviating from its capital intensive steel and mining business, which will free up more capital for investment opportunities. Fosun is trading between 1.1 and 1.2 times book value, at 11 times earnings and is yielding 2% currently.

Even if the transformation is not successful, a premium business like Fosun should be trading at least 1.5 times book value. Fosun’s book value per share as of Dec. 31, 2012, is RMB 5.48 and growing at 12% per year since 2007. In five years, Fosun’s book value will be grown to approximately RMB 9.7 per share or HKD 12.3 per share. Applying a P/B ratio of 1.5, Fosun’s per share price should be worth about HKD 18.5 per share, or almost 200% higher than what Mr. Market is offering now. 

If the transformation is successful, the value created by Fosun is hard to measure at this point. Learning from Warren Buffett, we’ll leave it as between zero and a lot. As discussed in the above, even at zero, Fosun seems to be very undervalued. 

Disclosure: No position in Fosun.

Warren Buffett's Biggest "Secret"

To may value investors, the achievement of Mr. Warren Buffett, the greatest investor of all time, has been their ultimate goals in investing. Many value investors would study the companies Warren Buffett invested in, read his letters to partners and to Berkshire Hathaway's shareholders, read all books about Warren Buffett, hoping to copy or emulate his success. Mr. Buffett has also publicly made his success sound very simple, although not easy: just buy businesses you can understand, with a moat around it and an outstanding management team in place, at a reasonable price. What he did not reveal, was the most important part in my opinion. Namely, how did he do it? I found the answers in Ms. Alice Schroeder's book "Snowball."  Here is an excerpt from the book that explains his success.

"(His passion for money making) had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else's eyes. He read every word of several newspapers each morning and sucked down the Wall Street Journal like his morning Pepsi, then Coke. He dropped in on companies, spending hours talking about barrels with the woman who ran an outpost of Greif Bros. Cooperage or auto insurance with Lorimer Davidson. He read magazines like the "Progressive Grocer" to learn how to stock a meat department. He stuffed the backseat of his car with Moody's Manual and ledgers on his honeymoon. He spent months reading old newspaper dating back a century to learn the cycles of business, the history of Wall Street, the history of capitalism, the history of the modern corporation. He followed the world of politics intensely and recognized how it affected business. He analyzed economic statistics until he had a deep understanding of what they signified. Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. He ruled out paying attention to almost anything but business- art, literature, science, travel, architecture - so that he could focus on his passion. He defined a circle of competence to avoid making mistakes. To limit risk he never used any significant amount of debt. He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head, which gave him insights nobody else had. He developed a network of people who - for the sake of his friendship as well as his sagacity - not only helped him but also stayed out of his way when he wanted them to. In hard times or easy, he never stopped thinking about ways to make money. And all of this energy and intensity became the motor that powered his innate intelligence, temperament, and skills. "

What a remarkable summary from Ms. Schroeder. This reminds me of a great little book by Albert Gray, The Common Denominator of Success. To quote Mr. Gray,

“The common denominator of success – the secret of success of every man who has ever been successful – lies in the fact that he formed the habit of doing things that failures don’t like to do.”

And this in my opinion, is Warren Buffett's biggest secret. 

Some Thoughts on Investing - Part 1

I was reading Warren Buffett's letters to shareholders from the 1970s and came across a performance measurement ratio he used when evaluating the performance of Berkshire's performance - Operating Income on Beginning Equity Capital.  The rationale behind not using earnings increase year over year is that "there's nothing particular noteworthy in a management performance combining a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings per share each year because of compounding. "

To better understand this, I wrote a simple business scenario and compiled the financial statement by myself.

Let's say we started a juice business with $2000 bank loans and $3000 equity capital (3000 shares with $1 par value). We then bought 4 juicers for $250 each and other fixed assets (such as desks, chairs, credit card processing machines) for another $2,000. Our beginning balance sheet will look like

Cash              2,000
Juicer             1,000
Fixed Assets:  2000
Total Assets:  5,000

Bank Loans:  2,000
Equity:           3,000
Total L+E:     5,000

Here are the assumptions:
We can sell 30 cups per day, or 10,950 cups per year
Sale price is $5 per cup.
Cost of sales is $2 per cup.
Rent Expense is $12,000 annually
Utilities and Electricity is $2,400 annually
Interest expense rate is 5%, or $100 annually.
Juicers and fixed assets are depreciated straight-line using 5 years, which means depre exp= $600 annually.
Other expenses: $100
Tax rate: 30%

Our Income Statement will look like:                    

Sales :                             $54,750
Cost of Goods Sold:          21,900
Gross Profit:                      32,850

Rent expense:                    12,000
Utilities and Electricity:         2,400
Depreciation Expense:            600
Interest Expense:                    100
Other Expense:                       100
Total Operation Expense: $15,200

Income from Operations:  17,650

Income Taxes:                    5,295

Net Income:                     12,775

Earnings per Share:            4.26


Our Balance Sheet will look like this:

Cash:                        $15, 375
Juicer (net)                        800
Other Fixed Assets:          1600
Total Assets:              $17,775

Bank Loans:                  2,000
Equity:                         15,775
Total L+E                    17,775



Our key ratios and stats for year 1 are as follows:

1. Gross Profit Margin: 60%
2. Operating Margin:  32.2%
3. Net Margin:  23%
4. BV per share: 5.26
5. Return on Beginning Equity: 426%
6. EPS: 4.26

Now, assuming in year 2, we didn't not buy new juicers and all other information stay the same. Our income statement will look exactly the same, our balance sheet will look like this:

Cash:                       $28,750
Juicer:                             600
Other Fixed Assets:       1,200
Total Assets              $30,550

Bank Loans:                 2,000
Equity:                       28,550
Total L+E                 30,550


Our key ratios and stats for year 2 are as follows:

1. Gross Profit Margin: 60%
2. Operating Margin:  32.2%
3. Net Margin:  23%
4. BV per share: 9.52
5. Return on Beginning Equity: 81%
6. EPS: 4.26

In year 3, again, we didn't not buy new juicers and all other information stay the same. Our income statement will look exactly the same, our balance sheet will look like this:



Cash:                       $42,125
Juicer:                             400
Other Fixed Assets:         800
Total Assets              $43,325

Bank Loans:                 2,000
Equity:                       41,325
Total L+E                 43,325


Our key ratios and stats for year 2 are as follows:

1. Gross Profit Margin: 60%
2. Operating Margin:  32.2%
3. Net Margin:  23%
4. BV per share: 13.78
5. Return on Beginning Equity: 44.8%
6. EPS: 4.26

This scenario unfortunately did not give me a better understanding of Return on Beginning Equity Capital. However, I accidentally stumbled onto the following implications based on this exercise:

1. This scenario essentially illustrates a business model with low reinvestment (capital) need, high fixed cost, high cash flow generation, and high ROA and ROE in prospering years. We may see situations like this in Retail and For-Profit Education industries a lot.
2. This business model will do extremely well in booming years because once you covers fixed cost, every sales dollar will add to the bottom line. On the other hand, this business model is extremely cyclical as high operating leverage will magnify the impact of decrease in sales.
3. A great business with this business model should have pricing power and can differentiate its product. A perfect example is See's Candy.
4. Non-controlling stockholders may not do as well as owners, especially if the equity interest is purchased at a later stage. Even though BV will increase every year, EPS is stagnant. Mathematical illustration is as follows:

If we use book value as a proxy of intrinsic value:
Year 1: Both BV and IV increase by 81%.
Year 2: Both BV and IV increase by 44.75%
Year 3: Both BV and IV increase by  31%
........
Year 10: Both BV and IV increase by 10.82%
.....
Year 20: Both BV and IV increase by  5.2%

Here we are subject to the law of diminishing returns. While the early equityholders enjoy fabulous returns in early years, later equityholders may face only mediocre return. This may be the case for Abercrombie and Fitch.

5. In order for the business to grow earnings per share, the owners must have the courage and determination to make investment that will generate returns in excess of cost of capital.   The best business will be able expand by opening more stores, expanding to new markets or increase prices of the products consistently. Urban outfitters, Coca Cola and See's Candy are good examples.

My Stockfolio-Malaysia Stock Analysis: Li Lu sharing his Value Investing Strategies

My Stockfolio-Malaysia Stock Analysis: Li Lu sharing his Value Investing Strategies: This past weekend was the Berkshire Hathaway (NYSE:BRK.A / BRK.B) annual shareholder meeting. At one point during the Q&A, a questioner ...

The 2013 Pilgrimage - Part 2

6:30 am, May 3rd, Friday. My alarm had been snoozing for a few times. I had a sound sleep after yesterday's  value investing fest. Nine more great speakers today, including Howard Marks, one of the greatest thinkers and investors. Looks like it was going to be another great day. 

The first speaker today is Barnett Helzberg, founder of Helzberg Diamond, a subsidiary of Berkshire Hathaway. He talked about what he learned before selling to market and the entrepreneurship mentoring program. My biggest takeaway from his presentation is his insight on retail. When asked about what he thinks is most important in the retail business, he said management quality and business culture. Retail is essentially a people business, if you have bad management and bad culture, it will ultimately reflected in sales and profits. He said the retailers he admires the most are Nordstrom and  Costco. 

The second speaker today is David Rofle, a portfolio manager from Wedgewood Parters, a Saint-Louis based investment advisor. David talked about GEICO's history and Warren Buffett's investment history with GEICO, which reminded me of Tom Russo's speech from yesterday. For each new policyholder, GEICO will show approximately a loss of $250 in the first year but the present value of future premiums will be a net gain. Buffett told management at GEICO just to grow the business even though each new policy holder that was put on the books cost an enormous amount of losses the first year. They had high net present values and you've seen the history.The result: the number insured at GEICO, because of Berkshire's willingness to show the losses up front, have grown from just under a million policy holders to almost ten million. And his spending to drive that growth that just burdens operating income up front has grown from $30 million a year to almost $900 million. The fact is by spending up front, having the elasticity, the willingness, to burden your income statement and then getting the results in the future is a very nice trade off. GEICO is a great example of the capacity to suffer and discipline. David also talked about how Wedgewood Partners adheres to Buffett's 20 punch card philosophy and only invest in the 20 best ideas, resulting a ultra-low portfolio turnover. I asked David a question on how to utilize footnote information in the valuation process. He brought up a good point: Use footnote as a filtering tool, if you can't understand the footnote, simply don't buy the stock or sell the stock if you already own it. That's why they sold AIG back in 2008 because they could not understand the footnote. 

Then came Scott Phillips from Lauren Templeton Fund. His topic is the Templeton touch. Sir John Templeton is, without doubt, one of the best investors of all time yet his investment philosophy is not widely understood by the investing public. Buying at maximum pessimism is one of the doctrines I stick to but it is psychologically very difficult to do so when you almost have to go against everyone at that point. A case in point is JC Penney. Almost everyone thinks it is a dying business and stocks have dropped precipitously after the 2012 full year earnings release. When you hear media and almost everyone else is talking about the possible demise of JC Penney, it is certainly not easy to go against the crowd and voice a different opinion. 

The fourth speaker is Michael Shearn, author of the book "The Investment Checklist."  I have read his books three times and learned enormously. However, how to incorporate all the information from the checklist into the valuation process still baffles me. Luckily Michael answered my question inadvertently during his presentation, "the fair value derived from the checklist is dynamic, if you have a change in management, if will impact the valuation. " This is a great point. As human beings, we are all subject to the conservatism, confirmation bias and status-quo bias, the combination of which creates a massive psychological barrier  for us, as investors to absorb new information of the companies we invested in and make changes to the dynamic fair value accordingly. The most important thing, as Howard Marks would put it, is to be vigilant to structural industry or company-specific changes. 

The last speaker before lunch break is Ryan Floyd, founder of the Barca Capital. He talked about his investment in emerging markets and the power law. The key takeaway ties closely to Nassim Taleb's book of "Fooled by Randomness" and "Black Swan." Fat tail event does happen all the time. Right after he invested in a bank in Ivory Coast, a civil war broke out and the value of his investment tanked 40%. My thoughts on this is, the lower the probability of a certain event happen (inherently true for black swan events), the larger the possible loss and there is no way you can build this in a quantitative model. How do you hedge the risk? Don't be greedy and don't leverage. 

After Ryan's presentation, we took a lunch break. I talked to Jeff Stacey, a BRK meeting veteran and Richard Russo, Tom Russo's nephew over lunch time. Jeff talked about how BRK's meeting has evolved over time. 

The highlight of the day is Howard Marks. He doesn't give public presentations very often so his arrival grabbed everyone's attention. Howard's topic is the human side of investing. Here's a link to the detailed notes:

http://www.gurufocus.com/news/218106/howard-marks-the-human-side-of-investing

The 2013 Pilgrimage - Part 1

It is 8:00 pm on Wednesday May 1st, 3 days before the Berkshire Hathaway 2013 Shareholder Meeting. I am at the Atlanta Airport, waiting with great excitement for my flight to Omaha, NE that departs in an hour. This is only my second pilgrimage to Omaha. Last year's meeting was certainly mindbogglingly amazing so I decided to make it an annual event. I found out that there's a Value Investing Conference right before the meeting and many highly admired value investors such as Tom Russo and Howard Marks are speaking at the conference. Therefore, I decided to make this year's trip a little more than just the shareholder meeting.

My flight departed on time. I spent most of the time reading books. " It looks like we are getting some snow tonight at Omaha, ladies and gentlemen." The captain announced about 30 minutes prior to landing. "Great," I thought to myself. "Now this trip is going to be epic. Who would have thought you will get snow in May."

The plane landed a bit earlier than scheduled and I could see the snow outside. It's going to be a wild ride to the hotel. We got out of the plane around 10:30 Central time. Omaha's airport is relatively small and somehow it gives you a very warm feeling. Walking towards baggage claim, I saw a picture of the young Warren Buffett with the words "Invest in Yourself" right next to his picture. He is exactly right and that's why over 35,000 fellow value investors flock to Omaha this year. A six-hour meeting with the "Oracle of Omaha" is one of the best learning opportunities you can ever imagine as a value investor. 

At the end of the hallway is a big screen with a picture of Omaha with the following words: "Welcome, Berkshire Shareholders." Suddenly I felt like I was home and it's awesome. I quickly grabbed my luggage from the carousel and hopped on a taxi right outside the airport. The driver is from Togo and has been living in Omaha for more than 10 years. My taxi driver from last year was also from Africa. I started to think that there is something magical about Omaha that keeps Buffett here.

 I woke up the next day after a sound sleep. It was white outside, like it was still January. I called the taxi driver from last night and he took me to the UNO business school, where the Value Investor Conference is held. I checked in and took a seat in a conference room. First thing I noticed was that there are many people from outside of the U.S, maybe half of the participants are from another continent. Many Spaniards, Aussies, Canadians, South Africans and Brazilians. Robert Miles, the organizer of the conference, gave a brief welcome speech and told a few jokes that ignited a good amount of laugh. Then he introduced the first speaker, Jeff Matthews, author of the internet book "Secret in Plain Sight." It is an interesting book with some very good insights. Jeff opened up with an anecdotal story about how he found out about Dr.Pepper in a small town in Texas then he talked about what he thinks is the most important yet highly ignored secret of Buffett's success- the quality of shareholders. I thought that was a remarkably good point. In the world of investment, during a market crisis such as the recent meltdown from 2007-2009, if you don't have quality investors who shoot for the long run and are less concerned with the near term volatility, you will be doomed by the velocity at which investors withdraw from the fund. When the panic is wide spread, the best way to survive is to have investors who perceive the wide-spread panic as buying opportunities as opposed to the end of world. Yet in the financial world, very often (maybe 90% of the time) money and greed are the drivers of hedge fund or mutual fund managers. If your goal is to get rich fast, you use leverage and you bet big. As we've seen from the collapse of LTCM and other quant funds during the crisis, the ending is often devastating. Investors in those funds had a quick build up of wealth, which evaporated even faster during a so called "25 sigma event". Jeff talked about how his investors stayed with him during the downturn and that made it much easier for the fund to avoid liquidation of loss positions due to withdrawal of funds. 

The second speaker is Ivan Martin-Aranguez, a portfolio manager of the Santander Fund Asset Management from Spain. His topic is "The Case For Spanish Equities." Since most investors will have a home-bias, meaning they only invest in the equity market in the country he or she resides in, it was interesting to hear why the Spanish market can be attractive given different market dynamics such as "less analyst coverage" and " more family-controlled companies." 

The last speaker of the day is Tom Russo, who in his word, is a value investor I highly admire. His topic is " The Capacity to Suffer," which he had presented several times in the past. He shared his favorite story about Charlie Munger. During an interview, someone asked Charlie how he feels about Warren getting all the attention and credit and Charlie said, "well, some people do the talking and some people do the thinking. " This story got a good laugh from the audience. Tom went on to talk about the capacity to suffer. He mentioned that his No.1 question to the management of the companies he invested in is "are you spending enough?" A company can suffer from a prolonged period of paper losses from investing for the long run and Wall Street does not like that but a culture to suffer for the long run is critically important to build a great company. A case in point is Nestle double down on its investment in Russia during the Russian ruble crisis. They built more facilities and made acquisitions when everybody fled Russia because they wanted to avoid booking short term losses in their income statements. Now Nestle is benefiting from a $2 billion a year business in Russia. Another case is Buffett's holding of $50 billion cash before the crisis and willing to suffer short term under-performance when the market shot up. Then when the crisis came, he was able to secure some special arrangement with Goldman Sachs and GE with the cash on hand.  The capacity to suffer is extremely hard mentally, especially when everyone else around you is benefiting from short term gains and you look like an idiot. But the capacity to suffer is also often one of the most important qualities that separate the best from the mediocre. Tom brought out another interesting point, which I have never thought about- margin of safety comes from not only the price you pay, but also from the competitive advantage of the business you invested in. Does P&G offer a good margin of safety at the a seemingly hefty valuation? Yes, and obviously the margin of safety does not come from the price. If it's not the price that gives you the margin of safety, then it must come from the competitive advantage of the business that offers sustainable growth in the future. This is one of the best lessons I learned from the conference. 

After Tom's presentation, Thursday's session came to an end and we were all going to the Omaha Marriott for the CFA dinner which features Mario Gabelli. During the shuttle ride to Marriott, I met an investor from California. He told me he made millions of money during the tech bubble from a few hundred thousand dollars capital and got wiped out after the tech bubble busted. He went in the market and made millions of money again during the housing bubble and got wiped out during the financial crisis. So over the last 15 years his wealth had gone through a roller coaster ride. He went from a middle class worker to a multi-millionaire, and back to a middle class worker and again to a multi-millionaire and then back to where he started. I have not experienced a wild ride like and I cannot imagine what it is like to experience something like that. But his story reaffirmed my belief that not losing money is extremely important in achieving superior returns. This is a big idea that often falls into oblivion in practice. Here is a mathematical illustration: 

Assuming we have investors, Mr. Quantmania and Mr.Valuemania.

Mr. Quantmania started with $10,000 dollars. He leverages up and compounds it for 4 years at 50% per year. In 4 years, his $10,000 will turn into approximately $50,600 pre-tax. That is an admirable achievement on an absolute return basis. Now assuming the market turns into a chaos in year 5, like it did in 2002 and 2008, and Mr.Quantmania suffers a 80% drop in value, his investment now only worth about $10,100 pre-tax at the end of year 5, or approximately 0.2% compounded annually.

Mr.Valuemania also started with $10,000 but he does not use leverage and does not invest in fad stocks. His return is 20% per year for the first 4 years and he loses 20% in year 5. His $10,000 will turn to approximately $16,600 pre-tax at the end of year 5, or approximately 10.6% compounded annually.

There are a few observations we can glean from this imaginary scenario (even though we've seen similar real stories during 2002 and 2008).

1. Mr. Quantmania's cumulative return, prior to the downturn, is 406.25% pre-tax whereas Mr. Valuemania's cumulative return, prior to the downturn is only 107.36%.After the downturn, Mr. Quantamania's return is essentially flat whereas Mr. Valuemania is still up more than 65%.

2. Mr. Quantmania's 80% drop, wiped out almost 100% of his cumulative gains from the 4 years prior to the downturn whereas Mr. Valuemania's 20% loss only reduced his cumulative gains from the 4 years prior to the downturn by 38.6%.

3. Over 90% of investors will choose Mr. Quantmania's fund at the end of year 4 over Mr. Valuemania's fund.

4. Over 90% of money managers will copy Mr. Quantmania's strategy at the end of year 4.

5. A bigger percentage gain is needed to compensate for the same absolute dollar loss. Or inversely, a smaller percentage losses will wipe out a larger cumulative percentage gains, other things equal. Mathematically speaking, a 5% loss will wipe out a 5.26% cumulative gain; a 20% loss will wipe out a 25% cumulative gain; a 30% loss will wipe out a 43% cumulative gain; a 40% loss will wipe out a 67% cumulative gain and a 50% loss will wipe out a 100% cumulative gain. 

6. Knowing implication 5 above, investors should focus on not losing money and if loss of capital is inevitable, limit it to 20% if you can. 

I think I have a better understanding of Mr. Buffett's Rule Number 1 now. It is indeed very simple but not easy. We ended the night with the CFA dinner featuring Mario Gabelli. My biggest take away from the keynote speech is that an investor has got to be able to back up his or her thesis quantitatively, something Mr. Buffett routinely and habitually does and yet vastly ignored by his followers. For example, Mr. Gabelli stated that if you invested in a 5 carat diamond ring 50 years ago, your compounded annual return will be 4.5% whereas if you invested with Mr. Buffett 50 years ago, your compounded annual return will be close to 20%. Now you have an investment thesis backed by quantitative evidence. The best illustration, of course comes from Mr. Buffett.

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about seven Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

During another interview at a different time, Mr. Buffett said the following

The value of all that gold at today's prices would be about $10 trillion.

As for its merit as an investment, Buffett observes the following:
The cube of gold will produce nothing in the next hundred years (or, for that matter, thousands of years).
The cube of gold will not pay you interest or dividends, and it won't grow earnings.
You can fondle the cube, but it won't respond.

If you had $10 trillion sitting around, Buffett further observes, instead of buying the cube of gold, you could buy all the cropland in America ($400 billion-worth) and 16 Exxon-Mobils. And you would still have $1 trillion of "walking-around money."

Over the next hundred years, your cropland and Exxon-Mobils would produce trillions of dollars of dividends (the size of which would be adjusted for inflation), and you would still have them at the end of the century, at which point you could probably sell them for vastly more than the $9 trillion you bought them for.

So, which investment would you choose?

For the cube of gold to be the smarter investment, Buffett observes, you would have to be convinced that you could persuade someone else that the cube of gold would be an amazing investment at your asking price. Because that's the only way you can ever make money in gold—if there's someone out there who is willing to buy it from you for more than you paid for it (and pay enough to offset the costs you have incurred from storage and insurance in the meantime).

Meanwhile, your cropland and Exxon-Mobils would likely keep throwing off tons of cash even if the market for them completely dried up.

Note that the value of all the gold and the number of Exxon-Mobils you can buy with the value of gold are different as the first interview took place during 2011 and the second interview took place during 2012. Did Mr. Buffett calculate these numbers by himself? Not all of them, at least not the length of the side of the cube that holds all the gold in the world.  You can get that information from websites such as:

http://www.numbersleuth.org/worlds-gold/

  Ditto to the value of all the cropland in America. Mr. Buffett probably remembers it from his readings. However, the secret is, in my opinion, to put the total value of gold into a comparative fashion quantitatively such as the number of Exxon Mobil you can purchase. The underlying thought process centers around opportunity cost. It all boils down to what else you could have invested when allocating capital. "Intelligent people make decisions based on opportunity costs," says Charlie Munger. This is another Mr. Buffett' secret that is often neglected. 

Back to my hotel, I already could not wait for tomorrow.

2013 Berkshire Meeting Notes Compilation

"Overall I would advise any young person who wants to manage or invest money to have an audited track record as early on as possible,"

"To attract money, you should deserve money... Record is a product of sound thinking."

Munger says most people start with friends and family. "It's hard to do when you are young and that's why they start so small."
Warren: You'll see it again, not necessarily in housing. Humans make the same mistakes again. People get fearful when others are fearful. You saw it in money market funds. I've often thought, if I owned a bank in a two-bank town, I'd hire extras to line-up in front of the other guys bank. But then, the extras would come over to my bank, after the other one went down. This is an area where Charlie and I have an edge. We don't get caught up in what other people are doing. We learned that over time, maybe. When we see failing prices, we think it is time to buy. We don't own on margin. Don't get out on a limb. Leverage is tempting when things are going up. Leverage was a huge part of housing.

Q: What would you tell your 30 year old self?
Munger: Be boring, stay rational and work where you are turned on. I've never done well in a job I didn't enjoy.

Q: if buying shares in the 20 best companies in the United States would be better than investing in an index fund.

Buffett: The results would probably be similar. Then he launches into a bigger point: there are professional investors, and then there are amateurs who invest. Being the former requires a lot of work and research, which many, many amateurs don’t have the time or inclination to do.

The main problem for most people, he says, is “trying to behave like a professional when you aren’t spending the time in the game needed to be a professional.”

Q: What identifies fraudulent financial statements?
Warren: It varies over the years. We can't identify 100%, 90%, 80%... but people give themselves away. In poker, its called tells. We try to assess the individuals that we're dealing with. We don't think we can assess everything accurately. But we try to be right when we make a buy. In looking at financials, for example, in insurance, you can see things done with lose reserves. Before offering stock to the public, reserve would mysteriously go down. I've seen how promoters act. You can spot certain people that are playing games with the numbers. I can't give you a 40-item checklist.

Munger's assessment of BRK's competitive advantage is a template for its success - Recruit well, buy well, and let people do their thing. Stay rational - easy to say for a little while, but so many get sucked into irrationality due to the weight and time and probably intense public scrutiny.

What BRK does is not unique or are they the only one who does so. In the book, "Outsiders," which showcased 7 or 8 highly successfully run businesses that are run by outstanding CEOs, that handily beat market and industry returns during their tenure, also employed the tricks that BRK practices! So these practices is similar to how the trick of value investing can be attributed to the village of Graham & Doddsville. No luck but skill!

Some people probably though I was running a Ponzi scheme, Buffett said of his early days investing other people's money. "Didn't you manage to scrape together $100,000 from your loving family?" Munger asked. Buffett said they might not have loved him immediately after. In sum, however, Buffett said, young people wishing to make a living as investment managers should develop an audited track record and start slowly. Munger said do as Buffett did and start with family money.

Warren: I don't understand the moat around IBM as well as Coca-Cola. I'd have more conviction around Coca-Cola or Wrigley or Heinz. But, I feel good enough about IBM, and I put a considerable amount of money in IBM. Nothing precludes IBM and Microsoft both being successful. I like IBM's financial policy. Its hard for me to think of things that could wrong with BNSF. I could think of things that could go wrong. IBM has big pension liabilities -- it's an annuity business on the side. The liabilities and assets seem equal, but the liabilities are more certain.

Warren: The example of used in the past is, "The Meek will inherit the Earth, but will they stay Meek?" You'll notice that I don't tell our newspapers who to endorse to for president. When I write that , I'm trying to box in my successor. We don't want a CEO using Berkshire as a power base. We want it to be run for shareholders.

Charlie: Sometimes somebody becomes CEO, who has the characteristics of a famous Californian CEO about whom it was said 'he could strut sitting down'

Charlie: A lot of them aren't being fraudulent, because they're deluded. They believe what they're saying.

Warren: Berkshire is an usually rational place. We know what we want to accomplish. We've benefited from a long-run. We've avoided outside influences that pushed us places we didn't want to go. Insurance should be run rationally. Other insurers have had Wall Street pressure to increase premiums. At National Indemnity, we decreased premiums 80% -- I doubt another company answering to external pressure could do that. We have no external pressure, and that's a great way to operate. We don't have outside criticism, and there is no reason for us to do something stupid in insurance. We were major writers of natural catastrophe insurance years ago when the prices were good. We don't do it today because the prices are right. We didn't leave the market, it left us. We won't price at $0.90 for a probabilistic loss of $1.

Charlie: Sometimes it's pretty obvious. I was once introduced to a man who wanted to sell us a fire insurance company. One of the first things he said to us - with a thick accent... Eastern European, I think - said, it's like taking candy from a baby. He said, 'we only write insurance for concrete structures that are underwater'

Charlie: On the subject of Warren's operating methods. We didn't know when we started out that you shouldn't make a lot of decisions when you're tired, or that making a lot of decisions is tiring. We didn't know that consuming caffeine and sugar was helpful for decision making (laughter). It turns out that this is an ideal way to sit where Warren sits. He didn't know that - he just stumbled into it.

Charlie: I have nothing to add... but I do think knowing the edge of your own competency is important. If you think you know more than you do, you're in trouble. Works particularly well in matrimony.

Warren: but you know that BNSF will carry more carloads in 10 or 20 years. There will be no substitutes. There will be 2 railroads in the West, 2 railroads in the East... It's not complicated, they have assets... It's silly to ignore what you know because of things you don't know. Any sort of normal (new, in-between, old, etc) doesn't mean anything to us. If you get a good business, and the price is good, you'll do very well over time. If you try to time the market based on forecasts, you'll make lots of money for your broker.

Warren: We will get a decent rate of return (on the newspapers). Most newspapers were bought as corporations or partnerships, so we get to write-down the intangibles, which affects after-tax returns. Everything that we've seen to date indicates that will meet or beat 10% returns.

Buffett: the consolidation in the airline industry is interesting to watch, but he's not looking to invest. Airlines have very high fixed costs but very low marginal costs. Too much temptation to sell that last seat at a low price. If we ever get down to one airline with no regulation, then it will be a great business.

Munger: It's hard to create a new railroad, easy to create a new airline.

Charlie: I cannot remember an important decision that Warren made when he was tired. He sleeps soundly. He eats what he's always eaten.

Warren: We don't look at forecasts. We have never made a decision on a stock on a macro forecast. We don't know what things will look like. So why spend time talking about something you don't know anything about. So we talk about the businesses. I like Bill Gross. But it doesn't make a difference to me what he or any economist thinks about the future.

How do you not ruin your children, a shareholder asks?

Buffett: "More kids ruined by parental behavior than inheritance. Your children learn through your actions. It is important and serious job. The amount of money left by rich person is not determining factor how children turn out."

Buffett: There is virtually no correlation between book value and intrinsic value. Investors should care about intrinsic value. In Berkshire's case, book value is used as a very understated proxy for intrinsic value. At 1.2 times book value, Berkshire would be willing to buy back a lot of stock.

Warren: Todd and Ted, working under a 2/20 arrangement, if they put the money in a whole in the ground, would make a $120m each this year. Not exactly an arrangement you don't want to think about ahead of time.

Charlie: The arithmetic attracts the wrong sort of people.

Charlie: Letting in Greece into the EU is a lot like using rat poison as whipping cream - an exceptionally stupid idea. It's not a responsibly capitalistic country... a place where people don't pay taxes and committed fairly straight fraud to get into the EU.

Charlie:There's a reason why all that stuff is in the bible that you can't covet your neighbour's ass... it's a terrible thing to do. How much fun can you have being envious... it's the only sin there's no fun in.

Buffett: Generally speaking if you have a chance to buy a wonderful business, you probably should stretch yourself (on the price) particularly if a company can invest new money at very high rates of return.

Charlie: We're in a different mode now. That has a great lesson in that if we'd kept our earlier molds, if we'd never learned. We wouldn't have done so well. The game of life is a game of learning.

Munger: "You can't make a lot of money just knowing what is going on now."
Buffett: "And you can lose a lot of money thinking you will know what is going on tomorrow."

Buffett: Some jump out at you. A lot of it is based on figuring out how promoters act. They generally give themselves away. If you have doubts, forget it.

Charlie: When you multitask like young people do, you're unlikely to do anything well.

Buffett "When people get scared, they get scared in mass. They get greedy in mass. Confidence come back individually."

Warren: Whenever you hear people talk about concepts, for instance, country by country ideas, they are probably better at selling than investing.

Munger on the Fed's policies (low interest rate) : Well they had to hurt somebody, and the savers were convenient.

Charlie: You can have a CEO who's 9 out of 10 on almost everything, but some deep flaws too.

Buffett: Four or five times in the average lifetime, you will see incredible opportunities in the equity markets. You need the mental fortitude to take advantage of them.

Buffett: Individuals tend to get excited about stocks at the wrong time.

Charlie: The railroads consolidated, grew their profits and what did we do? We missed it. It's conceivable that Bill Miller is right. It goes into my 'too hard' pile.

If you try to time the market based on forecasts, you'll make lots of money for your broker.

Buffett on bubbles: "It works for a while. Your neighbor gets richer because he goes along. The bandwagon is hard to resist. We just don't give a damn. If they can make a lot of money day trading, good luck to them."

Munger: "We are boring and trite. Keep plugging, stay rational. The old virtues."

Charlie Munger's life advice: "It's trite, but the old-fashioned virtues still work."

Charlie and I have simple lives. We do what we love. We both like to read a lot. Charlie likes to design buildings