Sign in Subscribe

Banking on Management: Buffett's Wells Fargo Investment During Crisis

By sagebytes —

Buffett's Investment Best Practices

Key Principles from the 1990 Berkshire Hathaway Shareholder Letter

Intrinsic Value Focus

  • Intrinsic value exceeds book value in quality businesses
  • Aim for 15% annual growth in intrinsic value
  • Use accounting numbers as a starting point, not an endpoint
  • Consider "look-through earnings" that include your share of retained earnings from investments

Business Assessment

  • Seek companies with consistent earning power (not turnarounds)
  • Value excellent operating managers above industry dynamics
  • Look for businesses earning good returns on equity with little or no debt
  • Prefer simple businesses you can understand
  • Be wary of companies with high debt levels; 20:1 leverage means small mistakes can destroy equity

Investment Approach

  • Be rational - use thinking, not polling or following crowds
  • "Margin of Safety" is the most important investing principle (Graham's wisdom)
  • Welcome market pessimism for the prices it produces
  • Treat stock declines as buying opportunities if you're a long-term investor
  • "Most men would rather die than think. Many do." - Bertrand Russell

Intelligent Contrarianism

  • A contrarian approach is just as foolish as following crowds if done mindlessly
  • Being contrarian works only when combined with sound analysis
  • Low prices alone don't make something a good investment
  • "The most common cause of low prices is pessimism... We want to do business in such an environment, not because we like pessimism but because we like the prices it produces."

Long-Term Ownership Mentality

  • Look for businesses with honest management you can trust
  • Seek companies with economic characteristics that will endure
  • Focus on total business performance, not quarterly results
  • "We prefer a lumpy 15% return to a smooth 12%"

Risk Management

  • Avoid "long-tail" liabilities (where claims might arrive far in the future)
  • Be careful with businesses that can be crippled by events beyond their control
  • Understand that accounting conveniences can hide real risks
  • Remember that "in the insurance business, there is no statute of limitations on stupidity"

Avoiding Pitfalls

  • Beware the "institutional imperative" - the tendency of executives to imitate peer behavior
  • Be skeptical of extreme debt levels justified by financial engineering
  • Don't follow financial fashion; what works at one company may not work at yours
  • Recognize that promises made during acquisition discussions often go unfulfilled

Final Wisdom

"If the sole motive of the present owners is to cash their chips and put the business behind them, any buyer will do. But if the sellers' business represents the creative work of a lifetime and forms an integral part of their personality and sense of being, the choice of buyer has serious implications beyond price."