The Oracle of Omaha Warren Buffett is part of most value investors daily indulgence. And while he’s not the founder of the strategy, Buffett’s made it part of his makeup. Biznews founder Alec Hogg is a huge fan of his, and usually travels to the annual pilgrimage to Omaha for the annual shareholders meeting. This year he’s not but it’s the first year it’ll be digitally transmitted around the world, so in effect, everyone’s invited. Alec’s also the author of How To Invest Like Warren Buffett and in the interview below he talks to local value academic Adrian Saville, on investing the Warren Buffett way. – Stuart Lowman
ALEC HOGG: How do you invest? How do you actually play in these times? Remember Nenegate â extraordinary developments. We are now unpacking what happened there. Iâve done a lot of work on that and Iâm sure you guys have done lots of reading on it as well. However, when you wake up one morning and there is a change, which has taken banking shares that you might have invested in down 20 percent in two daysâŠthatâs what happened. If you were in bonds, you would have lost (collectively) ten percent of the value of the bonds, which are supposed to be as safe as houses. This is the reflection of a developing market and a developing market is where politics trumps economics. What do you do in a situation like that? Well, a lot of the advice in this bookâŠand Iâve written it in a very easy, readable manner. Iâve tried not to complicate anything. Buffett is a âhomespun wisdomâ kind of guy. When you go to Omaha (and I urge you to do this at least once in your lifetime. Make the trip. Go and listen to Warren whoâs now 85 and Charlie whoâs now 92. They hold forth for 5-and-half hours, answering spontaneously posed questions by people in the audience and people who sent emails.
This year, for the first time ever, they are webcasting so we can all watch it. As a result, Iâm not going. I have a young business and at R150, 000 to go to Omaha and back, you need sponsorship and unfortunately, we didnât get sponsorship this year. Iâll be watching the webcast with you and I strongly recommend that you do that because Buffett talks in terms that we can all understand. Itâs like the great professors. You (Dr Adrian Saville of GIBS) were very highly rated in one of those recent surveys because people understand what you talk about.
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ADRIAN SAVILLE: Iâll give you what I think is a quaint recollection, which is the launch of that radio station 20 years back. I would very often record that if I were out at meetings into the early evening etcetera. Those were the days of specialized outsourcing, computer configuration holdings, amalgamated appliances (Max Tech and House of Busby). I make that point because I think what you bring to this conversation is this incredible ingredient called experience and thatâs what Buffett displays â these acres and acres of experience. One of the things that I hear you expressing in this experience is that my intro, which says âinflation is seven percent. Producer price inflation is 9.71. The interest rate is up 75 basis points)⊠Your suggestion might be that this is ânoise, not newsâ.
ALEC HOGG: Totally. Thatâs what Buffett tells us. He says he canât (and heâs clever). This is a really, smart guy. The smartest man whose books youâre probably ever going to read is Charlie Munger (his partner), but Buffett is right there and I think their IQâs are off the charts. Where people get it wrong though, is when Buffett says, âI donât invest in technology because I donât understand it.â He doesnât mean that he doesnât understand it as in âI donât understand how to dig a hole for a stadiumâ. He means âI donât know where the earnings for the next five years are going to come or what theyâre going to beâ. His best pal is Bill Gates who he plays online Bridge with every week. Billâs on his Board and so is the former COO of Yahoo!, and he still doesnât buy technology shares. What he did say a couple of years ago though, was that he canât poke a hole in Googleâs business model. He doesnât know well enough what Googleâs going to earn in the next five years, but he canât poke a hole in the business model and as a consequence of that, value investors worldwide went and bought Google â just because Buffet said so.
He says, âForget the noise.â He says, âI canât call the big picture. I canât call the big trends.â What I do is invest (and this is really what the basic story of my book). It really talks to you in a very easy fashion about Buffettâs life and how he has applied his investment knowledge. The basic thing is, how do you work intrinsic value for a company? Youâre buying the company and not the shares to work out the intrinsic value and itâs not difficult. He says, âDonât try and get to the second decimal point. In fact, you have a range for your intrinsic value.â The way he puts it is that if somebody walks through the door (weighing 310 or 30 pounds), you donât need to know their exact weight to know theyâre fat. Itâs a similar situation with investing. You get the intrinsic value and that rarely changes. It changes as you get the new financials in there. Youâre doing your estimate on what you think the company can earn over the next 10 years and work that into your numbers. Itâs pretty easy and Iâve gone through in some detail on how to work that out because thatâs where you begin.
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Once you have an intrinsic value of a company, you then find what the margin of safety is that you would be comfortable with. Letâs just say the intrinsic value is R1.00. Your margin of safety would be 20 percent so you donât buy those shares unless theyâre 80 cents. Then you let Mr Market (the manic-depressive who doesnât have any medication) get manic and depressive but primarily, you want for him to get into one of his depressive phases so that the share price gets below your margin of safety. Thatâs when you buy and the period you hold on for isâŠforever. Thereâs no trading. Thereâs no punting. Thereâs no watching the share price and saying, âoh, thatâs a good priceâ or âthatâs a bad price.â Itâs about doing your homework.