The Value Investing Approaches of Warren Buffett, Charlie Munger, Todd Combs, and Ted Weschler at Berkshire Hathaway David I. Kass, Ph.D. Clinical Professor of Finance Robert H. Smith School of Business University of Maryland October 19, 2017 1
15 Largest Common Stock Investments (12/31/2016) 2
5 Largest Common Stock Investments (6/30/2017) These 5 holdings comprise 63% of Berkshire Hathaway s Common Stock Holdings 3
4
Berkshire Hathaway vs S&P 500 (1965-2017) In dollar terms, $1,000 invested in Berkshire Hathaway 52 years ago is now worth $18.5 million. The same amount invested in the S&P 500 would be worth $123,000. (Values were calculated using the compounded annual gain of 20.8 percent from 1965-2017 for per-share market value of Berkshire, and the compounded annual gain of 9.7 percent from 1965-2017 in the S&P 500, with dividends included.) 5
Warren Buffett CEO and Chairman of Berkshire Hathaway 1965-present 6
Forbes 400 (2017) 7
Forbes World s Largest Companies by Market Capitalization (2017) 8
Early Life Born August 30, 1930 (age 87) Enrolled in the University of Pennsylvania s Wharton School Transferred to and graduated from the University of Nebraska-Lincoln Graduated from Columbia Business School in 1951 Married Susan Buffett in 1952 They had three children: Susie, Howard, and Peter That same year he began teaching Investment Principles night class at the University of Nebraska 9
Career Progression 1951 to 1954 Buffett-Falk & Co as an investment salesman 1954 to 1956 Graham-Newman Corp as a securities analyst 1956 to 1969 Buffett Partnership, Ltd as general partner 1965 Chairman and CEO of Berkshire Hathaway 10
Charlie Munger Vice Chairman of Berkshire Hathaway Munger and Buffett built an informal investing partnership in the 1960s and 1970s Buffett refers to him as his partner 11
Charlie Munger Born January 1, 1924 (93 years old) Born and raised in Omaha, Nebraska Worked at Buffett & Son as a teenager Studied Mathematics at the University of Michigan Dropped out to join the Air Force during World War II He continued his education at Caltech Studied Meteorology Graduated from Harvard Law School in 1948 Graduated magna cum laude with a J.D. 12
Charlie Munger Career Moved to California and joined the law firm Wright & Garrett In 1962 he created the law firm Munger, Tolles & Olson working as a real estate attorney Also ran his own investment firm from 1962-1975 Generated compound annual returns of 24.3% Compared to just 6.4% annual appreciation for the Dow Jones Industrial Average 13
Charlie Munger Wesco Financial Served as chairman from 1984 to 2011 Diversified financial corporation Daily Journal Currently serves as chairman American publishing company covering legal affairs in California and Arizona Portfolio (as of June 30, 2017): 14
Todd Combs Current portfolio manager at Berkshire Hathaway Born January 27, 1971 (age 46) Graduated from Florida State University in 1993 degrees in Finance and Multinational Business Operations Graduated from Columbia Business School in 2002 with an MBA 15
Career Progression Began as a Florida bank regulator Left to take on a role in Progressive s pricing department In 2005 he launched his hedge fund - Castle Point Capital Closed it down in 2010 to work with Warren Buffett at Berkshire Hathaway 16
Castle Point Portfolio (2010) Performance (2000-2010): 34% cumulative return vs. negative 46% for the XLF (Financial Sector Fund) 17
Ted Weschler Current portfolio manager at Berkshire Hathaway Born May 16, 1962 (55 years old) Graduated from University of Pennsylvania s Wharton School Degree in economics with concentrations in accounting and finance Winning bid (anonymously) of two lunches with Warren Buffett in 2010 and 2011 $2.6 million each year (for charity/glide Foundation) 18
Ted Weschler Career Worked for chemical manufacturer WR Grace Including two years as assistant to its Chairman J. Peter Grace Later joined the private equity firm Quad-C Management in Charlottesville, VA Started by the former vice chairman of WR Grace Ten years later (2000) he started his own hedge fund Peninsula Capital Closed it in 2011 to join Berkshire Hathaway 19
Peninsula Capital Advisors Portfolio (2011) Performance (2000-2011): over 1,000% appreciation vs. S&P 500 unchanged 20
How are Todd Combs and Ted Weschler compensated? Each receive a salary of $1 million per year plus 10% of the amount by which they beat the S&P 500 They get paid 80% based on their own record and 20% based on the record of the other Each manages $10 billion Performance Both have outperformed the S&P 500 since joining Berkshire 21
Working at Berkshire Hathaway "I get in around 7 or 8 and I read until about 7 or 8 at night. And I go home and see my family and then I'll read for another hour or two in bed at night. And you know, there might only be three to four phone calls the entire week. So there are very, very few interruptions But it's literally just reading about 12 hours a day. - Todd Combs 22
Berkshire Hathaway s Evolution from a Portfolio of Stocks to a Conglomerate 23
Berkshire Hathaway Companies Berkshire has acquired approximately 80 companies within its 4 major sectors of operations Insurance (Geico, General Re) Regulated, Capital Intensive businesses (Burlington Northern Santa Fe Railroad, Berkshire Hathaway Energy) Manufacturing, Service & Retailing Operations (Precision Castparts, Marmon, Lubrizol, IMC) Finance & Financial Products (Wesco Financial) 24
Warren Buffett s Investment Strategy Find a good business and one that he can understand Durable, competitive advantage, run by able and honest people Will earn more money 10 and 20 and 30 years from now A management team he admires and trusts His favorite investment that embodies this philosophy is Geico He learned about this when he was 20 years old on a Saturday from future CEO Lorimer Davidson Berkshire bought control in 1995 when it had a 2% market share, now it has a 12% market share 25
Berkshire Hathaway s Portfolio in 1977 26
Berkshire Hathaway s Portfolio in 1986 27
Berkshire Hathaway s Portfolio in 1996 28
Berkshire Hathaway Portfolio in 2006 29
Berkshire Hathaway s Portfolio in 2016 30
Berkshire s Investments in Bank of America and Goldman Sachs $5 billion dollar investment in each Goldman Sachs in 2008 $2.6 billion return 50% return on investment Bank of America in 2011 Earned $13 billion 28% return per year 31
Berkshire s Recent Returns 23.8% in 2016 12.25% for the S&P 500 14.44% in 2017 YTD As of October 6, 2017 32
Warren Buffett s Advice Invest in yourself. Address whatever you feel your weaknesses are, and do it now. I was terrified of public speaking when I was young. I couldn t do it. It cost me $100 to take a Dale Carnegie course, and it changed my life. 33
34