A f t e r w o r d
2 0 9
A common thread for outperformance, whether it be for the Super-
investors of Graham-and-Doddsville, the Superinvestors of Buffettville,
or those who lead the funds that Michael’s research identif ied, is a port-
folio strategy that emphasizes concentrated bets and low turnover and a
stock-selection process that emphasizes the discovery of a stock’s intrin-
sic value.
Still, with all the evidence on how to generate above-average long
results, a vast majority of money managers continue to underperform
the stock market. Some believe this is evidence of market eff iciency.
Perhaps with the intense competition among money
managers, stocks
are more accurately priced. This may be partly true. We believe the
market has become more eff icient, and there are fewer opportunities to
extract prof its from the stock market using simple-minded techniques
to determine value. Surely no one still believes the market is going to
allow you to pick its pocket simply by calculating a P/E ratio.
Analysts who understand the deep-rooted changes unfolding in a
business model will likely discover valuation anomalies that appear in the
market. Those analysts will have a different
view of the duration and
magnitude of the company’s cash-generating ability compared with the
market’s view. “That the S&P 500 has also beaten other active money
managers is not an argument against active money management,” said
Bill Miller; “it is an argument against the methods employed by most
active money managers.”
2
It has been twenty years since I read my f irst Berkshire Hathaway an-
nual report. Even now, when I think about Warren Buffett and his phi-
losophy, it f ills me with excitement and passion for the world of
investing. There is no doubt in my mind
that the process is sound and,
if consistently applied, will generate above-average long-term results.
We have only to observe today’s best-in-class money managers to see
that they are all using varied forms of Buffett’s investment approach.
Although companies, industries, markets, and economies will al-
ways evolve over time, the value of Buffett’s investment philosophy lies
in its timelessness. No matter what the condition, investors can apply
Buffett’s approach to selecting stocks and managing portfolios.
When Buffett f irst started managing money in the 1950s and
1960s, he was thinking about stocks as businesses and managing focused
2 1 0
A F T E R W O R D
portfolios. When he added the new economic franchises to Berkshire’s
portfolio in the 1970s and 1980s, he was still thinking about stocks as
businesses and managing a focused portfolio.
When Bill Miller bought
technology and Internet companies for his value fund in the 1990s and
into the f irst half of this decade, he was thinking about stocks as busi-
nesses and managing a focused portfolio.
Were the companies purchased in the 1950s different from the com-
panies in the 1980s? Yes. Were the companies purchased in the 1960s dif-
ferent from those purchased in 1990s? Of course they were. Businesses
change, industries unfold, and the competitiveness of markets allows new
economic franchises to be born while others slowly wither. Throughout
the constant evolution of markets and companies, it should be comforting
for investors to realize there is an investment
process that remains robust
even against the inevitable forces of change.
At Berskhire’s 2004 annual meeting, a shareholder asked Warren
whether, looking back, he would change anything about his approach.
“If we were to do it over again, we’d do it pretty much the same way,”
he answered. “We’d read everything in sight about businesses and indus-
tries. Working with far less capital, our investment universe would be far
broader than it is currently. I would continually learn the basic principles
of sound investing which are Ben Graham’s, affected in a significant way
by Charlie and Phil Fisher in terms of looking at better businesses.” He
paused for a moment, then added, “There’s nothing different, in my
view, about analyzing securities today versus fifty years ago.”
Nor will there be anything different f ive, ten, or twenty years from
now. Markets change,
prices change, economic environments change,
industries come and go. And smart investors change their day-to-day
behavior to adapt to the changing context. What does not change, how-
ever, are the fundamentals.
Those who follow Buffett’s way will still analyze stocks (and com-
panies) according to the same tenets; will maintain a focus portfolio;
and will ignore bumps, dips, and bruises. They believe, as I do, that the
principles that have guided Warren Buffett’s investment decisions for
some sixty
years are indeed timeless, and provide a foundation of solid
investment wisdom on which all of us may build.
2 1 1
Appendix
Table A.1
Berkshire Hathaway 1977 Common Stock Portfolio
Number
Market
of Shares
Company
Cost
Value
934,300
The Washington Post Company
$ 10,628
$ 33,401
1,969,953
GEICO Convertible Preferred
19,417
33,033
592,650
Interpublic Group of Companies
4,531
17,187
220,000
Capital Cities Communications, Inc.
10,909
13,228
1,294,308
GEICO Common Stock
4,116
10,516
324,580
Kaiser Aluminum and Chemical Corp.
11,218
9,981
226,900
Knight-Ridder
Newspapers
7,534
8,736
170,800
Ogilvy & Mather International
2,762
6,960
1,305,800
Kaiser Industries, Inc.
778
6,039
Total
$ 71,893
$139,081
All other common stocks
34,996
41,992
Total common stocks
$106,889
$181,073
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