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I am an author of books related to the decision framing and optimizing processes of Buffett and Munger. These books are available at and: With integrity and patience, we can also earn superior profits by carefully evaluating facts and... More
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The Four Filters Invention of Warren Buffett and Charlie Munger
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  • Does GM Make For An Intelligent Speculation?

    Does GM make for an intelligent speculation?

    Since it is backed by the U.S. government, let's do a rough estimation. Starting with a base estimate of annual free cash flow at a value of approximately $3.3 billion and the number of shares outstanding at 1.57 billion shares, we used an assumed free cash flow annual growth of 6 percent for the first 10 years and assume zero growth from years 11 to 15. Review the free cash flow record here:

    The resulting estimated intrinsic value per share (discounted back to the present) is approximately $29.34.

    Market Price = $21.94
    Intrinsic Value = $29.34 (estimated)
    Price To Value (P/V) ratio = .75 and the estimated bargain = 25. percent.

    Before we make a purchase, we must decide (filter No. 1) if GM is a high quality business with good economics. Does GM have (filter No. 2) enduring competitive advantages, and does GM have (filter No. 3) honest and able management?

    Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is GM the best place to invest our money today? I do not think so. However, since Mr. Combs' and Mr. Weschler's compensation is based on three-year performance, I think this was a bet made by one of them and approved by Mr. Buffett.

    I agree with Dr. Maulik Suthar's take on an upswing in a cyclical industry and consideration of a leaner GM backed by the US. I posted some ideas at the Facebook ISVI site, and Idea #5 is to look at this interesting play as an "insurance policy" on Buffett's bet that the US economic recovery continues. While $500+ million is a mini stimulus on one business, GM, it also carries the weight of Buffett and Berkshire's reputation... more upside than downside. So, should we reframe and think of GM as a multinational company with a profitable primary market in China and semi-profitable secondary markets in the US and other parts of the world? Obviously they see value there that we do not yet see.

    I can see GM doing well for the next three to four years as a restructured entity. I do not yet see any long-term competitive advantages at GM.

    Bud Labitan
    author of "The Four Filters Invention of Warren Buffett & Charlie Munger" and "Moats"

    Disclosure: I am long BRK.A, BRK.B.

    May 18 9:59 AM | Link | 1 Comment
  • Filter One Before Filter Two, Three, And Four

    Filter One Before Filter Two, Three, And Four
    By Bud Labitan

    As the author of the 2008 book called "The Four Filters Invention Of Warren Buffett & Charlie Munger," I feel compelled to revisit the importance of its sequential process. As some of you know, I think Buffett and Munger invented an amazing Behavioral Finance Process that is underappreciated by the business and academic communities. Their work in designing a mixed qualitative plus quantitative formula may be worthy of a Nobel Prize in Economics and Behavioral Finance.

    The Four Filters invention of Warren E. Buffett and Charles T. Munger helps us eliminate many prospects, and they help us find: "Understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price." In this short article, I will explain the importance of performing the four checklist sequence from filter 1,2,3,4 instead of starting with quantitative screening similar to filter four.

    Warren Buffett has written about the Four Filters in several ways. This behavioral sequence is always similar: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag." While Charlie Munger has described the process as getting into high quality businesses, Warren Buffett has also phrased the Four Filter process in this slightly different way: "When buying companies or common stocks, we look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price."

    After devoting hours of thinking time into their investing ideas and guiding principles , I felt like a man who stumbled upon hidden treasure in the middle of his back yard. I rediscovered a simple sequence called the Four Filters! They were there all the time.

    In the 2003 Berkshire Hathaway annual meeting, a man asked Warren Buffett this question: "Could you just take us thru your filter process when it comes to, selecting a company?" Warren Buffett answered, "It's a question of a. Can I understand it?...if it makes it thru that filter…b. Does it have some kind of sustainable long-term competitive advantage…" If it makes it thru that filter…How do I feel about the management in terms of, their ability and honesty?.. and if it makes it thru that filter,…What's the price?... And if it gets it thru all four filters, I sign my name to the check."

    Notice the sequence that Warren Buffett stated. The key phrase may be "if it makes it thru that filter..." These ideas sound so simple. Many people hear them at the Berkshire Hathaway annual meeting in Omaha each year. Yet, few people have stopped to think about the importance and usefulness of each individual filter.


    If we spend a lot of our time with quantitative screening, we rob ourselves of the time available in getting to know and "understand the nature of the business." Filter One is about finding "a business we understand." Then, Filter Number Two is about finding a durable competitive advantage and favorable long-term economics. This, by the way, is the topic of my seventh book "MOATS : Competitive Advantages of 70 Buffett & Munger Businesses."

    In developing an "intimate knowledge" of the business, would you rather know its latest numbers well? I suspect that we should spend our valuable time learning, and getting to know the nature, competitive advantage, and management of the business in question.

    The checklist nature of these Four Filters serve as a logical and sensible justification mechanism. A checklist can serve to confirm or disconfirm evidence. Like pilots who use checklist prior to flying, the Four Filters help us frame a rational investment decision. Charlie Munger believes in using checklist routines to help us avoid a lot of errors. These errors occur because our human brains are wired to find shortcuts, or what Munger calls "shortcut types of approximations." Charlie Munger said: "The main antidotes to miscues from Availability-Misweighing Tendency often involve procedures, including the use of checklists, which are almost always helpful."

    Charlie Munger described the self-development process this way: "If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It's like playing golf -- you have to work on it."

    We should spend our valuable time learning, and getting to know the nature, competitive advantage, and management of the business in question. If we fail to buy at a great bargain, the wonderful business will still yield happy returns. If you don't believe me, just remembr that Warren Buffett said: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

    Yes, a decision framing sequence does matter!

    Disclosure: I am long BRK.B.

    Mar 29 10:22 PM | Link | Comment!
  • Moats : Competitive Advantages Of 70 Buffett & Munger Businesses Is Now On
    Moats : The Competitive Advantages of 70 Buffett & Munger Businesses is now on

    This may be the best business book that describes the competitive advantages of profitable businesses. MOATS describes the nature of 70 selected businesses purchased by Buffett and Munger for Berkshire Hathaway Inc. MOATS is a very useful resource for investors, managers, students of business. Since its subject matter has proven success, MOATS may become a useful practical text in businesses schools around the world. MOATS also looks at the sustainability of these competitive advantages in each of the 70 chapters.

    The author extends a special thanks to Professor Phani Tej Adidam, Ph.D. Chair of the Department of Marketing and Management and Director of the CBA International Initiatives at University of Nebraska at Omaha. Thanks are extended to Richard Konrad, CFA, Dr. Maulik Suthar, and Scott Thompson, MBA for sharing their thoughts, analysis, and feedback. The 70 Businesses covered in MOATS:

    Acme Brick Company, w Adam Ward
    American Express Co. (NYSE:AXP), Dr. Maulik Suthar
    Applied Underwriters, w Adam Ward
    Ben Bridge Jeweler, w Beryl Chavez Li
    Benjamin Moore & Co., w Mr. Jack Wang CPA
    Berkshire Hathaway Group, w Brian Greising & Rick Mayhew
    Berkshire Hathaway Homestate Companies, w Beryl Chavez Li
    BoatU.S., w Peter Chen
    Borsheims Fine Jewelry, w Tariq Khan.
    Buffalo News, Bud Labitan & Peter Stein
    Burlington Northern Santa Fe Corp. w David Leoy.
    Business Wire, w Larry Harmych.
    BYD, w Kevin Walsh.
    Central States Indemnity Company, w Azalia Khousnoutdinova,
    Clayton Homes, w Erin Sestak.
    Coca Cola (NYSE:KO) w Sebastian Jung,
    ConocoPhillips (NYSE:COP), w Adam D. Studts, PE.
    CORT Business Services, w Erin Sestak.
    Costco Wholesale (NASDAQ:COST), w Jubin Jacob, AUC-SOM
    CTB Inc., w Todd Sullivan.
    Fechheimer Brothers Company, w Ben Albaitis.
    FlightSafety, w Peter Stein
    Forest River, w Richard Konrad, CFA
    Fruit of the Loom®, Dr. Maulik Suthar
    Garan Incorporated, w Dr. Edwin Fuentes
    Gateway Underwriters Agency, assigned Daniel Rudewicz, CFA
    GEICO Auto Insurance w Florian Beil,
    General Re, w Raghu Dasari, & Theodor Tonca
    H.H. Brown Shoe Group, w Mervyn H. Teo
    Helzberg Diamonds, w Natalja Callahan
    HomeServices of America, w Sebastian Jung
    IBM, w Tim Bishop & Peter Stein
    International Dairy Queen, Inc., w Tariq Khan
    Iscar Metalworking Companies, w Kevin Walsh
    Johns Manville, w Manpreet Singh Saran
    Johnson & Johnson (NYSE:JNJ), Beryl Chavez Li
    Jordan's Furniture, w Zehao Sun.
    Justin Brands, Dr. Maulik Suthar
    Kraft Foods (KFT), w Andrea Tagart.
    Larson-Juhl, w Tim Bishop
    Lubrizol, w Scott Thompson, MBA.
    M&T Bank Corp (NYSE:MTB), w Cliff Orr & Richard Konrad, CFA
    Marmon Holdings, Inc., w David Lau & Theodor Tonca
    McLane Company, Dr. Maulik Suthar,
    Medical Protective, w Michael Murillo
    MidAmerican Energy Holdings Company, w Dr. Maulik Suthar & Brian Bernardino, JD
    MiTek Inc. w Mr. Jack Wang CPA
    Moody's (NYSE:MCO), w Raghu Dasari
    National Indemnity Company, w Jen Iwanski & Rick Mayhew
    Nebraska Furniture Mart, w Julie Rosenbaugh, Theodor Tonca, & Shouryamoy Das
    NetJets®, w Christian Labitan
    PacifiCorp., w Beryl Chavez Li
    Precision Steel Warehouse, Inc., w Adam D. Studts, PE & J.T. Loudermilk, MBA
    Procter & Gamble (NYSE:PG), w Beryl Chavez Li
    RC Willey Home Furnishings, w Azalia Khousnoutdinova
    Richline Group, Daniel Doyon
    Scott Fetzer Companies, Cliff Orr & Hoang Quoc Anh, Vietnam
    See's Candies, w Jen Iwanski
    Shaw Industries, w Daniel Doyon & Richard Konrad, CFA
    Star Furniture, w Pamela A. Quintero, MBA
    The Pampered Chef® w Julie Rosenbaugh
    TTI, Inc., w Peter Chen
    United States Liability Insurance Group, w Stephen Chan & Colin Farrier
    US Bancorp (NYSE:USB), w Richard Konrad, CFA
    USG Corp (NYSE:USG), w Richard Konrad, CFA
    Wal-Mart (NYSE:WMT) w Florian Beil
    Washington Post (WPO), w Andrea Tagart & Richard Konrad, CFA
    Wells Fargo (NYSE:WFC), w Natalja Callahan.
    Wesco Financial Corporation, w Stephen Chan
    XTRA Corporation, Bud Labitan

    Disclosure: I am long BRK.A, BRK.B.

    Mar 01 12:20 AM | Link | 1 Comment
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