Buffett on Investing vs. Business

Includes: BRK.A, BRK.B
by: Nadav Manham

Jason Zweig's "Intelligent Investor" column in last week's WSJ featured some interesting Buffett tidbits:

1)  Buffett, whose powers of mental calculation are legendary, confessed that he doesn't know how well Berkshire Hathaway's (NYSE:BRK.A) portfolio of stocks has done in recent years: 

I've no idea what the rate of return would be.  But, knowing myself how hard it would be to do the calculations right, I'm suspicious of anybody's numbers.

The reason it's so hard to calculate is that you can't just take the ending value of the portfolio and compare it to the beginning, because he added outside money along the way (generated from operating earnings, interest and dividends) and also took out money (to buy operating business, fixed income instruments, raise cash, etc.).  Keep this in mind the next time someone pitches you a fund with a fantastic historical "IRR".

2)  Buffett talks about the advantages of being both a businessman and an investor, rather than one or the other:

Being a businessman makes me a better investor and being an investor makes me a better businessman . . . Most businessmen limit themselves to their own field, and most investors don't really think about businesses.  And many businessmen are semi-oblivious to to the yardsticks other people use outside that field.  I'm always comparing everything to everything else.

"Most investors don't really think about businesses" is a pretty strong statement.  At the end of the day most investments--stocks and corporate bonds--are simply claims on the assets and cash flows of businesses.  It's a damning indictment to say that most investors, including professionals, don't think about what's actually behind the pieces of paper they own. 

Conversely, as I've said before, to be able to approach investing from the perpective of someone who understands businesses can be of great advantage.  Most family offices are in this position, since they're started and seeded by successful businessmen who've sold their business. 

Disclosure:  Long Berkshire Hathaway

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