MOATS : Competitive Advantages of 70 Buffett and Munger Businesses

MOATS : The Competitive Advantages of Buffett and Munger Businesses discusses the "competitive advantages" of 70 selected businesses purchased by Warren Buffett and Charlie Munger for Berkshire Hathaway Incorporated. This is a very useful resource for investors, managers, students of business around the world. It also looks at the sustainability of these competitive advantages in each of the 70 chapters.

find it here: http://www.lulu.com/spotlight/4filters

The MOATS book introduction audio mp3 file: http://www.frips.com/moats.mp3

audio file of Wells Fargo, WFC chapter from MOATS book:
http://www.frips.com/wfc.mp3

audio file of the Johnson and Johnson chapter from MOATS:
http://www.frips.com/jnj.mp3

audio file of the Costco chapter in MOATS http://www.frips.com/costco.mp3

audio file of the American Express chapter: http://www.frips.com/axp.mp3

The IBM Chapter from MOATS. Why did Buffett buy into a technology services
company after so many years? http://www.frips.com/ibm.mp3

Here is a 1 min : 32 sec audio file of Warren Buffett talking about an
economic castle and its moat http://www.frips.com/wbmoat.mp3

Herman Cain May Change World View On Taxes

Who ever thought that a conservative man from Georgia running for President of The United States could affect taxation and democracy debates around the world?

Herman Cain's 9-9-9 Plan is a Vision for Economic Renewal that can be good for America and the world's economies. He believes that the natural state of our economy is prosperity. Freedom from excessive regulation and excessive taxation ensures that.

Cain believes that in order to return to prosperity, Government must get off our backs, out of our pockets and out of our way.

His Economic Guiding Principles include:

1. Production drives the economy, not spending. Production is the engine, consumption is the caboose. We can not spend our way to prosperity. Government spending is like taking a bucket of water from the deep end of the pool, pouring it in the shallow end. Then they HOPE that the water level will CHANGE.

2. Risk taking drives growth. Business formation and job creation are dependent on entrepreneurs taking risks. Investors who fund those entrepreneurs likewise take risks.

3. Measurements must be dependable. A dollar must always be a dollar just as an hour is always 60 minutes. Sound money is crucial for prosperity.

UNITE, never DIVIDE; UNITED around ECONOMIC GROWTH

Cain states that when one party is so focused on spending so that the other must focus on cutting, we must unite around economic growth. Unite income tax payers with payroll taxpayers so we all pull for low rates Unite those wanting to eliminate deductions with those seeking lower rates. Unite the Flat-Taxers with the Fair-Taxers.  

Price To Value - Chapter Seven: Phil Carret’s Ideas

Price To Value - Chapter Seven: Phil Carret’s Ideas


CHAPTER SEVEN: Phil Carret’s Ideas
from the new book Price To Value (Acalmix)


Philip Carret founded Pioneer Fund in 1928, six years before Ben Graham wrote the 1st edition of Security Analysis. Carret also wrote a useful and enlightening book called “The Art of Speculation.” And, Warren Buffett stated that Philip Carret “had the best truly longterm investment record of anyone I know."

What made Carret so successful in investing? I asked Frank Betz, of Carret Zane Capital Management, a similar question. Frank shared a partner's desk with Phil Carret as his personal assistant from the mid-eighties until Phil's death in 1998. Carret was then over age 101, and he was still commuting most days from his Scarsdale home to the mid-town NYC office of Carret and Company that he founded in 1962. There he was still functioning fully in the management of client portfolios. Betz recalled that Phil was a voracious reader not only of dozens of corporate annual reports and daily newspapers, but of an eclectic variety of books ranging from philosophy, history, biography and economic subjects. Phil Carret always claimed the most useful information he gleaned from this was from his concentration on the detailed footnotes appended to annual reports.


While Frank was already a long experienced money center banker, analyst, and investor when he was recruited to work for Carret by Phil's son Donald, I wanted to know how this interaction affected his own approach to investing. Frank believes that “working with Phil Carret, significantly sharpened my senses.”

Frank Betz also remembers that Carret would warn others against following fads in investing, and he often cited one of the most important characteristics of successful investors is patience. In the preface of his book, Phil Carret wrote, “The man who looks upon speculation as a possible means of avoiding work will get little benefit from this book. It is written rather for the man who is fascinated by the complexity of the forces which produce the ceaseless ebb and flow of security prices, who wishes to get a better understanding of them.”


“Successful speculation requires capital, courage and judgment. The speculator himself must supply all three. Natural good judgment is not enough. The speculator’s judgment must be trained to understand the multitudinous facts of finance.” Like mine, it was Carret’s hope that his book would assist his readers.


At the 1996 Berkshire Hathaway Annual Meeting, Warren Buffett said: "The main thing is to find wonderful businesses, like Phil Carret, who's here today, always did. He's one of my heroes, and that's an approach he's used. If you've never met Phil, don't miss the opportunity. You'll learn more talking with him for fifteen minutes than by listening to me here all day."


Let us take a brief look at Carret’s somewhat contrarian view on oil. “Oil is produced in thousands of oil fields on every continent in the world. The temporary absence from the market of a single country - even a country as important to oil as Iraq or Kuwait - will have only a temporary effect. Other oil producers can boost their output quickly. And in the United States, we have abundant supplies of natural gas, which can serve as a substitute for oil to a considerable extent.”


More importantly, take a look at Phil Carret's "12 Commandments of Investing":


1. Never hold fewer than 10 different securities covering five different fields of business;


2. At least once every six months, reappraise every security held;


3. Keep at least half the total fund in income producing securities;


4. Consider (dividend) yield the least important factor in analyzing any stock;


5. Be quick to take losses and reluctant to take profits;


6. Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available;


7. Avoid inside information as you would the plague;


8. Seek facts diligently, advice never;

9. Ignore mechanical formulas for value in securities;


10. When stocks are high, money rates rising and business prosperous, at least half a given fund should be placed in short-term bonds;


11. Borrow money sparingly and only when stocks are low, money rates low and falling and business depressed;


12. Set aside a moderate proportion of available funds for the purchase of long-term options on stocks in promising companies whenever available.


We see that Phil Carret exercised safety-based commandments. And, the last one appears to be targeted towards “intelligent speculation.” There, he advised setting aside a proportion of available funds for long-term options on stocks in promising companies whenever available. With careful study and patience, Carret knew he could predict good outcomes. Philip Carret died on May 28, 1998, at age 101.




- - - - - - -

“Price To Value” is about Intelligent Speculation and Decision Framing. Readers will benefit from this book if it stimulates better thinking into the most important factors crucial to decision making. These decision framing ideas can be applied across different asset classes. First, the book presents the four investing decision filters in simplified terms. Then, it extends these ideas by looking into the intelligent speculation ideal described by Benjamin Graham in his tenth lecture of 1946.



Bud Labitan's books are available on Amazon.com and Lulu.com

http://stores.lulu.com/4filters

 

The Book

What we view as tough times may soon be viewed as "buying opportunities" for Warren Buffett and other value investors. After all, some of their best purchases were made during the stagflationary period of the 1970's.
I think Buffett and Munger invented an amazing Behavioral Finance Formula or Process that is underappreciated by the business and academic communities. On paper as early as the 1977 BRK annual letter, their work in designing a mixed qualitative + quantitative formula may be worthy of a Nobel Prize in Economics and Behavioral Finance. So, in my new self-published book "The Four Filters Invention of Warren Buffett and Charlie Munger" ( www.frips.com ) I examine each of the basic steps they perform in "framing and making" an investment decision. I made this book a small and focused look into this amazing invention within "Behavioral Finance."Buffett mentions the Four Filters this way: "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."

In my view, the genius of Buffett and Munger's four filters process was to "capture all the important stakeholders" in one "multi-variable" equation. Imagine...Products, Enduring Customers, Managers, and Margin-of-Safety... all the important stakeholders for business success in one mixed "qual + quant" formula...The genius of the Munger and Buffett collaboration. And, quality bargains at 50 cents on the dollar may soon appear; Use the Four Filters!

Thanks for your interest in my book and helping to promote awareness of my book. Here is a 10 minute audio book summary: http://www.frips.com/4fsummary.mp3

Behavioral Finance

A handful of readers have looked at my book as a reiteration of ideas. So, I wrote some these words to a reviewer of my book. Then, I realized that it helps to explain "the essence" I tried to express in my book:

Thanks for your positive words and review of my book. I appreciate yours and all the feedback I get. If possible, kindly mention to your readers that I intended to make this book a small and highly distilled look into this amazing invention within "Behavioral Finance."In my view, the genius of Buffett and Munger's for filters process was to capture all the important stakeholders in a "multi-variable" equation or formula. Imagine... Products, Enduring Customers, Managers, and Margin-of-Safety... all in one mixed "qual + quant" formula. In my view, that is the real genius of the Munger and Buffett collaboration.

Perhaps Munger does not get enough credit for this amazing formula because he enjoyed some of the profits and distributed some to family and charities along the way. However, their record speaks for itself. And, Buffett is always ready to mention that "Time is the friend of the wonderful business, the enemy of the mediocre. You might think this principle is obvious, but I had to learn it the hard way. In fact, I had to learn it several times over... It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner."

So, my book, "The Four Filters Invention of Warren Buffett and Charlie Munger" is really a subtle tribute to their collaborative genius in Behavioral Finance. And, let me be the first in line to nominate both men for a Nobel Prize in Economics.

However, the significance of their ideas in Behavioral Finance will most probably be eventually recognized like the ideas of Rev. Thomas Bayes. Posthumously. As Bill Gates is keenly aware, "Bayesian Probability" is vitally important to Microsoft Windows software. ( http://en.wikipedia.org/wiki/Thomas_Bayes )

Abridged book on seekingalpha.com

How do we improve and optimize our investing decision making? How do we develop a better understanding of a company, its products, its present, and its future?

http://seekingalpha.com/article/69566-the-four-filters-of-warren-buffett-and-charlie-munger

Look for the book soon.

The Four Filters Invention of Warren E. Buffett and Charles T. Munger

“Understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.”

CHAPTER ONE OF FIVE: UNDERSTANDING

The Four Filters.

What I Learned from Warren Buffett.
By Bud Labitan


CHAPTER ONE OF FIVE: UNDERSTANDING

Over the years, I have read most of the books about Warren Buffett, his teacher Benjamin Graham, and his business partner Charlie Munger. I have also listened to many hours of audio lectures and interviews. During this time, I have been consistently interested in how Warren Buffett frames an investment decision and how he arrives at a winning investment prospect.

Warren Buffett has talked about the Four Filters in several ways, but the sequence is always the same: “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.” Buffett has also phrased the four filter process in this 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.”

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 effectiveness of each individual filter.

This is a small and valuable book that concentrates on the four sequential filters that will make anyone a better and more skillful investment decision maker. It is dedicated to Janine Rueth and Victoria Labitan. In this book, I squeeze “all the lean beef” into five chapters: “the Four Filter chapters and a summary chapter.” The final summary chapter will tie the filters together and demonstrate, with enthusiastic attitude, why these filters work to maximize the probability of investing success from both a mathematical and a practical point of view.

In developing understanding of a company and its products, Buffett framed the diligent mental process this way: “If I were looking at a company, I would put myself in the frame of mind that I had just inherited that company, and it was the only asset my family was ever going to own. What would I do with it? What am I thinking about? What am I worried about? Who are my customers? Go out and talk to them. Find out the strengths and weaknesses of this particular company versus other ones.”

Like a detective, he begins by asking himself basic questions. He looks for simple things that he can count. He looks for companies run by able and owner-oriented people.
Said Mr. Buffett, “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.”

I have played with the four filters and twisted them into 4 clusters this way:
1. Products 2. Customers 3. Management 4. Margin of Safety

Why do the filters work? I will give you a hint - Elaboration and Elimination.
In terms of mathematical probabilities, think of each stop along the four filters as a mutually exclusive and additive event. If a company passes a couple of filters, it is, by the process of elimination, farther to the right on a normal distribution curve, from an “investment prospect” point of view. If this were a field of racing horses, movement along each step of the Four Filters path, the prospect or suspect enters a subset of “better than average” horse. In my view, practicing these steps will make you a better thinker.

The majority of Berkshire Haathaway companies have important competitive advantages that will endure over time. For Warren Buffett and his shareholders, it is comforting to be in businesses where some mistakes can be made and yet satisfactory overall performance can be achieved.

How were these four filters developed? Over the course of their investing experiences, Warren Buffett and Charlie Munger have had many discussions about the qualities of both bad and good businesses. Warren Buffett’s advantage is passion and attitude for sensible investing. He learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values. Sound owner-oriented business principles, along with time, training, and temperment have mabe them even better investors.

So what does Ben Graham add to filter number one, understanding? Graham, according to Buffett, added three basic ideas that can enhance our intellectual investing framework.
Graham’s ideas can help us do reasonably well in stocks.


Buffett on Graham:
His three basic ideas - and none of them are complicated or require any mathematical talent or anything of the sort - are:

1. that you should look at stocks as part ownership of a business,
2. that you should look at market fluctuations in terms of his "Mr. Market" example and make them your friend rather than your enemy by essentially profiting from folly rather than participating in it, and finally,
3. the three most important words in investing are "Margin of safety" - which Ben talked about in his last chapter of The Intelligent Investor - always building a 15,000 pound bridge if you're going to be driving 10,000 pound trucks across it.

I think those three ideas 100 years from now will still be regarded as the three cornerstones of sound investment.

In developing our understanding of a company and its products, Warren Buffett advises students to “Think for yourself.”

He reads annual reports of the company he is looking at, and he reads the annual reports of the competitors. He has said that annual reports are the main source of the study material needed or understanding. Of course, he also cautions students to focus on their own circle of competence. Notice the filtering process of his statement here: “Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management, and limited exposure to hard times.”

Just as a good leader has been tested by tough times and has a solid followership, a good company will have a loyal followership or customer base. The wonderful ones will have some sort of pricing power.

Charlie Munger understood the importance of thinking about the “Wonderful Business” early, while Warren Buffett was still buying cheap “Cigar-Butts.” Shortly after purchasing Berkshire, Buffett acquired a Baltimore department store called Hochschild Kohn. That was purchased through a retailing company called Diversified Retailing that later merged with Berkshire Hathaway. They now consider this, as well as the original textile company purchase an investing mistake. But, they both admit that they have learned from their mistakes. Now, when buying companies or common stocks, they look for first-class businesses accompanied by first-class managements. They look to what managements do more than what managements say.

Along with learning about GEICO’s low cost advantage from Lorimer Davidson, Warren Buffett learned some things from studying Phil Fisher, Philip Carret, and Henry Singleton. Buffett met Phil Fisher in the early Sixties, after reading his first book. Phil Fisher was a deep thinker into the nature of managements and their business growth potential. According to Buffett, “His ideas, like those of Ben Graham, were simple but powerful, and I wanted to meet the man whose teachings had such an influence on me…It's been over 40 years since I integrated Phil's thinking into my investment philosophy.”

So, part of developing your “circle of competence” is reading, learning, observing and integrating sound ideas into your investment philosophy. According to Buffett, he and Charlie Munger “just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities.”


Buffett and Munger’s Goal at BRK:
Our long-term economic goal is to maximize the average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the economic significance or performance of Berkshire by its size; we measure by per-share progress.


How do we develop a better frame of reference and make better investing decisions? As you now know, Filter One is to “Develop a Better Understanding” of the company and its products. I got interested in looking at how Buffett and Munger frame their decisions when I was in business school at Purdue University Calumet. This is a quick summary about my views on their “framing.”

Framing in behavioral finance is the choosing of particular words to present a given set of facts. And, framing can influence our choices. Tversky and Kahneman described "Prospect Theory" in 1979 using framed questions. Tversky and Kahneman found that contrary to expected utility theory, people placed different weights on gains and losses and on different ranges of probability. They also found that individuals are much more distressed by prospective losses than they are happy by equivalent gains. Some have concluded that investors typically consider the loss of $1 twice as painful as the pleasure received from a $1 gain. Others believe that this work helps to explain patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty. An increasing body of literature on framing supports a tendency for people to take more risks when seeking to avoid losses as opposed to securing gains.

Takemura (1992) showed that the effects of framing are likely to be lower when subjects are warned in advance that they will be required to justify their choices, and when more time is allowed for arriving at their choices. Luckily, Buffett and Munger seem to have arrived at practical use of these optimal framing ideas earlier than most.

They try to keep this simple. Notice this example from the latest 2007 annual report:

The Pritzker family decided to gradually sell or reorganize certain of its holdings, including Marmon, a company operating 125 businesses, managed through nine sectors. Marmon’s largest operation is Union Tank Car, which together with a Canadian counterpart owns 94,000 rail cars that are leased to various shippers. The original cost of this fleet is $5.1 billion. All told, Marmon has $7 billion in sales and about 20,000 employees. We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula tied to earnings.

A simple valuation example here will demostrate this bargain purchase in a well run company. For fun, lets do a fair "replacement cost" estimate on the 94,000 railcars alone.
94,000 x what? Made out of steel, the boxcar cost about $45000 a copy in 1980. A buddy of mine, says that $90,000 would be a fair price to pay for a mid-age mid-use rail car which can be depreciated over about 40-50 years. So, 94,000 x $90,000 = 8.46 Billion.... just in railcars alone. Furthermore, consider that the Marmon Group is composed of 125 different companies. And, I may be understating the replacement cost of a mid-age mid-use rail car.


Buffett and Munger have employed the principles taught by Dave Dodd and Ben Graham. In my view, Buffett and Munger overcome the conventional framing effects thru rational and thorough business analysis. They simply avoid getting into judgments in some fields. Warren Buffet has said: "If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter." I call their approach the compounding success theory because I imagined how their sequence of rational decisions push the probability of investment return success into the upper percentiles.

In my masters paper, I must admit that I got too wordy. I have come to realize that the Four Filters encapsulate the most important contributions of John Burr Williams, Benjamin Graham, Phillip Fisher, Warren Buffett, and Charles Munger. Each of the great investors learn from knowledgeable others.

While everyone may take a little different approach to measuring both quantitative and qualitative value; in my view, each of the Four Filters delivers something especially valuable. They help get us closer to the real "intrinsic value" of a good business.