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Initially Buffett started out as pretty much an arbitrageur, he focused on companies selling below their liquidation value. This was all from learning under Benjamin Graham. So if you look at his partnership years, he would often invest in companies where they had hidden assets.

Sanborn Map company sold maps, but they also had an investment portfolio that dwarfed their market cap. So he had them sell it off. He did a lot of cigar butts like that. Back then, Buffett was pretty pushy. He would do whatever it took to acquire all the stock of companies and would sack the management teams and replace them with others. At one point an entire town in Dempster protested against him.

Then he met Charlie Munger and Munger got him to start focusing on acquiring good businesses that had franchise values. See's Candy is the best example. So he looked for companies with sustainable competitive advantages and high returns on invested capital. So he started to buy your good businesses run by great entrepreneurs with little actual control. The only thing he would ask is if they could not meet an internal hurdle for ROIC (return on invested capital) that they give excess capital for him to redeploy.

Now, if you look at what Buffett has been doing, he's continued to evolve a bit. He seems much more focused on buying utility-like businesses. MidAmerican and Burlington Northern exemplify this. They don't throw off cash that can be redeployed elsewhere like the previous Berkshire deals. At the same time though, they potentially can be around for the next 50 years and increase prices to make up for inflation.

These deals are probably going to continue. Buffett must realize that his 3 replacements wont be as good at allocating capital, so he will need to find businesses that are great but also utilize a lot of cash. That would reduce the burden on his CIO replacements.




The transition from bargain trader to long term investor had a lot to do with the magnitude of his war chest. You can ex: flip houses with time, skill, and a million dollars, but it's much harder to see a large ROI when flipping houses with time and a billion dollars. It’s all about maximizing ROI as your time becomes more limited than your capital.

PS: He once said, I can find plenty of people that can consistently turn 1 million$ into 2million$ in a year, I can't find people that can consistently turn 1 billion$ into 2 billion$ in a year.


Buffet describes the 'businesses with franchise value' as a company with a large moat - or brand value. That's why he owns large stakes in companies like Coca-Cola. They're not unique, but consumers are willing to pay a premium even though there are competitors that offer a similar product.


Yeah, I mean one of the reasons he purchased Coca-Cola was actually because of what Roberto Goizueta did when he came into the company. At the time Coke was #2 in supermarkets behind Pepsi.

Goizueta did a lot of great things. He separated out the bottler business and got them to focus on returns on invested capital with every investment they made. He made a ton of money for shareholders. Buffett has remarked that he held KO stock too long but now I believe he keeps it mainly to collect the dividends, his cost basis is low.


Coke is now wanting to reacquire the bottling business to keep the costs low. Last year Pepsi re-acquired its entire bottling business and runs it by itself.


Yeah, if you watch his comments on CNBC, he was a bit disappointed by that decision since it will consume more capital in the business. He prefers just owning the concentrate business.


Buffett is an insurance guy. Insurance companies give him free float to go buy 'great companies' (well - at least until the economy crapped out its own skeleton). It will be interesting to watch the stock when that old man passes away. I have tried numerous time to read "The Intelligent Investor" and man - I guess my ADD is just too much to do it.

He also has unprecedented access to financial data of companies he may be sniffing around - not the garbage you and I see in SEC documents. (although 10q documents are treasure chests of company info for research).


You can try reading Graham's "Security Analysis" instead. It's a much harder book--so it might keep your interest for longer.


"cigar butts"?




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