What helps Buffett to get his investment idea?

Berkshire Hathaway Acquisition Criteria

In Berkshire Hathaway’s 2003 shareholder meeting, Buffett unveiled how he get his investment idea.

What helps

Reading


Buffett said: “He reads a lot and knowledge accumulates – reads a lot of 10-Ks, earnings conference call.”

In addition to Chevron (ticker: CVX), Buffett only increased his stake in Occidental Petroleum (ticker: OXY) aggressively in the first quarter of this year, and his shareholding ratio has been raised to 15%. Accurately grasp the time before the big rise, and see the opportunity to increase.

When Buffett talked about his investment in Occidental Petroleum at this year’s shareholders meeting, he said that Occidental Petroleum’s annual report was very good, so he decided to invest in it. He claimed to have acquired 14% of the latter’s outstanding shares, valued at more than $7 billion, in the first two weeks of March, leaving only 60% of Occidental’s shares in circulation. He also pointed out that when index funds that own a large stake in Occidental are included, the stake is actually larger (about 20%).

Buffett told CNBC he decided the weekend before to start buying after reading a transcript of Occidental’s Feb. 25 earnings conference call. “I read every word, and said this is exactly what I would be doing. She’s [CEO Vicki Hollub] running the company the right way,” Buffett told CNBC.

Business journals

Both Buffett and Munger said : “They read business journals, newspapers.” Munger said: “Wall Street Journal is indispensable.”

Buffett has said before that he (as a young man) used to read the paper S&P Ratings Stock Guide, Value Line, Moody’s (ticker: MCO) Business Guide; he also said that he now uses an iPad to read business news online. And because Berkshire’s main business is insurance, he also reads journals in the insurance industry, and suggested that the best way to understand an industry or become an expert in that industry is to read the top industry journals in that field.

Things not help

Company visiting

Buffet’s way

Back in his twenties, he visited companies but today relies on almost exclusively publicly available info. He said: “He does not find it particularly useful to talk to management – they aren’t necessarily the best info source.”

When they buy business, they’ll check out management but “don’t give a hoot about management projections”(meaning don’t fully trust the company’s management)

Wall Street perception

This point is completely different from the views of most investors, because Wall Street generally believes that face-to-face communication with corporate management is a prerequisite for substantial investment in listed companies.

Peter Lynch is an outlier

As far as the more famous investment gurus are concerned; Peter Lynch is one of the very few well-known investors who is diligent in visiting corporate management. He once mentioned that he has visited hundred of listed companies, and his energy and seriousness are few. Peter Lynch, in fact, is a very peculiar investment master in many ways, and this is one of them.

The other is that when he was a fund manager, his investment was extremely diversified, which was different from most investment masters, but this was because of his work. However, he reminded retail investors to concentrate rather than diversify their investments. I discussed this matter in the book “The Rules of Super Growth Stocks Investing“, and this part can also be found in my post “Why long-term investment is better?.

Influenced by Graham

It is also worth mentioning that Buffett’s mentor Graham is a well-known investor who advocates that there is no need to visit the company’s management. The main reason is that he only reads financial reports to judge investment opportunities, and basically he will not hold a company’s stock for too long───this investment method is called the cigar butt investment method (see my article for details “Problems with Cigar Butt Investment). Buffett also used this method to invest in the early days, so he may also be partially influenced by Graham.

investment idea
Buffett

Analyst reports

Buffett never read analysts reports. Buffett said “they’ll read’em if funny papers aren’t available.”

He once complained that people he didn’t know often sent him some analyst reports and recommended certain stocks, which really troubled him.

When a media reporter asked him how to obtain necessary information about companies, he answered very briefly: “We read the annual report of listed companies, that’s all.

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