A Smorgasbord of Investment Tips From Buffett

Now it is the new year and color trends for 2011 have begun to emerge. Believe it or not, but many of the sweaters we wear this year, napkins and tablecloths we buy, and pillows we place on couches will surprisingly be the same color. Thanks to the "color of the year," one color and a few color palettes will stand out from the crowd and become the colors that will fill our closets, Homes and lives without most of us even noticing. Some may think it's a marketing ploy, but colors really do become a part of the times. So, when you look back 10 years from now, the color of the year will make "sense."

Last year the color of the year was turquoise, a color that symbolizes healing and compassion. This color is inspired by water and sky and represents an escape to many people. So what could possibly be next?
Warren Buffett is probably the most widely read, but most ignored, business leader in the world.

Buffett's annual letter to his Berkshire Hathaway (BRK) shareholders is always widely anticipated by investors for its Investment insights, humour and market views. This year's effort doesn't disappoint.

What continues to amaze many of we 'Buffett-watchers' is how rarely he is emulated. Here is the world's second richest person with a nest-egg of US$37, who wins plaudits from investors all around the world for not only his returns and Investment approach, but also his open and frank communication with his shareholders, and yet only a daring few seem to want to try and follow in his footsteps.

And just by way of introduction, Buffett and partner Charlie Munger have delivered a return of 22% a year to BRK shareholders for 40 years - in other words, he has turned a $10,000 Investment in Berkshire in 1965 into $80 million today. Nobody has come close to matching this return over 40 years.

When picking stocks Buffett and Munger prefer predictability over growth and avoid businesses whose future they can't evaluate. "It required no brilliance to foresee the fabulous growth ahead of sectors like cars in 1910, aircraft in 1930 and TVs in 1950. But that future also included immense competition which would decimate almost all companies in those industries".

Growth is not enough, they look for stocks whose profit picture for decades to come is reasonable predictable. They like predictable profit margins and returns on capital.

They also believe it is very important to keep a cash buffer. "We will never become dependent on the kindness of strangers. Too-big-too-fail is not a fallback position at Berkshire. We will always keep ample liquidity. Our $20 billion of cash is earning a pittance at present. But we sleep well".

The housing market received some attention in the letter, no doubt because of Berkshire's ownership of home builder, Clayton Homes. "A few years back people thought it was good news that we had two million housing starts a year, but household formation - the demand side - only amounted to about 1.2 million. The result was a glut of houses and falling prices.

There are three ways to cure this overhang: (1) blow up a lot of houses, (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number below the rate of household formation. Our country has wisely selected the third option".

At the height of the financial crisis, Buffett and Munger made big Investments in both shares and bonds, but he rues not doing more. "I should have done far more (buying). Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble".

CEOs and boards that were caught out by the financial crisis got a serve from Buffett. "In my view a board of directors is derelict if it does not insist that its CEO bear full responsibility for risk control. If he's incapable of handling the job, he should look for other employment".

He goes on to say that shareholders have borne the burden of the losses from the financial crisis. "CEOs and directors of the failed companies have largely gone unscathed. Their fortunes may have diminished by the disasters they oversaw, but they still live in grand style. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well".

He also delivered a cutting line on the risks of taking advice about acquisitions from Investment bankers - "Don't ask the barber whether you need a haircut". Buffett's point is that the potential fees may cloud the independence of their advice.

Last year Buffett completed the largest purchase in Berkshire's history with the $44 billion acquisition of the Burlington Northern Santa Fe Railroad. At the time he stated it was indicative of his belief in the long-term outlook for the US economy. He also quipped that "this is all happening because my father didn't buy me a train set as a kid".

Cam Watson is the Chief Investment Officer for ABN AMRO Craigs, which is one of New Zealand's largest independent Investment firms.

He has over 18 years experience in the financial services industry. For eleven years Cam has been employed with ABN AMRO Craigs, becoming Chief Investment Officer in 2007. Previously he has held Business Development, Investment Management, and Client Services roles at Tower, Southpac, Prudential and Tower Trust Services. This experience in a range of senior roles for major companies has given Cam a wealth of knowledge to draw upon and made him one of New Zealand's trusted Investment experts.

Cam holds a Bachelor of Arts Degree and a New Zealand Stock Exchange (NZX) Diploma. He has been a member of the NZX since 2001 and has a current Sharebroker Licence. As with all ABN Amro Craigs Investment Advisors, Cam is required to maintain continuous internal performance modules, covering topics such as industry and regulatory developments. He also has the support and resources of ABN AMRO Craigs global research network. http://www.abnamrocraigs.com/
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