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The Margin-of-safety principle


Another leading prudential legacy from Graham is his margin of safety principle. This principle holds that one should not make an investment in a security unless there is a sufficient basis for believing that the price being paid is substantially lower than the value being delivered.


Buffett follows this principle devotedly, noting that Graham had said that if forced to distill the secret of sound investment into three words, they would be "margin of safety".


Over 40 years after first reading that, Buffett still thinks those are the right words. While modern finance theory enthusiasts cite market efficiency to deny there is a difference between price (what you pay) and value (what you get), Buffett and Graham regard it as all the difference in the world.



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In reply to: Techno on Wednesday 06/07/05 04:48pm

Hi Techno


I take it you're a fan of Warren Buffet http://www.sharescene.com/html/emoticons/biggrin.gif


I'm just about to start reading "the winning investment habits of Warren buffet and George Soros" (written by Mark Tier).


I'll report back in a week or two http://www.sharescene.com/html/emoticons/wink.gif



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QUOTE (texas4qld @ Wednesday 06/07/05 06:00pm)

Hello texas,


Yes. I bought that book upon its release last year and read it promptly.


An excellent book. Highly recommended.


Watch for the caption that explains how the university students of Ben Graham paid their way through university from the capital gains from Graham's case studies presented in class. The students rushed off to place buy orders once the class was over.


Graham saw Buffett as his top student.


Wish I had a university lecturer of that calibre during my time, instead of ones that taught a lot of nonsense about the efficient market hypothesis and random walk theory. http://www.sharescene.com/html/emoticons/biggrin.gif

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May 24 (Bloomberg) -- Billionaire Warren Buffett's utility company agreed to buy PacifiCorp from Scottish Power Plc for $5.1 billion in cash, gaining low-cost generators in the western U.S.


``PacifiCorp is a business that may not fit the profile of Scottish Power, but it fits our profile,'' Buffett said today on a conference call with reporters. ``Our favorite holding is one that is forever. Utility assets fit the bill.''


The purchase is the biggest by Buffett since his Berkshire Hathaway Inc. bought General Re Corp. in 1998. Buffett on April 30 said he's looking for ways to invest Berkshire's $44 billion in cash. The Berkshire utility company, MidAmerican Energy Holdings Co., already owns the Kern River pipeline, which carries natural gas to California.


The acquisition of hydroelectric and coal generation that can be sold in California shows that Buffett wants ``to be long supplies of energy in a state that looks to be short,'' said Nathan Judge, a utility analyst at Atlantic Equities in London. ``PacifiCorp is one of the lowest-cost producers of electricity in the country.''


Berkshire owns 83.4 percent of MidAmerican and has 9.9 percent of the voting control. The structure, set up when a Berkshire-led group bought MidAmerican in 2000, was a way to comply with the Public Utility Holding Company Act, a Depression- era law that limits ownership of utilities by non-utility companies.


Berkshire has stakes in such businesses as Gillette Co., the world's largest razor maker, and Procter & Gamble Co.


Debt Assumption


MidAmerican, based in Des Moines, Iowa, will assume $4.3 billion in debt, bringing the value of its purchase of Portland, Oregon-based PacifiCorp to about $9.4 billion. The company will gain 1.6 million power customers in six western U.S. states, about doubling its existing power and gas utility business.


The acquisition will increase MidAmerican's power-generating capacity by 78 percent to 16,000 megawatts, enough electricity for 12.8 million average U.S. homes. Most of that output will come from coal-fueled plants, which produce power at less than half the cost of gas-fueled generation.


Glasgow-based Scottish Power Plc, whose 1999 purchase of PacifiCorp for $12.2 billion marked the first acquisition of a U.S. utility by a foreign company, said it will record costs of 927 million pounds ($1.7 billion) because the unit was valued at more on its books than Buffett is paying.


Classic Buffett


``I think it's kind of a classic case of Buffett expanding in an area he understands,'' said Donald Yacktman, who oversees $1.1 billion at Yacktman Asset Management in Buffalo Grove, Illinois. ``He's paying less than the Scottish company paid.''


PacifiCorp is building two power stations in Utah, where rising population is boosting power demand by 4 percent a year. The company, which contributes almost half of Scottish Power's profit, has customers in Oregon, Washington, Utah, Idaho, Wyoming and California.


``If we run it well we can deploy significant amounts of capital in the long term and earn a reasonable rate of return,'' MidAmerican Chief Executive David Sokol said in a telephone interview.


MidAmerican plans to invest $1 billion a year over the next several years to expand and upgrade PacifiCorp's operations, Sokol said.


Buffett's Edge


``In Sokol you have one of the best operators of power companies,'' said James Armstrong, who helps manage about $450 million, including shares of Berkshire, at Henry H. Armstrong Associates in Pittsburgh. ``Then you have a parent, Berkshire, that is one of the last AAA-rated companies on earth that can supply virtually any amount of capital.''


Class A shares of Berkshire, based in Omaha, Nebraska, rose 2.4 percent to $85,500 in New York Stock Exchange composite trading. Scottish Power shares climbed 6.3 percent to 469.75 pence in London after the company said it plans to return $4.5 billion from the PacifiCorp sale to shareholders.


Scottish Power, the U.K.'s fifth-biggest energy provider, hasn't decided whether to return the money to investors in a share buyback or a special dividend, Chief Executive Ian Russell, 52, said in an interview. The sale may take a year to complete, he said.


Scottish Power's stock has dropped 33 percent since the company announced its purchase of PacifiCorp in December 1998. Shares of Scottish & Southern Energy Plc, the U.K.'s fourth- largest energy supplier, rose 30 percent in the same period.


Failed Investment


``PacifiCorp has not been a successful acquisition, both operationally and financially,'' James Sparrow, an analyst with Royal Bank of Scotland, said in a note to investors.


The PacifiCorp deal comes amid a wave of U.S. utility acquisitions. Duke Energy Corp. on May 9 said it agreed to buy Cinergy Corp. for about $9 billion. Exelon Corp. agreed in December to buy Public Service Enterprise Group Inc. for $12.8 billion, the largest U.S. utility acquisition on record.


The Public Utility Holding Company Act, which limits Berkshire's voting control of MidAmerican, also may complicate the purchase of PacifiCorp. The law requires utility companies to operate in a single region.


While definition of a region for purposes of the law has been subject to debate, a combined MidAmerican and PacifiCorp would probably fail the test, said Scott Hempling, a lawyer in Silver Spring, Maryland, who represents state utility commissioners. ``I can't imagine they have lawyers telling them this will pass.''


Regulatory Hurdle


This month, an administrative law judge at the U.S. Securities and Exchange Commission said American Electric Power Co.'s 2000 acquisition of Dallas-based Central South West Corp. failed to meet some requirements of the law. Repeal of the act was included in energy legislation the House approved April 22. The Senate energy committee is considering repeal.


MidAmerican may be betting on repeal of the holding company act, according to Christine Tezak, utility analyst with Stanford Washington Research Group. ``Otherwise, the plan to acquire Scottish Power's PacifiCorp would be very hard pressed to clear'' the single-region test and other requirements, Tezak said in a note to clients.


MidAmerican's Sokol said the acquisition meets the single- region test because the companies get fuel for their power plants from the same places. Both use coal from Wyoming's Powder River Basin and natural gas from the Rocky Mountains, he said.


``I think we will not have a problem getting through those regulatory issues at all,'' said Sokol, who discussed the proposed merger with officials from the SEC and Federal Energy Regulatory Commission.


Buffett, 74, has become the world's second-richest man, according to Forbes magazine, by purchasing out-of-favor stocks and companies. About 20,000 shareholders and admirers attended Berkshire's annual meeting April 30 to hear Buffett and Vice Chairman Charles Munger talk about their investing philosophy.



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  • 1 month later...

In reply to: Techno on Thursday 07/07/05 11:52am


Techno, maybe u should write a book about WB.hehe

I've just finished reading Buffettology by Mary Buffet. And I'm trying to analyse some companies using some of WB's methods, however i find it difficult to atain historical information about a company like for eg the EPS for BHP in 1995 or the return on Equity. Do you guys have any free sources that can provide me with that sort of information?




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  • 1 month later...

Just $1 to buy some of Buffett's midas touch




AUSTRALIANS will be able to buy into U.S. investor marvel Warren Buffett's investment company through a company seeking to list on the Australian Stock Exchange.


Shares in his U.S.-listed Berkshire Hathaway Inc trade at $US84,000 each, but the new route in for Australians is ASX-aspirant Global Masters Fund.


Its $1 stapled shares will hold 80 per cent of their assets in Berkshire Hathaway Class A Stock, with the balance in cash and global bond funds.


Berkshire Hathaway has grown at a compound annual rate of 22 per cent since 1965.


A $US10 investment then would be worth $US50,000 now.


Global Masters managing director George Birch said yesterday "for Australian investors who want to have a dabble offshore, this is ideal because it's a mixture of currencies".


Sixty million stapled shares will be offered at $1 each, with unstapling in late 2006 and the shares and options then traded separately until late 2007.


A minimum investment of $5000 is required, with the stapled shares expected to list on the ASX on December 16.





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  • 4 months later...

LONDON (Dow Jones)--Billionaire investment guru Warren Buffett blasted the global derivatives industry Sunday after unconfirmed reports HSBC Holdings PLC lost $500 million in a disastrous interest-rate trade, the Times of London reports Monday.

ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“The number and value of derivatives contracts outstanding in the world continues to mushroom and is now a multiple of what existed in 1998, the last time financial chaos erupted,ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ the report cited Buffett as saying in his company Berkshire HathawayÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s annual report.

Buffett likened himself to a canary in a coal mine after admitting he had lost $404 million trying to extricate himself from derivatives deals, the report says. Referring to the difficulties of unwinding contracts inherited when his company acquired General reÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s derivatives operation six years ago, Buffett said ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“the blood has kept flowingÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ since then.

Buffett once likened derivatives to ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“financial weapons of mass destruction.ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ


Newspaper Web site: http://www.timesonline.co.uk



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  • 2 months later...

The good news is that Warren is feeling very confident about prospects of the share market and is looking to reduce Berkshire cash reserves, lots of rumours about companies on his buy list.


WOW you have to admire a company whose earnings are...

$1,501 per share this year... Last year it was only $900 per share!!!



Wouldn't mind getting that dividend cheque. http://www.sharescene.com/html/emoticons/laughingsmiley.gif

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