CHAPTER 1 It’s Easy to Invest like Warren Buffett

1 CHAPTER 1It s Easy to Investlike Warren BuffettBuying shares of Berkshire Hathaway is the easiest way to investlike Warren Buffett . While the A shares cost around $70,000 apieceas of this writing, the B shares sell for only around $2,300 each roughly 1/30of the A shares. The B shares do have their disadvan-tages. For example, holders have less in the way of voting rights andaren t entitled to indicate where Berkshire charitable contributionsgo. (Berkshire is unusual in allowing shareholders to recommendhow Berkshire s charity money should be allocated.) And while youcan convert A shares into B, it doesn t work the other way to buy? Berkshire is nothing if not shareholder friendly,and Buffett has given this advice: Buy the A shares, if you can af-ford them, unless the B shares are trading cheaply.

2 In my opinion,mostof the time the demand for B will be such that it will trade atabout 1/30of the price of the A. However, from time to time, a differ-ent supply demand situation will prevail and the B will sell at somediscount. In my opinion, again, when the B is at a discount of morethan, say, 2 percent, it offers a better buy than A. When the two ofthem are at parity, however, anyone wishing to buy 30 or more Bshould consider buying A instead. 1 CCC-Boroson 1 (1-44) 9/20/01 10:52 AM Page 1An investor might dollar-cost-average into Berkshire s B shares us-ing a discount broker. So, for example, in order to build a $13,200 po-sition, he or she might buy two shares six times a year. Or, if thebuyer is less patient, two shares for three straight is also a good idea to check whether two leading newsletters,The Value Line Investment Survey and Standard & Poor s The Out-look, give the stock a decent rating at the time of purchase, and per-haps either wait a bit or buy energetically depending on their views.

3 (Hardly any other analysts cover Berkshire.) As of this writing, ValueLine rated Berkshire, at $70,000 a share, average; The Outlook whose Berkshire analyst, David Braverman, is probably the verybest above guide: Consider whether the stock is closer to its yearlyhigh or low. Buying Berkshire low is certainly appropriate for some-one intending to be a follower of Warren Buffett s value-oriented in-vestment Individual StocksAnother practical possibility for Buffett followers is to buy the pub-licly traded stocks that Berkshire owns like Coca-Cola, Gillette,H&R Block, and General Dynamics. (Berkshire is also the soleowner of various companies, like See s Candy and GEICO, the insur-ance company, but these companies are not publicly traded.)

4 Be-cause of Buffett s history of purchasing reasonably priced stocks,these stocks should still be worth danger, of course, is that Berkshire may have begun unloadingthose stocks, the way it began quietly bailing out of Disney in 2000,as you are just beginning to purchase them. Another danger is thatyour portfolio will be askew: You will have more exposure to certainstocks and industries than Berkshire itself has. As a result, yourportfolio might be a riskier version of can balance out your Buffett -like portfolio with stocks fromthe holdings of mutual funds that Invest roughly the way Buffettdoes, such as Sequoia, Tweedy, Browne Global Value and AmericanValue, Legg Mason Focus Trust (omitting from the last any technol-ogy stocks, which Buffett tends to avoid), Third Avenue Value, Clip-per, Longleaf Partners, Torray, and Vontobel Value.

5 You canexamine a list of these funds recent holdings either by going to theirweb sites or by consulting Morningstar Mutual Funds, a newsletterto which most large libraries subscribe. The list of holdings will be2IT S EASY TO Invest LIKE Warren BUFFETTCCC-Boroson 1 (1-44) 9/20/01 10:52 AM Page 2somewhat outdated, but, again, most of these value stocks shouldremain reasonably might also balance your portfolio by concentrating on stocksin industries outside the ones you already have covered in your Buf-fett-like portfolio, along with foreign stocks, which Buffett alsotends to avoid. For suggestions of foreign stocks to buy, check thosein the portfolio of Tweedy, Browne Global stocks, I would single out health-care stocks becauseBerkshire has tended to ignore this entire industry, perhaps becausethe stocks have almost always been high-priced or because they areoutside Buffett s circle of competence.

6 You can also balance out your Buffett -like portfolio with stockschosen from the list compiled at by RobertHagstrom. He derives this list using his criteria for picking Buffett -type stocks, Hagstrom being an authority on Buffett s strategy.(See CHAPTER 20.)For more on Sequoia, see CHAPTER 21; for Legg Mason Value Trust, CHAPTER 22; for Tweedy, Browne, CHAPTER 24; for Third AvenueValue, CHAPTER 25; for Torray, CHAPTER 27; for Vontobel, CHAPTER 28;and for Clipper, CHAPTER Buffett -like Mutual FundsInstead of buying individual stocks, you could buy one or more Buf-fett-like mutual funds in effect, having someone else buy Buffett -type stocks for you. Even granting that Buffett is in a class byhimself, cheap imitations cheap in the sense of your being able tobuy many shares for a low minimum aren t to be sneezed at.

7 Thesefunds, in some cases, do not deliberately emulate Buffett s example, Third Avenue Value, under Martin J. Whitman, doesn , to a certain extent, do notably, Sequoia, Tweedy, BrowneBUYING Buffett -LIKE MUTUAL FUNDS3 Getting Into Closed FundsWith a fund closed to new investors, you can ask a current shareholder to signover just one share to you and use that one share to obtain more shares onyour own. Unfortunately, owners of Sequoia shares have, in my experience,never evinced any interest in selling 1 (1-44) 9/20/01 10:52 AM Page 3 American Value, Legg Mason Focus Trust, Torray, Longleaf Partners,and Vontobel fund most resembles Berkshire? No doubt Sequoia,which was started by a Columbia Business School friend of Buf-fett s and which invests a big chunk of its assets in Berkshire.

8 (Un-fortunately, Sequoia is closed to new investors.) Table showsSequoia s recent suffered a dismal 1999, along with Berkshire itself andwith many other value funds. But its long-term record is the past 10 years it has outperformed the S&P 500 by per-centage points, returning percent a of the other funds most resembles Sequoia? Buffett hasreportedly said that the Clipper Fund is close to his lesser-known fund that has much in common with Berkshire isVontobel Value, run by Edwin Walczak. He readily acknowl-edges Buffett s influence; his portfolio recently had a 5 percent expo-sure to Berkshire, its fifth largest position. Other stocks in Walczak sportfolio that have overlapped with Berkshire: Mercury General,Gannett, McDonald s, Gillette, Wells Fargo.

9 The fund is classified byMorningstar as mid-cap possible way to search for other funds that imitate Buffett s4IT S EASY TO Invest LIKE Warren BUFFETTTABLE s Holdings (3/31/00)STOCK% OF ASSETSB erkshire Hathaway Treasury note Third Treasury note Commerce Source:MorningstarCCC-Boroson 1 (1-44) 9/20/01 10:52 AM Page 4strategy is to compare their R-squareds, numbers indicating howclosely a fund follows an might search for a fund with an R-squared close to Sequoia s.(If A is equal to B and B is equal to C, then A is equal to C.) The Van-guard Index 500, which mirrors the Standard & Poor s 500 Stock In-dex, has an R-squared of 100. The higher the R-squared, the moreclosely a fund mirrors an index. (Table lists the R-squareds ofsome Buffett -like funds.)

10 BUYING Buffett -LIKE MUTUAL FUNDS5 TABLE of Buffett -like FundsFUNDR-SQUAREDS equoia37 Tweedy, Browne American Value70 Legg Mason Focus Trust79 Torray71 Third Avenue Value52 Clipper63 Longleaf Partners49 Vontobel Value27 Data Source:MorningstarUnderstanding R-SquaredR-squared measures how much of a mutual fund s performance is explained byits similarity to an entire market. If a fund owns large-company stocks, bothgrowth and value, and they are well diversified by industry, it should have ahigh R-squared compared to the Standard & Poor s 500 Stock Index. FidelityDisciplined Equity has an R-squared of 93. A fund that deliberately attempts toduplicate the Standard & Poor s 500 might have an R-squared of 99. (TheVanguard Index 500 Fund, which mirrors the S&P 500, actually has an Rsquared of 100.)