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Notes from a speech by Alice Schroeder at Darden Value Investing Conference 2008. This is so much better than her mass audience oriented book for insights on how Buffett invests.

-So much of Warren’s success has come from training himself into good habits. Aristotle said, “We are what we repeatedly do.” Excellence is not an act, but a habit.
-First habit of Buffett – hard work. What more can I do to get an edge on the other guy?
-Charlie Munger says, “The guy is a learning machine.” It does help to have a photographic memory, which he has.
-Horse Handicapping. First step is what is the odds that this business could be subject to any catastrophe risk that will make it fail? If there is any chance, he won’t go there.
-Figured out the one or two factors that can make a business succeed or fail. Then look at all the historical data, quarter by quarter, for every single plant and every competitor. Filled pages with this information. Rely totally on historical figures with no projections.
-What is the cat risk? You save yourself a lot of time and energy. Focused on efficiency. Being realistic about cat risk, don’t convince yourself otherwise later.
-Compounding. I want a 15% return on day one return-of-investment and compound growth from there using a huge margin of safety. Very simple thing. No DCF model.
-Doesn’t really care if the price goes up or down for the next year or two. He just knows at this price, odds are it will do well
-In 1999 he said it’s good idea to invest in the market when stock market’s value is 70-80% of GDP
-Inner Scorecard: The only person really qualified to advise you on what you can do is yourself. You know yourself better than anyone else does. You and you alone know how determined you are to make a success of any undertaking. And in the last analysis, about 90% of being successful in business is that indefinable thing which for lack of a better name we call guts.
-Follow your passion. Do what you really want to do. Don’t waste time with resume filling jobs. Don’t work for anybody that makes your stomach turn. You can’t get ahead that way. The odds are better for you to succeed if you love what you do.
-The purpose of margin of safety is to render forecasts unnecessary.

From her book:

The Buffett Method
-estimate an investment’s intrinsic value
-handicap its risk
-buy using margin of safety
-concentrate
-stay in circle of competence
-let it roll as compounding does the work

People who exploited [inefficiencies] them generally had a steady pulse and deep knowledge based on long study, and the willingness to put in full-time concentrated effort

Lots of news today on Warren Buffett buying American stocks for his personal portfolio from CNBC and this editorial he wrote for the New York Times. He has done this before in 1974, 1999, etc., where he tells people publicly in his witty way now is the time to buy or sell.

Buffett is almost always right, but let me clarify… in the slightly longer-term. He is usually a few month off from the exact top or bottom. For example, he went negative on the market in November 1999. The market topped out in March of 2000. He started selling his Petrochina (PTR) stake in mid-July of 2007. Petrochina rallied for a 3 more months another 66% from his initial sell and peaked on October 31, 2007.

His best call was October 1974, where he pretty much nailed the exact bottom in his an interview with Forbes. When asked about what he felt about the stock market he said, “Like an oversexed guy in a whorehouse,” he shot back. “This is the time to start investing.”

October 10th will go down as one of the most frantic days I’ve ever experienced. When the market opened and went straight down 698 points (Dow) in the first 8 minutes and then rallied back to positive by 10:08AM, you could hear the cheering roars of the NYSE trading floor on CNBC. That gave me goose bumps.

Then you had Bush come on TV to calm the nation; however as soon as he started speaking, the Dow plummeted again near the lows of the morning by 1:50PM. Near the end of the day there was another huge rally around 2:56-3:36PM to even higher highs up 322 points (1019 points from the low) for the day and then a selloff the rest of the day to close down 128 points.

“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side”

Comparing Paper Trading vs. Real Trading
“Are you a good shot?” “I can snap the stem of a wine glass at twenty paces” “That’s all well, but can you snap the stem of a wine glass while the wine glass is pointing a loaded pistol straight at your heart?”

“A man must believe in himself and his judgement if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip, I must sell those stocks on Smith’s tip. I am depending on him”

“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on”

“The more I made, the more I spent. This is the usual experience with most men. No, not necessarily with easy-money pickers, but with every human being who is not a slave of the hoarding instinct. Some men, like old Russell Sage, have the money-making and the money-hoarding instinct equally well developed, and of course they die disgustingly rich”

“If a stock doesn’t act right, don’t touch it; because being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit”

“The big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend”

“It was never thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

“Me who can both be right and sit tight are uncommon. I found it one of the hardest things to learn”

“He had not only the courage of his convictions but the intelligent patience to sit tight. Disregarding the big swing and trying to jump in and out was fatal to me”

“Without faith in his own judgement no man can go very far in this game. That is about all I have learned-to study general conditions, to take a position and stick to it”

“The big men of the Street are as prone to wishful thinkers as the politicians or the plain suckers. I myself can’t work that way. In a speculator such an attitude is fatal.”

“Sell down to the sleeping point (own so much cotton, can’t sleep thinking about it, wearing me out)”

“It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you determined it”

“Prices, like everything else, move along the line of least resistance”

“A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort”

“It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet”

“Of all the speculative blunders there are few greater than trying to average a losing game”

“Always sell what shows you a loss and keep what shows you a profit”

“He must fear that his loss may develop into a much bigger loss, and hope his profit may become a big profit”

“What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles.. he is after immediate profit. He cannot afford to wait.. he hugs the fallacy that he is merely taking a fifty-fifty chance.. particularly on purchases made at the height of the bull market just before a moderate reaction. It certainly is no way to trade”

“A great many smashes by brilliant men can be traced directly to the swelled head – an expensive disease everywhere to everybody, but particularly in Wall Street to a speculator”

“Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee”

“A trader.. must also know himself and provide against his own weaknesses”

“The game does not change and neither does human nature”

“A man does not swear eternal allegiance to either the bull or the bear side. His concern lies with being right”

“Another thing to bear in mind is this: Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally”

-bet with the market leader with sustainable competitive advantage
-believe very strongly that stocks go up because a company’s earnings go up
-simple approach. “Is the story improving?” or “which way are the earnings going” or are earnings estimates going up or down?
-own Apple and Google – great innovative companies with bright futures
-”I want to be more like Ken Heebner. He’s my hero. His performance is staggering. What he does very well is marry the discipline of owning just the 25 names with the idea of wanting to be the best performer. That leads him to the very best-performing companies. He has an incredible knack for finding the market’s true leadership.”
-”Valuation is always the bugaboo. But you can’t get great companies at bargain prices.”
-Top 10 holdings: Google, Berkshire Hathaway, Apple, Schlumberger, ExxonMobil, Genentech, EnCana, Procter & Gamble, Hewlett-Packard, Research in Motion

-thinks downturn will be “longer and deeper”. Won’t be better five months from now
-Freddie and Fannie in a practical sense “don’t have any net worth”. From standpoint of independent entity “game is over”
-OFHEO was setup by Congress in 1992. It’s sole job was to regulate Freddie and Fannie with 200 employees and annual budget of $65M a year [tax payers sure didn't get their money's worth]
-Bear Stearns had 750,000 derivative contracts on the books
-To protect against inflation, first invest in your own talents. Second own stocks that have products that don’t require much capital investment
-the wonderful thing about investments is your knowledge is cumulative
-he’s always interested in understanding the math of things and understanding as much as I can about all aspects of business
-last 10 years: first 5 years oil demand went up 4 million barrels a day. Next five years it went up 8 million barrels a day. That’s 12 million barrels a day of new demand. Current demand is 86 million barrels a day
-US is using 20 million barrels a day about a 1/4 of the world’s demand
-what he asks politicians is what do you believe in and will work for that a majority of their constituents oppose. Answers to that show what they really believe in
-Fed got real problems with inflation and commodity prices. He sees dramatic cost increases in July and margins are getting squeezed. Brick is natural gas. Carpet is oil
-”We are in an economy that is going to see significant inflation”
-Paul Volcker mentioned, “the problem with inflation is if it get ignited, it gets very hard to put out”
-”I don’t try to pick turns in any kind of industry in terms of buying stocks. I just like to buy them when I think they’re cheap relative to their long-term earnings power”

-Never play macho man with the market. Never over-trade relative to the equity in your account
-his first mentor has “steel hard emotional control”
-always liquidate half his position below new highs or lows
-after having 60-70% draw-down, he was so depressed he nearly quit. “Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?”
-he then first decided to learn discipline and money management. Become disciplined and business-like about trading
-”Now I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them”
-Be quicker and more defensive. Always think about losing money as opposed to making money. He always has a mental stop. If it hits that number, he is out no matter what
-”Risk control is the most important thing in trading” Stop out at near 10% monthly draw-down. He never wants to lose 10% in a month
-Try to picking turning points. Keep trying, but cut position size down if trading poorly (after successive losing trades)
-Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading
-If you have losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start
-The most important rule of trading is to play great defense, not great offense. Every day he has stop risk points for his positions, so he define his maximum drawdown. He spends the rest of the day enjoying positions that are going in his direction. If they go against him, he has a gameplan to get out
-Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead
-He wants to invest in things that allows him to get liquid “very quickly”
-His investment philosophy is “I don’t take a lot of risk, I look for opportunities with tremendously skewed reward-risk”
-Don’t ever let them get into your pocket – that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities
-You’ve got to look at good traders historically. If a trader can on average annually deliver two to three times their worst draw down, then that’s a very good track record, and I’d say that that’s what I try to do. If I thought that for the funds that I managed that 10% would be the worst that I would tolerate in a given year then hopefully I’d annualize two or three times that and that’s probably what I’ve done. Maybe a little below that in the ’90′s and a little above that in the ’80′s.
-The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what’s going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information.
-the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.

Take-aways: Discipline and risk management is 99% of trading. Don’t ever take substantial leverage or risk. Don’t be a hero. Wait for the fat pitches, don’t gamble, work hard, and have an unquenchable thirst for information/knowledge. Spend your day trying to make yourself happy and relaxed – get rid of losing positions and ride the winners.

Source: Various interviews found on the internet

Listen to Glenn Greenberg of Chieftain Capital give a lecture to Columbia Business School students on March 28th, 2006. He’s an investing legend.

Real Media Video Stream [You need a player that can play Real Media Videos]

Some basic learnings:

-You need an approach that over long-term will win and not utterly fail even during 100 year hurricane. If you have a strategy that can make explosive money, but blow up in any given year, it doesn’t matter. Buffett likes to say: 100% X 100% X 0% still equals 0%.
-Only one approach that makes sense to him: Buy good businesses, reasonably predictable, necessary businesses, don’t have high rate of change, figure out paying a under-valued price given the long-term prospects.
-Was an English major. Was a teacher during Vietnam War. Went to Columbia Business school. Then worked JP Morgan – 2 years in research as money “mis-manager”. 150 growth stocks in the portfolio. Left to work for family office, Central National, for 5 years. Learned how to look at companies and how to take them apart.
-Don’t trust other people’s research is a mistake. Best thing to learn is “to do your own work.”
-After 10 years in the business started Chieftain Capital with $40 million (about $26 from family and friends). Will never market again. Will never ask Wall Street to call them up with their investment ideas. Told clients we don’t have time to meet with you. Maybe meet once a year. Spend time “doing research.”
-Early on 100% invested. 3-4 ideas. Last 8 years, 30% in cash. Hedge-funds used get you 25-30% after fees. Today people invest 2/20 to get 8-10% after fees.
-Occasionally come across a business that was “wildly mis-priced.” Is it a great business at a cheap price?
-Chieftain owns 6-12 stocks. Normally fewer than 10 stocks. Focus on U.S. stocks.
-We don’t do relative valuations. Look for 14-15% rate of return. Buffett even looks at 13% EBIT return or 7-8Xs pre-tax (but he has low cost of capital due to insurance companies).
-Study company carefully, be confident in your analysis. Many of his stocks imploded after they bought it, but bought more lower and made more money.
-Huge fan of periodicals, read 4-5 newspapers a day, magazines, and trade magazines. Most information comes from reading and talking to smart people. However journalism standards have gotten worse, point of view has to be “punchy” and take an extreme stand.

I’ve read a ton of Buffett related books, interviews, annual reports, original partnership letters, etc. Here’s his strategy boiled down to the basics:

1. Do you understand the business? Stick to your “Circle of Competence”. If you don’t know what your “edge” is, you don’t have an “edge”.
2. Does it have “durable competitive advantage” or in other words “a moat”? Companies in this camp have a great brand, a franchise, high returns on equity and returns on invested capital, and pricing power. Buffett likes to ask if someone spent $1 billion on trying to build a competitor, would it make a “dent” on the business? If no, it has a good “moat”.
3. Do we like the people that run it? Honest and able management. Life is too short to deal with bad people.
4. Does it sell for a price that is attractive? He bought See’s Candies for 6Xs earnings. He bought Korean stocks a few years ago at 2Xs earnings. He bought Connoco Phillips at 6Xs earnings. He bought PetroChina at 5Xs earnings and a 10% dividend yield.

The above is his primary core strategy these days. In the past he did more micro-cap “cigar butt”, arbitrage, and activist type things.