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Berkshire Hathaway
Re: Buffett's new analytical game?

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By neuroberks
July 12, 2004

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My belief is that Buffett will not do anything differently. Since he has more money to spend, and since Berkshire is larger, he will be able to look at larger acquisitions, and be less willing to make the smaller ones. But, I don't believe that he will change his investment criteria. If he can't find anything that fits his requirements, he won't do anything at all.

I agree with Elias 100% on this. On looking back the career of Buffett, one is struck by the consistency and repeating patterns of what he does in investing. Even in earlier Buffett partnership years in 1950's, Buffett was always interested in buying or controlling a whole company, not just stocks. He always got into 'work out', 'arbitrage' or 'special situations' when the stock market became too expensive. He always was an opportunist in capital allocation, without any set rules. The current cash position of $40 billion (slightly less than 50% of book value) seems high, but in relative terms, is less than the level Buffett maintained in 1985 when BRK's cash level was 54% of the book value.

Buffett did not become the best investor in the history by changing his most fundamental approach in investing just because of some rattling geopolitical events. Rational capital allocation and concentrating on business in bottom up approach, ignoring macroeconomic forecast as much as possible have been the hallmarks of his approach.

I emphasize 'rational' here, because that is the antithesis to passion or emotion, often aroused by current affairs, especially politics. Buffett always has had a very strong view on politics on his own, quite different from the majority of posters here as I understand, but has not let it affect his investment decisions throughout his career. When people thought the nation was unraveling in 1970's --- riots in many cities, stagflation and the worst bear market in decades, under constant threat of nuclear war with the "evil empire' --- Buffett was happily buying up companies and stocks. In my view, it is the result of typical amnesia to think that the current problems facing the U.S. are any worse than what the U.S. faced in 1970's. But then, that tendency of putting an exaggerated importance on what one is facing immediately is another ingrained human condition, imprinted through the evolution.

People seem to put too much importance in Buffett's recent moves in foreign exchange, thinking Buffett is going into macroeconomic style, a la George Soros, in a big way. Not so, in my opinion. Why not consider it as a cash management strategy? Why should BRK limit its $40 billion cash only in USD, when most reasonable people would agree that weakening of USD is unavoidable, at least for an intermediate future? What is the downside in allocating some part of cash in non-USD cash position now, considering the relatively small band of movement in the exchange rates anyway, especially without leverage?

A few macroeconomic concerns have been very important for Buffett from his early years --- such as the need for protection from a run away inflation. He always has been a keen observer of national political scenes, often participating in active discussion himself. But it is silly to think that Buffett would change his basic way of investing, which has worked so well through even worse times in nation's history, now because some changes in geopolitical situations. He will continue to try to find good businesses, part or whole, well priced. The only difference from the old time might be that Buffett will find more of these businesses outside of the U.S. as the relative proportion of the U.S. economic activity to the world will continue to diminish. Again, this is nothing to despair about, as the dominance of the U.S economic might for last half century was a historical aberration, mostly related to the two great wars ravaging the world, save the U.S.

There always are some good business opportunities, even in the worst of times. One can sell ropes at a profit when there are a lot of hangings going on, for an extreme example. If I were a young man who is interested in compounding money on a consistent basis, I would spend most of time in thinking about business opportunities, dispassionately, instead of letting myself too passionate about politics or develop an alarmist view of macroeconomics. That is why I don't give much credence to those people who keep posting politics related posts on this board, as most of us are primarily interested in compounding our wealth --- at least in the context of this board.


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