Tuesday, April 24, 2018

The Chinese Car Invasion Is Coming

On a bright spring day in Amsterdam, car buffs stepped inside a blacked-out warehouse to nibble on lamb skewers and sip rhubarb cocktails courtesy of Lynk & Co., which was showing off its new hybrid SUV.
What seemed like just another launch of a new vehicle was actually something more: the coming-out party for China’s globally ambitious auto industry. For the first time, a Chinese-branded car will be made in Western Europe for sale there, with the ultimate goal of landing in U.S. showrooms.
That’s the master plan of billionaire Li Shufu, who has catapulted from founding Geely Group as a refrigerator maker in the 1980s to owning Volvo Cars, British sports carmaker Lotus, London Black Cabs and the largest stake in Daimler AG—the inventor of the automobile. Li is spearheading China’s aspirations to wedge itself among the big three of the global car industry—the U.S., Germany and Japan—so they become the Big Four.
“I want the whole world to hear the cacophony generated by Geely and other made-in-China cars,” Li told Bloomberg News. “Geely’s dream is to become a globalized company. To do that, we must get out of the country.”
He’s not alone: At least four Chinese carmakers and three Chinese-owned startups—SF Motors Inc., NIO and Byton—plan to sell cars in the U.S. starting next year. At the same time, Warren Buffett-backed BYD Co. is building electric buses in California; Baidu Inc. is partnering with Microsoft Corp.TomTom NV and Nvidia Corp. on a self-driving platform; and Beijing-based TuSimple Inc. is testing autonomous-driving big rigs in Arizona.
The industry is set for more upheaval as China unravels a two-decade policy that capped foreign ownership of carmaking ventures at 50 percent. The change may energize companies such as Volkswagen AG and Ford Motor Co. to seek a bigger piece of the world’s largest car market and allow Tesla Inc. to set up a fully owned unit. Carmakers may get better visibility of their futures, and those Chinese companies that fear losing sales at home may sense a greater impetus to go abroad.
“They are in a better position now than they ever have been,” Anna-Marie Baisden, head of autos research in London with BMI Research, said of Chinese carmakers. “They’ve had so much time working with international manufacturers and have become a lot more mature.”
We’ve seen this movie before from China—in the smartphone industry. The nation used the shift in technology from basic flip phones to hand-sized computers to dominate the manufacturing industry, trouncing then-dominant makers from Finland, Sweden, the U.S., Japan and Germany.
Last year, three of the top five smartphone handset makers in the world were Chinese, according to Gartner Inc.
Yet the sequel may take longer to become a hit, given the brand loyalty that has existed since Henry Ford debuted the Model T in 1908. How will Chinese automakers convince Midwesterners to give up their Ford F-150 pickups or Tokyo residents to switch from their Toyotas?
“Chinese carmakers intend to come over, but what need will they fill?” said Doug Betts, senior vice president of global automotive practice at J.D. Power. “What is the reason to buy their cars?”
Chinese cars probably would compete more directly with Japanese and Korean models, said Bob Lutz, the retired vice chairman of GM. American consumers mostly cross-shop Asian brands.
“If they start coming in, they won’t be any more competent than Korean and Japanese cars,” Lutz said. “They would probably take share from other Asian brands because the vehicles will be more Asian in character. They’re not going to get much market share.”
And then there’s President Donald Trump. Trade tensions between the U.S. and China are simmering as both nations move to slap tariffs on each other’s products. This month, China said it would levy an additional 25 percent levy on about $50 billion of U.S. imports, including automobiles and aircraft. The move matched the scale of proposed U.S. tariffs, with Trump threatening an escalation.
That’s not to say the road is impassable. A few decades ago, South Korea’s Hyundai Motor Group was knocked for fragile engines and rust-sensitive body panels. Now it’s one of the five biggest manufacturers in the world, selling about 1.25 million cars in the U.S. last year, according to Bloomberg Intelligence. The group also has factories in Alabama and Georgia.
“Competitors emerging from China must be taken seriously,” said Matthias Mueller, former chief executive officer of Volkswagen, Europe’s biggest carmaker. “I visited China for the first time in 1989, and the development that has happened there since then is just impressive.”
The creeping global influence of China’s industry isn’t limited to getting their wheels on U.S. and European roads.
Equally important, the Chinese are getting under the hoods of foreign brands by buying up parts suppliers, making batteries for the world’s EV fleet and corralling supplies of the metals that give those batteries life.
Automakers such as Geely, Chery Automobile Co. and BYD started talking a decade ago about cracking the U.S. auto market with an array of low-cost passenger vehicles. Those efforts stalled, so the industry built a global presence through acquisitions.
Chinese companies have announced at least $31 billion in overseas deals during the past five years, buying stakes in carmakers and parts producers, according to data compiled by Bloomberg.
The most prolific buyer is Li, who spent almost $13 billion on stakes in Daimler and truckmaker Volvo. Tencent Holdings Ltd., Asia’s biggest internet company, paid about $1.8 billion for 5 percent of Tesla.
As software and electronics become just as critical to a car as the engine, China is ensuring it doesn’t lag behind in that market, either. Baidu, owner of the nation’s biggest search engine, announced a $1.5 billion Apollo Fund to invest in 100 autonomous-driving projects during the next three years.
“We have secured a chance to compete in the U.S. market of self-driving cars through those partnerships,” Li Zhenyu, a vice president overseeing Baidu’s intelligent-driving unit, told Bloomberg News. “Everyone has a good chance to win if it has good development plans.”
Baidu and Tencent are among the Chinese corporations racing Alphabet Inc.’s Waymo, Uber Technologies Inc. and the major automakers to develop autonomous driving, with an aim for mass adoption by 2021.
The government’s aspiration to deploy 30 million autonomous vehicles within a decade is seeding a fledgling chip industry, with startups like Horizon Robotics Inc. emerging to build the brains behind those wheels.
Then there’s Contemporary Amperex Technology Ltd., the maker of electric-vehicle batteries that’s planning a $1.3 billion factory with enough capacity to surpass the output of Tesla and dwarf the suppliers for GM, Nissan and Audi.
The Ningde-based company plans to raise 13.1 billion yuan as soon as this year by selling a 10 percent stake, at a valuation of about $20 billion. The bulk of the new funds would pay for a manufacturing plant that would make CATL the world’s biggest maker of Lithium-ion batteries.
CATL already supplies Volkswagen and owns 22 percent of Finland’s Valmet Automotive Oy, a contract manufacturer for Daimler’s Mercedes-Benz.
To juice those batteries, Chinese companies are leading the way in securing necessary raw materials like cobalt and lithium. Chinese companies make about 60 percent of the world’s refined cobalt, according to trading firm Darton Commodities Ltd.
China Molybdenum Co. is the world’s second-biggest cobalt miner after Glencore Plc.The company, with a market value of more than $24 billion, became a major force in battery metal in 2016 after buying control of the cobalt-rich Tenke Fungurume mine in the Democratic Republic of Congo.
Glencore said in March it agreed to sell about a third of its output during the next three years to GEM Co., a Chinese supplier of battery chemicals.
“China has made no secret of its ambition to have a really big and powerful auto industry,” said Michael Dunne, president of consulting firm Dunne Automotive Ltd. in Hong Kong. “China does intend to lead and dominate the electric-vehicle industry.”
The Chinese government sees EVs as its best chance to seize global leadership in an emerging powertrain technology. Cleaning the notoriously smoggy air and reducing a dependency on foreign petroleum are bonuses.
China, already the world’s biggest vehicle market, overtook the U.S. as No. 1 for EVs in 2015. This week’s Beijing auto show will feature 174 EV models, with 124 of them developed 
Western companies dominated for almost a century because they refined the internal-combustion engine. The electric motor threatens to erase that disadvantage, said Hu Xingdou, an economics professor at the Beijing Institute of Technology.
“NEVs can help China to become a global leader in the auto industry,” Hu said. “China and the rest of the world can now start from the same starting line.”
First in the blocks is Li, a 54-year-old former photographer who started his career with 2,000 yuan from his father and now has a net worth estimated at about $12 billion, according to the Bloomberg Billionaires Index.
Though Chinese-branded passenger cars are sold throughout Southeast Asia and Africa, none have made it to the U.S. or Europe. Li first promised at the 2006 Detroit auto show that he would crack the U.S. market within two years with Geely’s Free Cruiser compact.
That didn’t happen, so he came up with what he considers a better method: make Lynk’s new SUV—called the 02—in Belgium. The car will be available from the first half of 2020 in Europe, and then Li plans to hopscotch across the ocean.
“This is the next step,” said Mike Jackson, chief executive officer of AutoNation Inc., the largest U.S. auto-dealer group. “And it’s a doable step.”s on Track for Market in 2019, Co-Founder Says

resident Xi Jinping showed his determination to rewrite the rules of the automotive industry during a 2014 trip to Shanghai. “Developing new-energy vehicles is the only way for China to move from a big automobile country to a powerful automobile hub,” he said when visiting SAIC Motor Corp., a Shanghai government-owned company that partners with GM and Volkswagen in China.That set off a chain reaction. SAIC, the country’s largest automaker by ut sales, invested more than 20 billion yuan in new-energy vehicles, or NEVs, which include electric cars, plug-in hybrids and fuel-cell vehicle

Electric Buses Are Hurting the Oil Industry

Electric buses were seen as a joke at an industry conference in Belgium seven years ago when the Chinese manufacturer BYD Co. showed an early model.
“Everyone was laughing at BYD for making a toy,” recalled Isbrand Ho, the Shenzhen-based company’s managing director in Europe. “And look now. Everyone has one.”
Suddenly, buses with battery-powered motors are a serious matter with the potential to revolutionize city transport—and add to the forces reshaping the energy industry. With China leading the way, making the traditional smog-belching diesel behemoth run on electricity is starting to eat away at fossil fuel demand.
The numbers are staggering. China had about 99 percent of the 385,000 electric buses on the roads worldwide in 2017, accounting for 17 percent of the country’s entire fleet. Every five weeks, Chinese cities add 9,500 of the zero-emissions transporters—the equivalent of London’s entire working fleet, according Bloomberg New Energy Finance.
All this is starting to make an observable reduction in fuel demand. And because they consume 30 times more fuel than average sized cars, their impact on energy use so far has become much greater than the than the passenger sedans produced companies from Tesla Inc. to Toyota Motor Corp.
For every 1,000 battery-powered buses on the road, about 500 barrels a day of diesel fuel will be displaced from the market, according to BNEF calculations. This year, the volume of fuel buses take off the market may rise 37 percent to 279,000 barrels a day, about as much oil as Greece consumes, according to BNEF.
“This segment is approaching the tipping point,” said Colin Mckerracher, head of advanced transport at the London-based research unit of Bloomberg LP. “City governments all over the world are being taken to task over poor urban air quality. This pressure isn’t going away, and electric bus sales are positioned to benefit.”
China is ahead on electrifying its fleet because it has the world’s worst pollution problem. With a growing urban population and galloping energy demand, the nation’s legendary smogs were responsible for 1.6 million extra deaths in 2015,  according to non profit Berkeley Earth. 
A decade ago, Shenzhen was a typical example of a booming Chinese city that had given little thought to the environment. Its smog became so notorious that the government picked it for a pilot program for energy conservation and zero emissions vehicles in 2009. Two years later, the first electric buses rolled off BYD’s production line there. And in December, all of Shenzhen’s 16,359 buses were electric.
BYD had a 13 percent of China’s electric bus market in 2016 and put 14,000 of the vehicles on the streets of Shenzhen alone. It’s built 35,000 so far and has capacity to build as many as 15,000 a year, Ho said.
BYD estimates its buses have logged 17 billion kilometers (10 billion miles) and saved 6.8 billion liters (1.8 billion gallons) of fuel since they started ferrying passengers around the world’s busiest cities. That, according to Ho, adds up to 18 million tons of carbon dioxide pollution avoided, which is about as much as 3.8 million cars produce in each year.
“The first fleet of pure electric buses provided by BYD started operation in Shenzhen in 2011,” Ho said by phone. “Now, almost 10 years later, in other cities the air quality has worsened while—compared with those cities—Shenzhen’s is much better.”
Other cities are taking notice. Paris, London, Mexico City and Los Angeles are among 13 authorities that have committed to only buying zero emissions transport by 2025.
London is slowly transforming its fleet. Currently four routes in the city center serviced by single-decker units are being shifted to electricity. There are plans to make significant investments to the clean its public transport networks, including retrofitting 5,000 old diesel buses in a program to ensure all buses are emission-free by 2037.
Transport for London, responsible for the city’s transport system, declined to comment for this article because of rules around engaging with the media ahead of May local government elections.
Those goals will have an impact on fuel consumption. London’s network draws about 1.5 million barrels a year of fuel. If the entire fleet goes electric, that may displace 430 barrels a day of diesel for each 1,000 buses going electric, reducing U.K. diesel consumption by about 0.7 percent, according to BNEF.
Across the U.K. there were 344 electric and plug-in hybrid buses in 2017, and BYD hopes to be picked to supply more. It has partnered with a Scottish bus-maker to provide the batteries for 11 new electric buses that hit the city’s roads in March. Falkirk-based manufacturer Alexander Dennis Ltd. began making electric buses in 2016 and has quickly become the European market leader with more than 170 vehicles operating in the U.K. alone. More work is on the horizon, with London’s transport authority planning a tender to electrify its iconic double-decker buses, Ho said. “The tech is ready,” Ho said. “We are ready, we have our plants in China, and Alexander Dennis in Scotland is geared up for TfL. Once we’re given the word, we are ready to go.”

Monday, April 23, 2018

The Advantage Of Being A Little Underemployed

o realize how outdated the five-day, 40-hour workweek is, you have to know where it came from.
Before 1900 the average American worker worked more than 60 hours a week. A standard schedule was ten-hour days, six days a week. The only structural limits to working were lighting and religion. You stopped working when it was too dark to see or to go to church. It was exhausting. It was often fatal.
Unions helped turn this around. In 1916, railroad unions demanded an eight-hour work day, largely because work after that point correlated with a rise in accidents and death. The railroads declined. So workers went on strike. America’s rail system nearly came to a halt.
This was during World War I, when transporting military equipment by rail was vital to national security. President Woodrow Wilson, desperate to get the trains moving, asked congress to write an eight-hour railroad work day into law. He told a joint session in 1916:
I have come to you to seek your assistance in dealing with a very grave situation which has arisen out of the demand of the employees of the railroads engaged in freight train service that they be granted an eight-hour working day … I turn to you, deeming it clearly our duty as public servants to leave nothing undone that we can do to safeguard the interests of the nation.
It worked. Congress passed the Adamson Act, and overtime pay after an eight-hour day became railroad workers’ right.
Twenty years later, the New Deal pushed for broader workers’ rights. It used the Adamson Act as a template, as no one wanted to favor one field over another. The eight-hour, five-day workday was standardized for all industries.
Eighty years later this work schedule – originally designed for the endurance constraints of railroad depot workers – has become so ingrained that we rarely question it, regardless of profession.
Which is crazy.
The biggest employment change of the last century is the number of careers that shifted from physically exhausting to mentally exhausting. From doing stuff with your arms to doing stuff with your head.
Since the constraints of physically exhausting jobs are visible, we took decisive action when things weren’t working, like the Adamson Act. But the limits of mentally exhausting jobs are nuanced and less visible, so we get trapped in a spot where most of us work a schedule that doesn’t maximize our productivity, yet we do nothing about it.

Every person I’ve worked with comes back from vacation saying some variation of the same thing:
“Now that I had some time to think, I’ve realized …”
“With a few days to clear my mind, I figured out …”
“While I was away I got this great idea …”
The irony is that people can get some of their most important work done outside of work, when they’re free to think and ponder. The struggle is that we take time off maybe once a year, without realizing that time to think is a key element of many jobs, and one that a traditional work schedule doesn’t accommodate very well.
Not all jobs require creativity or critical thinking. But those that do function better with time devoted to wandering and being curious, in ways that are removed from scheduled work but actually help tackle some of your biggest work problems.
It’s just hard to do that because we’re set on the idea that a typical work day should be eight uninterrupted hours seated at your desk. Tell your boss you found a trick that will make you more creative and productive, and they ask what you’re waiting for. Tell them that your trick is taking a 90-minute walk in the middle of the day, and they say no, you need to work. Another way to put this is that a lot of workers have thought jobs without much time to think.
David Leonhardt of the New York Times recently wrote about former Secretary of State George Shultz, who carved out time to sit and wonder:
His hour of solitude was the only way he could find time to think about the strategic aspects of his job. Otherwise, he would be constantly pulled into moment-to-moment tactical issues, never able to focus on larger questions of the national interest. And the only way to do great work, in any field, is to find time to consider the larger questions.
That last sentence is crucial for anyone whose jobs involves strategy, analysis, creativity, innovation, managing people, non-structured decision-making, or really anything outside of repetitive tasks.
The “moment-to-moment tactical issues” Shultz refers to are what happens in the office during the eight-hour, five-day workweek. Meetings. Spreadsheets. Meetings. Phone calls. Meetings.
The “larger questions” often can’t be tackled at work, because creativity and critical thinking require uninterrupted focus – like going for a walk or sitting quietly on a couch by yourself. Or a bike ride. Or talking to someone outside your field.
Steve Jobs did most of his serious conversations while walking. Tim Armstrong spends four hours a week just thinking. Jeff Weiner does something similar. Jack Dorsey famously wanders about. Someone once asked Charlie Munger what Warren Buffett’s secret was. “I would say half of all the time he spends is sitting on his ass and reading. He has a lot of time to think.”

Amos Tversky, the late collaborator of Nobel-winning psychologist Daniel Kahneman, once said “the secret to doing good research is always to be a little underemployed. You waste years by not being able to waste hours.”
The same is true for a lot of jobs.
The traditional eight-hour work schedule is great if your job is repetitive, customer-facing, or physically constraining. But for the large and growing number of “knowledge jobs,” it might not be.
You might be better off taking two hours in the morning to stay at home thinking about some big problem.
Or go for a long mid-day walk to ponder why something isn’t working.
Or leaving at 3pm and spend the rest of the day envisioning a new strategy.
It’s not about working less. It’s the opposite: A lot of knowledge jobs basically never stop, and without structuring time to think and be curious you wind up less efficient during the hours that are devoted to sitting at your desk cranking out work.
There’s never going to be an Adamson Act for knowledge workers who need time to think. It’s up to you to figure it out. The first step is realizing that taking time in the middle of your day to do stuff that doesn’t look like work is the most important part of your work day.

Buffett's Edge

Defining what your game is, where you are going to have an edge is enormously important”  Warren Buffett
Every successful investor has an edge. And when I say 'edge', I'm referring to the difference we have that gives us an advantage in a situation. In investing, this could be a structural edge such as access to better information or low-cost permanent capital, or it may be an intellectual edge derived from creativity or lateral thinking or a psychological edge like emotional rigor or temperament. It could also mean having a longer time horizon than other investors, or even a better reputation. Outperformance as we know it is usually derived from a combination of more than one edge.  
"First answer the question, 'What's your edge?" Seth Klarman
"You have to figure out where you have an edge." Charlie Munger
I've long thought about the edges Warren Buffett has. These are his differences that he has utilized to allow him to deliver returns far in excess of the market indices; you don't compound capital at nearly 20%pa for over 50 years without some sort of serious edge. 
I've outlined the multitude of Buffett's edges below. There are probably others however these tend to define the key differences for me...

Reads & Thinks

“I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business." Warren Buffett


"An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style.  He can earn them only by carefully evaluating facts and continuously exercising discipline." Warren Buffett


“If you’re emotional about investment you’re not going to do well.”  Warren Buffett

Loves Investing

“I get to do what I love to do every day.” Warren Buffett

No Distractions

"The best CEO's love operating their companies and don't prefer going to Business Round Table meetings or playing golf at Augusta National."

No Ulterior Motives

“There’s nothing material I want very much.” Warren Buffett


“You gotta hit a few in the woods.” Warren Buffett
"You have to put mistakes behind you and not look back. Tomorrow is another day. Just go on to the next thing and strive to do your best." Warren Buffett

Learns from Mistakes

“One of the reason Warren’s so successful is that he is brutal in appraising his own past.  He wants to identify mis-thinkings and avoid them in the future” Charlie Munger
"It's good to learn from your mistakes. It's better to learn from other people's mistakes." Warren Buffett

Independent Thinker

“You will not be right simply because a large number of people momentarily agree with you.  You will not be right simply because important people agree with you. You will be right over the course of many transactions, if your hypothesis are correct, your facts are correct, and your reasoning is correct.”  Warren Buffett

Contrarian in Nature

“We have usually made our best purchases when apprehension about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”  Warren Buffett
"Berkshire buys when the lemmings are heading the other way." Warren Buffett


"It's hard to believe that he's getting better with each passing year. It won't go on forever, but Warren is actually improving. It's remarkable: Most seventy-two-year-old men are not improving, but Warren is."  Charlie Munger

Communication Skills

"We also believe candor benefits us as managers: The CEO who misleads others in public may eventually mislead himself in private." Warren Buffett
"By our policies and communications, we can encourage informed, rational behavior by owners that, in turn, will tend to produce a stock price that is also rational. Our it's-as-bad-to-be- overvalued-as-to-be-undervalued approach may disappoint some shareholders. We believe, however, that it affords Berkshire the best prospect of attracting long-term investors who seek to profit from the progress of the company rather than from the investment mistakes of their partners." Warren Buffett
[Buffett's skill in writing has helped him develop a rapport with Berkshire's shareholders. He's under no pressure to buy or sell assets or keep up with an index. He doesn't have to worry investors will pull their money. Unlike most managers, it has allowed him to maintain a long term focus].

Away from Wall Street

If I was on Wall Street I’d probably be a lot poorer. You get overstimulated on Wall Street. You hear lots of things. You may shorten your focus and a short focus is not conducive to long profits. Here I can just focus on what businesses are worth.  I don’t need to be in Washington to figure out what the Washington post is worth, or be in New York to figure out what some other company is worth. Here I can just focus on what businesses are worth.” Warren Buffett

Value Approach

"As far as I can observe and speak to with statistics, there has only been one style which has reliably and safely brought investors exceptional long term returns: value investing. Today, Buffett has a 57-year track record." Li Lu

Generalist / Opportunistic

“Our rule is pure opportunism. If there is a masterplan somewhere in Berkshire, they’re hiding it from me. Not only do we not have a master plan, we don’t have a master planner.” Charlie Munger
[Buffett doesn't have constraints such as benchmarks, indexes, asset types, time horizon, etc. There is no pressure to keep up with an index. As a private business owner, Buffett doesn't have to invest in any business if the return profile is unattractive. Furthermore, with a fortress balance sheet, Buffett is often sought out for transactions at times when others are constrained.]

Long Term Focus

"One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may begin to think in terms of short-term performance which can be most misleading. My own thinking is much more geared to five year performance, preferably with tests of relative results in both strong and weak markets.” Warren Buffett
[Having a long term focus allows Buffett to allocate capital to businesses which may depress short term earnings at the expense of long term gains. When investing, he can focus on what a business will be earning and likely worth many years into the future without the pressure of short term performance.]

Sticks with What he Knows / Defined Filters

I don’t need to make money in every game. I don’t know what coca beans are going to do. There are all kinds of things I don’t know about. That maybe too bad but why should I know all about them, I haven’t worked that hard on them.” Warren Buffett
"We do have filters. And sometimes those filters are very irritating to people who check in with us about businesses - because we really can say "no" in 10 seconds or so to 90%+ of all of the things that come along simply because we have these filters." Warren Buffett

Thinks as a Businessman

“When we buy a stock, we always think in terms of buying the whole enterprise because it enables us to think as businessmen rather than stock speculators.” Warren Buffett
“I did a lot of work in the earlier years just getting familiar with businessesand the way I would do that is use what Phil Fisher would call, the ―Scuttlebutt Approach - I would go out and talk to customers, suppliers, and maybe ex-employees in some cases. Everybody."

Buys Simple Businesses He Understands

“We try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character” Warren Buffett

Insists on Good Management

"In making both control purchases and stock purchases, we try to buy not only good businesses, but ones run by high-grade, talented and likable managers." Warren Buffett

Conservative assumptions

“.. take all of the variables and calculate ‘em reasonably conservatively .. don’t focus too much on extreme conservatism on each variable in terms of the discount rate and the growth rate and so on; but try to be as realistic as you can on these numbers, with any errors being on the conservative side. And then when you get all through, you apply the margin of safety.” Warren Buffett

Access to Information

"We have dozens and dozens and dozens of businesses. I've always said I'm a better investor because I've had experience in business and better businessman because I've had experience in investments. Berkshire is about as good a place as you can find to really understand competitive dynamics and all that." Warren Buffett
"There is almost no industry Berkshire doesn't touch in one form or another. I can't count the number of times when I'm looking at something and pick up the phone and talk to [one of our CEOs] and if it's in any one of their adjacent industries, they know more about it in 15 minutes than an investor can learn in a lifetime." Todd Combs

Looks at Price Last

“I always like to look at investments without knowing the price – because if you see the price, it automatically has some influence on you.” Warren Buffett

Doesn't Disclose Positions

“We cannot talk about our current investment operations. Such an “open mouth” policy could never improve our results and in some situations could seriously hurt us. For this reason, should anyone, including partners, ask us whether we are interested in any security, we must plead the “5th Amendment”. Warren Buffett

Buys Established, Predictable, Quality Businesses

"Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago."
“At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable.” Warren Buffett
"It must be noted that your Chairman, always a quick study, required only 20 years to recognize how important it was to buy good businesses. In the interim, I searched for "bargains" - and had the misfortune to find some.  My punishment was an education in the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers." Warren Buffett

No Committees / Groupthink

"As your company gets larger and larger and you have larger groups making decisions, the decisions get more homogenised.  I don't think you will ever get brilliant investment decisions out of a large committee." Warren Buffett

Aligned Shareholders

Boredom is a problem with most professional money managers. If they sit out an inning or two, not only do they get somewhat antsy, but their clients start yelling ‘swing you bum’ from the stands.” Warren Buffett
"We do not view Berkshire shareholders as faceless members of an ever-shifting crowd, but rather as co-venturers who have entrusted their funds to us for what may well turn out to be the remainder of their lives." Warren Buffett

Avoids Leverage

"Borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets." Warren Buffett

Maintains Significant Cash

"There will be some incident, it could be tomorrow. At that time, you need cash. Cash at that time is like oxygen. When you don't need it, you don't notice it. When you do need it, it's the only thing you need. We operate from a level of liquidity that no one else does." Warren Buffett

No Guidance to Hit

"We do not follow the usual practice of giving earnings 'guidance.'" Warren Buffett

Zero Cost Permanent Capital

"Berkshire has access to two low-cost, non-perilous sources of leverage that allow us to safely own far more assets than our equity capital alone would permit: deferred taxes and "float," the funds of others that our insurance business holds because it receives premiums before needing to pay out losses"
Better yet, this funding to date has been cost-free. Deferred tax liabilities bear no interest.  And as long as we can break even in our insurance underwriting - which we have done, on the average, during our 32 years in the business - the cost of the float developed from that operation is zero. Neither item, of course, is equity; these are real liabilities. But they are liabilities without covenants or due dates attached to them. In effect, they give us the benefit of debt - an ability to have more assets working for us - but saddle us with none of its drawbacks."
[Berkshire's insurance operations have their own significant edges versus competitors, including the absence of pressure to grow premiums if/when pricing is unattractive, the ability to write premiums no other insurer has the balance sheet to write, speed of response time, lack of bureaucracy, lowest costs (Geico) etc]

No Mark to Market on Wholly Owned Businesses

"Our equity holdings have fallen considerably as a percentage of our net worth, from an average of 114% in the 1980's, for example, to less than 50% in recent years. Therefore, yearly movements in the stock market now affect a much smaller percentage of our net worth than was once the case, a fact that will normally cause us to underperform in years when stocks rise substantially and over perform in years when they fall." Warren Buffett 2004
[While Berkshire owns marketable securities that fluctuate with markets, wholly owned subsidiaries are not marked to market. On a short term basis this limits exposure to large stock market declines. Over the long term, it's the business performance that drives returns. Buffett focuses on the earnings of the businesses he owns not the share prices]

Avoids Potential Blow-Ups / Focuses on Downside

“If we can’t tolerate a possible consequence, remote though it may be, we steer clear of plantings its seeds.” Warren Buffett

Avoids Turnarounds, Start-Ups and IPO's

"Start-ups are not our game." Warren Buffett
“After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems.  What we havelearned is to avoid them.” Warren Buffett
“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”  Warren Buffett


“Both of us [Warren] know that we’ve done better by having ethics”  Charlie Munger

Seeks Win-Win Outcomes

“He [Buffett] wanted win/win results everywhere - in gaining loyalty by giving it, for instance." Charlie Munger

Good Home for Businesses

"I won’t close down businesses of sub-normal profitability merely to add a fraction of a point to our corporate rate of return. However, I also feel it inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect. Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable." Warren Buffett
"We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub- par businesses." Warren Buffett
“You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever. Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.” Warren Buffett
"Financial profit was not the key to ISCAR's sale. We wanted to ensure that ISCAR could continue to grow, and we saw Warren Buffett as the person who would help achieve that.. In truth, the money - $4b for 80% of ISCAR - was not the most important consideration for us in this deal .. I liked the fact that Buffett does not operate in the stock market as a speculator but as an investor. He does not look for a rapid profit but instead for stability and growth potential in the companies he acquires. He has said that he buys businesses, not stocks, they are businesses he wants to own forever. For us, the deal was more than a tribute to the unique value of the company I had founded fifty-four years earlier with an old lathe in our two-room apartment in Nahariya" Stef Werthheimer
[Over time Buffett has attracted more and more quality businesses to join Berkshire. Business founders often prioritize legacy, staff morale, business continuity and management independence above financial gain. Buffett has developed an enviable track record and a reputation as an ethical, discreet, and timely buyer who will maintain a business for the long term. Buffett doesn't participate in auctions (another edge!) and is often the only party to be offered the businesses he buys. The counter to this is that negotiated private asset sales are rarely done at knock-down prices as they occasionally are in the stock market]


While the list of Buffett's edges is long and I'm sure you can think of others, he does have some headwinds. One of those is size. Another is the fact he doesn't close under-performing businesses - that's the likely cost of seeing more private opportunities. He's also conservative. Carrying more debt would have generated even more returns, but it could also have led to the permanent loss of capital. And that would have broken Buffett's first rule: Don't lose money.
Many of Buffett's edges are available to all investors. He certainly doesn't hide them; he's been writing about them for the last 50 years. But there's one other edge I haven't mentioned, and it could be the most important of all - Charlie Munger. And what an edge that is. Buffet has given us much in the way of learning over those 50 years, and Charlie has as much and more to teach. And if you're looking for more, you could certainly start with him.