Warren Buffett: The $42 Billion Investment Genius

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In most cases a “hot tip” is lukewarm or shivering by the time it is passed to the average investor.

Still, there’s a section of the market that thrives on punters pumping and dumping them.

Given I’m in the game, people often ask me for a hot stock tip. Normally I tell them to take their “investing” money to the casino – at least there you can lose your money looking at pretty lights and pretty girls.

Yet after thinking about it, I realised that I do have a red-hot tip – and it’s quite possibly the hottest stock tip of the century.

The facts

First, the hard numbers. This stock has risen some 305,134 per cent since 1964. If you had invested $10,000 in it in 1965 it would be worth approximately $50 million today.

The guy that runs this company is seen as the best investor in the world. While he’s only the second richest man on the planet, a few years back he recruited the guy in front of him, Bill Gates, to sit on his company’s board.

At last count 108 books had been written about cloning his investing techniques, but if you invest with his company he’ll do the number crunching for you. All you do is buy and hold.

Yet the most compelling reason to buy this “hot stock”, is that 99 per cent of his net worth is invested in this one company. Your money goes where his does.

The best kept secret

The stock is US-based Berkshire Hathaway, and it’s run by investment guru Warren Buffett.

It astonishes me that more people don’t know about this millionaire-maker of a company. Given that it ranks as one of the best investments in history, why haven’t more people heard of it, let alone have shares in it?

It’s not because it’s a risky proposition unsuitable for retail investors. Buffett has stated that his first two rules at Berkshire Hathaway are “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Berkshire Hathaway is an investment company that has savvy holdings in a host of companies.

Buffett is famous for buying low and never selling. Berkshire has large shareholdings in PetroChina (long before China was the in thing), Coke and Gillette among others.

When asked why he invested so heavily in the razor company, Buffett explained that he sleeps easy knowing that billions of men wake each day having to shave.

How is it hidden?

The reason Berkshire Hathaway isn’t as well known as it should be is simple: it’s too good an investment.

Financial services companies make money by encouraging people to trade excessively, and by shaving portions of assets to manage money.

This commission goes out of your pocket and into the fund manager’s bank account, and to your financial planner’s bank account every year, regardless of whether they make you money or not.

Collectively billions of dollars a year are removed from investors’ returns, and none have achieved the consistent track record of Berkshire Hathaway.

Compare this with the $100,000 Buffett pays himself as the chairman and head of investments – that’s probably less than most CEOs pay their secretaries.

Then again, he doesn’t have a costly lifestyle. Despite being worth some $42 billion, Buffett drives a second-hand equivalent of a Holden Commodore, and lives in the same house be bought when in his twenties.

He counsels his other “part owners”, or shareholders as they’re otherwise known, not to trade the stock, which Buffett argues only lines the pockets of share salesmen. “Wall Street is the only place people ride to in a Rolls Royce to get advice from those who take the subway,” he says.

Each year Berkshire Hathaway has its AGM at the company’s headquarters in sleepy Omaha, Nebraska, away from the bright lights and big money of the financial districts.

Last Saturday some 20,000 faithful Berkshire Hathaway investors from around the world made the pilgrimage to hear the Oracle of Omaha.

This year’s lesson was a warning about the frictional costs that threaten to lower investors’ returns in the years ahead. These costs come from an army of professional “helpers” who extract fees, which have the cumulative effect of lowering the overall return for investors.

Specifically, he’s referring to stockbrokers, highly paid managers, financial planners and consultants. See Buffett’s investment rules online at www.berkshirehathaway.com

The catch

The only downside to my hot tip is the share price. Berkshire Hathaway trades at around $US105,000 a share (as at 21/09/11) – out of reach for most investors. Buffett believes the high price of his shares act as a deterrent to people day-trading his stock.

Yet he has introduced Class B shares, effectively the same holdings but with a much lesser value, which trade at around $US70 a share (as at 21/09/11). The reasoning behind this was to stop fund managers creating Berkshire Hathaway look-alikes.

A recently floated Australian company calling itself Global Masters Fund has done just that. The company has one equity investment, Berkshire Hathaway, yet adds in layers of fees for the privilege. This listed investment company typifies what Buffett is against.

Three per cent of your investment in GMF is scooped straight off the top to line the pockets of both your financial planner and GMF.

Next comes a yearly management fee of 0.85 per cent of assets under management, plus $150,000 a year to pay the directors. It doesn’t stop there. According to the prospectus, shareholders will also have to pay all registry, accounting, audit and custody fees on behalf of the company.

Ratings agency Standard and Poors agreed with my sentiments, rating GMF as a “not recommended”.

Why then did a rival research house issue a strong buy recommendation on GMF, a clearly flawed investment?

I thought back to Buffett’s comments on helpers that lower investor returns. Then I rang GMF and asked: Did you pay the research house that issued the strong buy recommendation? Answer: Yes, $12,000.

Tread Your Own Path!

Photo: http://www.flickr.com/photos/26809991@N06/2509343041/

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