A Publication of Newsmax Finance

SPECIAL REPORT March 2015

Buffett’s
5 Best
Dividend
Stocks
PLUS:
An Investment
Survival Guide for
Tough Times Ahead
 Page 2 Warren Buffett’s Investment Survival Guide Special Report
Warren Buffett’s Top 5 Dividend Stock Plays
As of January 2015, the S&P 500’s dividend yield was
1.95 percent. That’s not a high return. But considering
bank CDs are paying a fraction of that, the yield looks
appetizing. What’s more, the payout and yield can grow
over time.
How? Simple. As the economy’s earnings grow,
companies can afford to pay out more over time. Fixed-
income investments like bonds and bank CDs can’t do
that.
Even better, unlike bank CDs and other types of
investment income, dividend stocks are taxed at a
special dividend rate. That rate is currently 15 percent
for most taxpayers, although those in the highest
bracket have to pay 20 percent. Bank income is taxed at
ordinary tax rates, which for many investors are easily
double the special dividend rate.
Over time, market experts have proven that dividends
account for over half of the market’s return. That’s
from taking the dividends and responsibly reinvesting
them. Whether you need current yield, or want to
substantially improve your returns over time with
dividend reinvestment, 1.95 percent is below the
historical average.
Looking for better yields and returns?
Warren Buffett’s whole investment philosophy is
predicated on finding quality dividend-paying stocks,
and holding those stocks for a long time.
Our analysts scoured the financial statements of Warren
Buffett’s Berkshire Hathaway (BRK-B) company to
unlock some of their highest-yielding stocks.
We discovered that many of Buffett’s picks provide
returns of around 3 percent, or 50 percent higher than
the average S&P 500 dividend-paying stock.
We selected these top five holdings based on both
yield as well as the size of the stake Berkshire has
amassed.
These are stocks for the long run that Buffett
perceives have great intrinsic value no matter what is
happening with the stock market on any given day or
particular market cycle.
#1: Coca-Cola (KO) — 2.9% yield
Buffett’s purchase of the world’s leading soft-drink
company caused a lot of head scratching back in 1988.
Although shares were off following the 1987 crash,
they didn’t seem like a value investment. On an
earnings basis, Coke has always been on the expensive
side. And the prospect of growth seemed limited — the
company already has operations in nearly every country
around the globe. Competitors would eat away at the
company’s margins.
But this dividend dynamo has paid off in spades.
And it will continue to do so. Coca-Cola remains one
of the world’s best-known brands. Its history of raising
dividends annually bodes well for investors.
Why has Buffett done so well? He’s simply let the
company raise dividends year after year! His yield on
cost is incredible. Given his cost basis adjusted for splits
of about $3.40 per share, every year Buffett receives 40
percent of his original capital back.
Granted, it’s taken over a quarter century. But that’s
the power of buying right, and sitting tight.
But that’s not all. Even as Coke has grown as a
company, the company’s share buyback program
automatically increases Buffett’s ownership stake. It
doesn’t require doing anything either — the company
does the work of buying back shares.
As Buffett explained in the 2012 annual report, “Stock
repurchases at Coca-Cola and American Express raised
our percentage ownership. Our equity in Coca-Cola
grew from 8.8 percent to 8.9 percent and our interest at
American Express from 13.0 percent to 13.7 percent.”
pick at a glance
coca-cola (ko)
industry: Non-Alcoholic Beverages
yield: 3.2%
market cap: $181 billion
profit margin: 15.4%
share buyback? Yes
Coca-Cola (KO) Stock Price, 5 Years
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Special Report Warren Buffett’s Investment Survival Guide Page 3
That was just over the course of a year. When Buffett
originally bought Coke in 1988, his cost basis of $1
billion represented 35 percent of Berkshire’s investment
portfolio. And it bought 6.2 percent of the company.
Another plus: Coca-Cola is an internationally
diversified company. If you’re worried about the dollar
or inflation, this company is protected by its huge
international cash inflows.
#2: International Business Machines
(IBM) — 2.8% yield
The software and hardware giant — also known
as Big Blue — made it into the Berkshire Hathaway
portfolio in 2011. Buffett bought shares initially in
the $150 range, with further additions up to $180. At
today’s prices, shares trade where Buffett originally
bought over three years ago.
After a few quarters of lackluster performance, IBM
reported an earnings beat on January 20, 2015. The
higher earnings numbers were offset by a 12 percent
drop in revenue. The company also announced plans to
reorganize and cut costs.
Does this poor performance worry Buffett? Hardly. In
the 2011 Berkshire annual report, Buffett said, “I won’t
keep you in suspense. We should wish for IBM’s stock
price to languish throughout the [next] five years.”
Why?
Because in addition to the 2.8 percent dividend yield,
the company has been aggressively buying back shares
pick at a glance
international business machines (ibm)
industry: Technology services
yield: 2.8%
market cap: $157 billion
profit margin: 12.96%
share buyback? Yes
International Business Machines (IBM)
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$200
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over the past few years. This ensures not only income,
but also a floor under the share price to keep it from
falling further.
If you have a low risk tolerance and don’t want to see
your investment drop too far in value over the short
term, stocks with a large share buyback like IBM are
likely to deliver low capital loss risk.
Long time Buffettologists are keenly aware that the
Oracle of Omaha does not like tech stocks. In fact, he
usually rails against them. That’s why it’s important to
remember that IBM shifted its focus in the 1990s from
being simply a high-tech, software driven company, and
began focusing on its service-driven IT efforts. That
strategy has paid off and is a key reason why Buffett
likes the stock so much.
#3: Deere & Company (DE) —
2.7% yield
One of Buffett’s latest buys, according to the 13F
form filed for December 31, 2014, is in this Illinois-
based agricultural manufacturing powerhouse. Deere
& Company is a worldwide maker of tractors, threshers,
utility vehicles, and even golf course equipment.
There’s a lot to like with Deere. With agricultural
commodities showing weakness in the second half of
2014, share prices of Deere held up well. Why? Likely
because of the company’s valuation. It trades at just 10
times earnings, about half the overall S&P 500 Index.
The company trades for less than one times its annual
pick at a glance
deere & company (de)
industry: Farm and Construction Machinery
yield: 2.7%
market cap: $30.6 Billion
profit margin: 8.24%
share buyback? Yes
Deere & Company (DE)
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 Page 4 Warren Buffett’s Investment Survival Guide Special Report
sales. It’s a cash-generating powerhouse, but also has a
high return on equity of 32.7 percent. In other words,
although they carry some debt, they handle it responsibly.
While Buffett hasn’t yet commented on this latest buy,
the appetizing yield and solid valuations are a strong
indicator of his reasoning. What’s more, Deere is poised
to gain from the long-term trend of a growing world
population.
But it’s not just the numbers of new hungry mouths
to feed. The rising global middle class is eating a more
diverse diet, and Deere’s harvesting equipment is a
strong brand the world over. It’s better to invest in
a moderate-yielding, relatively consistent company
to play this trend than to speculate with agricultural
commodities.
That’s part and parcel of the Buffett strategy. Don’t
buy oil, buy the utility that sells it to the end user. With
Deere, it’s selling the equipment to make food, not the
food itself.
#4: Wells Fargo (WFC) — 2.7% yield
The California-based bank remains the largest
holding in the Berkshire portfolio. Buffett’s 463 million-
share stake represents 20.8 percent — or more than
one-fifth — of all the portfolio. That’s a concentrated
bet that the financial sector will continue to thrive.
Buffett first started buying shares of the bank in 1989
— and has picked up more shares as recently as 2013.
Buffett’s view is that it’s the best-managed bank in the
industry. In the 1990 annual report, Buffett spoke of his
heavy concentration in Wells Fargo as follows:
“Because leverage of 20:1 magnifies the effects of
managerial strengths and weaknesses, we have no
interest in purchasing shares of a poorly managed bank
at a ‘cheap’ price. Instead, our only interest is in buying
into well-managed banks at fair prices.”
The bank’s 2.7 percent dividend yield is higher than
the average bank stock. And it’s risen sevenfold since
the financial crisis.
It’s well supported by the bank’s low valuation of
less than 13 times earnings. Buffett has held on to
shares through the savings and loan crisis as well as
the great recession of 2008. In an industry prone to
periodic panics, Wells Fargo stands apart — and rewards
investors with a large payout.
Another plus: With interest rates at zero percent,
banks are essentially hoarding money by leaving excess
deposits with the Federal Reserve. Yet they’re still
making a profit from the spread between zero interest
rates and what they charge on a loan (such as a 4
pick at a glance
wells fargo (wfc)
industry: Banking
yield: 2.6%
market cap: $281 Billion
profit margin: 27.79%
share buyback? Yes
Wells Fargo (WFC)
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percent rate on a 30-year fixed mortgage right now).
In other words, in bad times, the banks are doing well
protected by the federal government. But in good times,
the banks also boom, as Buffett well knows. As interest
rates rise, consumers are enticed to leave more money
in their bank accounts. Thus the deposit base tends
to swell as well, providing a larger amount of money
to lend out at higher interest rates. Thus, banks get
earnings growth with minimal effort.
#5: Wal-Mart (WMT) — 2.2% yield
Rounding out the top five holdings based on yield,
capital safety, and Buffett’s purchases, we come to
retailer Wal-Mart. It’s a long-standing position in the
Berkshire portfolio, also going back to the 1990s.
Between 2002 and 2011, shares barely budged. They
mostly stayed in the upper $50 range. Buffett started
adding to his original position in 2009, when shares
were in the low $40 range. They’ve since come back and
surged higher. Buffett continued to add shares to the
Berkshire portfolio even in 2014.
Like many other Buffett companies, Wal-Mart increases
its revenue consistently year after year. And that translates
into dividend hikes and share buybacks that deliver value
as well. It currently generates over $23 billion in cash each
year to fund operations and reward shareholders.
And when it comes to dividends, Wal-Mart is another
dynamo. The company has increased payouts for 41
years straight, at an average increase of 18 percent per
 Special Report Warren Buffett’s Investment Survival Guide Page 5

year. It was also one of two stocks in the Dow Jones

Index to end 2008 higher. Given the market’s selloff that pick at a glance
year of over 30 percent, it’s a testament to the defensive
nature of the stock. wal-mart (wmt)
Since 2010, the company has been buying back about industry: Diversified Retail
$15 billion in shares each year. It’s retired over 400 yield: 2.4%
million shares of stock, with little end in sight. market cap: $266.7 Billion
As with IBM, Buffett is likely betting on share profit margin: 3.37%
buybacks to deliver capital gains, while getting paid to
share buyback? Yes
wait with an increasing dividend payout. It just goes to
show that Buffett makes investing look easy — if you Wal-Mart (WMT)
have the patience to see things through. $100
Obviously, Buffett sees this company as something
of a utility. With its tremendous growth in the $75

supermarket business, and the fact that it is squeezing $50

out smaller retailers across the country, the barrier to
entry for new competitors will be tremendous. Expect $25

slow but steady growth. As with many Buffett stocks,

$0
the day-to-day action will look boring. But the long- 201
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term results will be great.
AP IMAGES
 Page 6 Warren Buffett’s Investment Survival Guide Special Report

Warren Buffett’s Investment Survival Guide

It’s as violent as a mugger, as frightening as an armed sees it, “Someone’s sitting in the shade today because
robber, and as deadly as a hit man. someone planted a tree a long time ago.”
That, at least, is how President Reagan described it . . . Buffett’s record isn’t just a marvel over the long term.
Economist Milton Friedman said it’s the only form of Since 1965, Berkshire Hathaway has outperformed
taxation without legislation. And comedy writer Robert the S&P 500 index in every five-year period. It’s an
Orben said it’s the crabgrass in your savings. incredible accomplishment by the Oracle of Omaha,
But no matter what you call it, inflation is the biggest and he owes his success to his persistent focus on
threat facing today’s investors. And with the Federal protecting profits rather than the pursuit of profits. His
Reserve’s recent rounds of quantitative easing, it’s sure investing philosophy consists of two simple rules: “Rule
to be the silent thief of your savings so many have No. 1: Never lose money. Rule No. 2: Never forget Rule
warned about. It’s hiding around the corner starting in No. 1.”
2015 . . . This is his survival guide. It’s for all investors who
While there may be nothing you can do to prevent were never taught Rule No. 1 . . . or simply forgot Rule
inflation, you can defend against it. Warren Buffett calls No. 2.
it investment survival.
Buffett is the charismatic CEO and driving force What Are the Risks for 2015 –
behind Berkshire Hathaway (NYSE: BRK-A), the most
successful conglomerate in history. He’s known for
and Beyond?
his wise but catchy “Buffett-isms” that have become a Just one word – inflation. In recent years, Buffett has
hallmark of investing logic. There’s a reason investors warned about a major economic upheaval, and hasn’t
listen . . . been quiet about the massive inflation storm that lies
Since he took control in 1965, the company’s book ahead.
value has grown an average of 19.7 percent every year Inflation is a destroyer. It strikes without obvious
compared to just 6.4 percent average annual returns for warning and, in certain situations, moves higher than
the S&P 500 index. A $1,000 investment most investors believe is possible. Once
in Buffett’s company in 1965 would be entrenched, it takes huge amounts of
worth over $8 million at the end of 2014. Buffett-isms . . . political will to dislodge, but not before
Investing in the S&P 500 index, instead, “Someone’s sitting in the permanent damage has been done to the
would have yielded just over $1.6 million. shade today because life savings of millions.
Nothing to sneeze at, but certainly not someone planted a tree Inflation is the general rise in prices,
the same. a long time ago.” which we’re all familiar with. Each
What’s creating the difference? How year, prices creep up just a little bit, so
can one person rack up such consistent something that costs $100 today will
gains year after year – for 50 years – when the majority cost about $103 in a year. For the U.S., inflation runs
of fund managers can’t beat the S&P 500 index in a about 3 percent to 3.5 percent per year. What’s the
single year? culprit behind steadily rising prices?
Buffett is unlike any other investor because he plays It’s a simple matter of supply and demand. As the
by his own rules. He calls his investment style the “Rip supply of anything rises, the value falls. For instance,
Van Winkle approach.” He buys companies as if he were if OPEC, or the U.S., increases oil production, oil
going to fall asleep for 20 years, just like the fictional prices fall. There’s more oil but without any additional
character from the American tale. demand, the price per barrel falls. Indeed, we watched
As he explains, “Time is the friend of the wonderful this particular scenario unfold in the latter part of 2014
business, the enemy of the mediocre.” According to and into early 2015.
him, the most consistent way to wealth is to invest Well, money is no different. If a government prints
in corporations – plant a seed – and then give the money to escape its debts, it increases the supply of
company time to grow and prosper. If a company is money. More dollars are circulating, but no new goods
good, its stock price eventually follows. The way Buffett and services are produced to absorb those dollars. It’s
 Special Report Warren Buffett’s Investment Survival Guide Page 7
the classic case of “too much money chasing too few
goods.” The printed money does nothing except lower
the value of everyone’s dollars, which means it takes
more dollars to buy the same things. That’s inflation.
To understand inflation, you must realize that
money isn’t wealth; it’s a claim on goods and services.
If money equaled wealth, we could print our way
to prosperity, and world poverty could easily be
eliminated. Counterfeiting would not only be legal, it
would be encouraged. It doesn’t make sense, does it?
That’s because printing money doesn’t create goods and
services; it just reduces the value of existing dollars.
In other words, printing money steals value from
everyone else.
So the rise in prices – inflation – is really an illusion.
But for governments that control the power of the
printing press, the temptation is too great.
Imagine for a moment that you are an all-powerful
sovereign ruler (with a mortgage, car loans, student
loans, and other debts). One way or the other, you have
to pay off those debts. But suppose that,
rather than using money to exchange for
more goods and services, you use it to Buffett-isms . . .
pay off your debt. You must work for it. It “Risk comes from
takes time. not knowing
Look at it from the other direction:
Suppose you could just go to a Xerox
machine, print off a few hundred
thousand dollars, and rid yourself of debt? You can see
the temptation every government confronts sooner or
later.
For the same reason, politicians want inflation as it
gets them off the hook for spending they know has
gone too far. Allowing inflation is an easy way to gain
votes by making promises of public spending without
having to raise taxes. Instead, politicians print money,
which acts like a tax on your money. In effect, you have
less money in your pocket; it’s been devalued and buys
less than it used to. It’s taxation without legislation.
If the number of goods and services stays the same
but the U.S. government prints 3 percent more dollars,
you’re going to see 3 percent inflation. It may not
seem like much, but remember we had an $18 trillion
economy in 2014. And 3 percent of that is, well, a lot
of money. As the late Sen. Everett Dirksen once said,
“A billion here, a billion there, and pretty soon you’re
talking real money.” It adds up.
From year to year, there’s not much of a problem with
prices rising slightly. People don’t notice it enough to
complain. The decision to print more money falls in
the concentrated hands of government, which benefits
greatly. The costs, however, are dispersed among 250
million or so working adults who hardly feel the effects
— at first.
But over time, compounding accelerates inflation’s
effects. At 3 percent per year, prices double every 24
years. If you expect to receive $1,000 per month from
Social Security in 24 years, that money is going to be
worth about the same as $500 today. Like a thief in the
night, your money vanishes without a trace. But watch
out if inflation gets out of hand . . .
Hyperinflation – Inflation Gone Wild
If not kept in check, small doses of inflation require
the government to print money at an accelerated rate.
As consumers and investors come to expect inflation,
they build it into prices and interest rates. So if you’re
offered a $50,000 per year job, you may ask for 3 percent
more, or $51,500, to account for the expected lost value.
But if inflation is persistent, everyone learns to think
that way, and the 3 percent expected
future inflation gets built into today’s
prices. In other words, you don’t need to
wait for the end of the year to see the 3
what percent price increase. It shows up today,
you’re doing.” and the government must now print
6 percent more money to be 3 percent
ahead.
And with that, the wheels have been set in motion
for heated rounds of inflation to get worked into the
economy. If the money supply is increased more than 50
percent per month, it’s called hyperinflation.
The first country to hyperinflate during the 21st
century was Zimbabwe. By mid-2008, reports were
showing prices doubling each day – an inflation rate
equaling 80 million percent per month!
That’s what can happen when governments choose
to print money to relieve
their debts; they simply
transfer the burden to its
citizens or any country
holding its currency. As
the currency deteriorates,
the government must
create larger and larger
denominations to give the notes any value at all. By
2009, Zimbabwe was forced to create the 100 trillion-
dollar note – that’s one followed by 14 zeros – the
highest denomination ever printed in history:
Holding a note like this may make you think you’re
rich. It has a lot of zeros. It makes prices at Tiffany’s
 Page 8 Warren Buffett’s Investment Survival Guide Special Report
look cheap. Unfortunately, it was merely a piece of
paper. There wasn’t any value because Zimbabwe prices
also had lots of zeros. In 2009, this note just covered
a bus ride in the capital city of Harare. That’s right –
100 trillion dollars to get you across town. It sounds
outrageous, but the price would be even higher the next
day. That’s the ravages of inflation. It can be as deadly as
a hit man.
Inflation not only destroys the currency’s value, but
also destroys the incentives for people to do business.
Because nobody can guess what future prices will be,
nobody wants to buy, sell, or enter
into future business agreements. It
causes monetary illusions that can Buffett-isms
cripple an economy. While few people “It takes 20 years to build a
would expect inflation to get that out reputation, and five minutes to
of control in the U.S., higher-than- ruin it. If you think about that,
expected rates could cause the U.S. you’ll do things differently.”
dollar to lose its status as the world’s
reserve currency, and that would have
profound effects on the economy.
In a televised interview, Buffett explicitly warned the
Obama administration — which he supports — that
rising debt poses a huge risk to the U.S. economy. At
the time (May 2010), the Congressional Budget Office
(CBO) predicted that government debt would peak at
54 percent of gross domestic product (GDP) in 2011.
Buffett didn’t buy the CBO’s guesstimate. He predicted
then that the ratio would surpass 80 percent unless
there were significant spending cuts or tax increases.
And we know how that story ended: The U.S. debt as
of mid-2012 was $15.9 trillion, more than 100 percent
of GDP! By the end of 2014 it surpassed $18 trillion and
accounted for 103 percent of GDP. By comparison, in
2012, Greece defaulted on its debt when it reached 170
percent of GDP. At the rate the U.S. is racking up debt,
there are serious concerns.
“A country that continuously expands its debt as
a percentage of GDP and raises much of the money
abroad to finance that, at some point, it’s going to
inflate its way out of the burden of that debt,” Buffett
warned back in 2010. He went on: “Every country
that has denominated its debt in its own currency and
has found itself with uncomfortable amounts of debt
relative to the rest of the world — in the end, they
inflate. That becomes a tax on everybody that has fixed
dollar investments.”
At the annual meeting of Berkshire Hathaway
shareholders in 2010, Buffett expressly mentioned the
risk that government overspending would doom the
country. “The prospects for significant inflation have
increased, not only here but around the world,” Buffett
told 40,000 shareholders in attendance. “Weaning
ourselves from the medicine” may be more difficult
than enacting the stimulus in the first place, he said.
Buffett went on to warn that the days of very low
interest rates in the United States cannot continue. “It
won’t work forever to run huge budget deficits and easy
money,” Buffett said. The reason is that investors will
eventually realize the looming debt is posing a risk of
default and demand a higher return. That perception
will raise the Treasury yields — and all other yields will
follow. Congressional spending, rather
than the Federal Reserve, will be to
. . . blame if inflation gets out of hand, he
said.
Is Buffett taking defensive measures
against inflation?
Consider his words in November
2003, in an article he penned for
Fortune magazine, an article he
continues to prominently feature on the online home
page of Berkshire Hathaway.
In the article, Buffett points that he had not bought
a foreign currency in his entire life until spring 2002.
“Since then Berkshire has made significant investments
in — and today holds — several currencies. I won’t give
you particulars; in fact, it is largely irrelevant which
currencies they are. What does matter is the underlying
point: To hold other currencies is to believe that the
dollar will decline.”
Since that article appeared, the dollar, while rising
against the value of other currencies, has actually lost
an average of 2.4 percent of its buying power each year,
just about equal to the median inflation rate since 1882.
Sounds OK, but Buffett truly fears that the trend will
increase abruptly for the worse, returning Americans to
the double-digit destruction the country experienced in
the 1920s and again in the early 1980s.
And he has a very good reason . . .
The End of Quantitative Easing:
Reason for Fear
In 2008, Federal Reserve Bank Chairman Ben
Bernanke began the largest and longest financial
experiment in the world, using several rounds of so-
called quantitative easing (QE), or money printing, in
an attempt to boost a sluggish U.S. economy.
Bernanke’s successor, Janet Yellen, fully supported
the $3 trillion the Fed had pumped into the economy
through its bond-buying activity. Indeed, she vowed to
 Special Report Warren Buffett’s Investment Survival Guide Page 9

continue with quantitative easing until the economy
showed signs of improvement. One year after her
nomination, and after months of speculation, Yellen
announced in October 2014 that the economy had
improved sufficiently for QE to end.
Buffett isn’t so sure. In a February 2015 interview on
Fox Business, Buffett stated, “I think it’s going to be very
tough [for the Fed] to raise [interest] rates with what
you have going on around the world . . . I think it’d have
a lot of international repercussions.”
The central bank is now caught between a rock and
a hard place. If it raises rates while other countries
are lowering rates, the U.S. economy will suffer. If it
resumes easing policies, it will reverse the course it’s set
and the central bank will lose its reputation.
But how did we get to artificially propping up the
economy in the first place?
Back in 2008, after the financial meltdown, the
economy was in a super slump. Banks were fearful of
lending, no matter how much money the Fed pumped
into the banking system: The housing market had
crashed, people were losing jobs, so why should banks
make loans for cars and homes? It was simply too risky.
Because unemployment was so high, people began
saving more in case they were next in line to get pink
slips. Nobody was borrowing. Consequently, rather
than money flowing from banks into the economy, it
flowed from the economy into banks — and sat there
— exactly the opposite of what the Fed intended.
The economy continued to sink, and unemployment
continued to rise. The Fed was out of
bullets.
In all, it took three rounds of QE Buffett-isms
before the Fed was able to end its huge “Should you find yourself in a
financial stimulus. What was once chronically leaking boat,
considered an experiment to try when devoted to changing vessels is
all other options failed has become likely to be more productive than
almost commonplace, with Japan and energy devoted to patching
the U.K. using QE to try and breathe
life into their flagging economies, and
the 19-nation eurozone recently embarking on its own
large-scale bond-buying program.
The real consequences of all this easing, however, are
just beginning.
During QE, the big fear was deflation — falling
prices. With falling prices, people learn to delay
purchases of high-priced goods and services because
they know they’ll be cheaper in the future. Why buy
today? And people will ask the same question in
the future. Deflation is the big risk during a serious
recession.
To make things worse, prices can fall during
quantitative easing. Take a look at Japan during the
1990s, where QE created seriously falling prices.
While quantitative easing pumped a lot of dollars
into the U.S. economy, it didn’t produce inflation for
two reasons. First, people and businesses were getting
rid of debt — deleveraging — and that means they
weren’t spending.
Second, with high unemployment, there’s a lot of
unused labor and equipment in the economy. Lots of
buying pressure won’t create inflation if there’s unused
capacity.
So the problems of QE don’t show during the process.
It may stall deflation if there’s any in the system. Or
it may not, and we’ll face deflation even with all the
money printing going on.
The newly created money doesn’t become
inflationary until the central bank unwinds its positions
and buys back the bonds it sold to the banks. That’s
when the newly created money enters the financial
system.
. . . But first, a word about some of those assets it
purchased.
Qualitative Easing
During all the bond buying, the Fed also bought
troubled assets from banks to improve their balance
sheets and provide financial stability. However,
the risk didn’t disappear with those assets; it only
transferred them to the Fed. Though
most economists downplay the
. . . concerns of a central bank taking
on ever more bad loans and other
energy distressed securities, a few propose the
possibility of a central bank default.
It hasn’t happened in the United
leaks.” States in modern times, but “sovereign
defaults” are not uncommon. Russia
defaulted on its debts in 1998. So did
Brazil in 1983. Germany couldn’t pay back its foreign
lenders in 1932. Mexico defaulted in 1827.
As Bernanke said, “The Federal Reserve System has
become the very type of ‘bad bank’ that they were
themselves trying to rescue.” Economists have called this
problem qualitative easing. In other words, quantitative
easing has only decreased, or eased, the quality of Fed
assets. The Fed has four times the amount of assets that
it had prior to QE, but the quality is far below what it
was — let alone should be. So are we really better off?
It’s like painting over rotten wood. QE merely masked
 Page 10 Warren Buffett’s Investment Survival Guide Special Report
the problems; it didn’t make them go away.
Buffett has always warned about the dangers of
financial actions devoted to patching leaks. In many
ways, allowing a few bank failures during the Great
Recession would have done less damage. Failed banks
would have been taken over by larger banks which
had stronger balance sheets and could run the business
more efficiently.
Had better banks taken over failed ones, perhaps
the more solid banks would have been prepared to
make loans, and the economy would have improved
sooner. Instead, banks in dire straits spent more time
on improving their balance sheets and stock prices —
at the Fed’s expense — and had no incentive to make
loans to stimulate the economy.
The Tricky Task of Reversing QE
Over the course of the three QE phases, the Fed’s
assets increased from $800 billion to $4.5 trillion. Now
it must get rid of those assets by reversing the process.
When the Fed was buying Treasurys during QE, bond
prices rose and interest rates fell. The opposite will
occur as the Fed unwinds the process. It will sell bonds
to banks, which puts downward pressure on bond
prices, and upward pressure on interest rates.
Keep in mind that while the Fed is selling bonds,
the U.S. government will continue selling new bonds
to finance its needs, which will accelerate the selling
pressure.
So the first problem for the Fed is that if they move
too quickly to unwind, interest rates could spike
quickly, which can bring the shaky economy to a
grinding halt. All of the years of hard work by the Fed
to stabilize the economy may quickly be undone.
The second problem is that by undoing the
quantitative easing, the Fed must reduce bank reserves,
and that puts banks back into the precarious position of
a liquidity crunch. In other words, banks may not have
the high-quality assets required to maintain the current
level of credit they’ve issued. All the concerns prior to
the Great Recession may merely have been delayed —
not solved — by QE.
What’s the solution?
The only practical solution is for the Fed to inflate
asset prices — again. The Fed cannot afford to watch
interest rates spike to 1980s levels of nearly 20 percent.
However, if the Fed can inflate housing prices again, the
risk on the banks’ balance sheets falls. The Fed could
also do the same by purchasing more of the risky assets
in the open market. As their prices rise, the risk falls.
A Fed-fueled inflation doesn’t immediately show
up in all prices across the board. Instead, whenever a
government inflates its currency, those businesses closest
to the printing presses will benefit the most. Those
business are, obviously, the banks. From about 2007
to 2009, the Nasdaq Bank Index (Nasdaq: BANK) fell
65 percent during the recession. From 2009 to 2014, it
increased 90 percent.
Large corporations will also benefit, since they have
access to cheap money. From 2009 to 2014, the S&P 500
increased 110 percent. In 2014 alone, the index rose 13
percent to new all-time highs.
Real estate has also begun to recover, although not
to the level of the stock market. For the U.S., overall
housing prices rose 8 percent with many cities posting
double-digit gains. Denver, Colorado and Flint,
Michigan, surpassed 30 percent gains for the year. As
housing heats up and unemployment falls, housing will
likely see better performances for 2015.
Of course, we have to reconcile the falling commodity
prices like oil and gold. In the middle of 2014, the
price of petroleum began a rapid descent from $100 a
barrel and fell below $50 by early in 2015. You might
be asking: How can oil prices decline so much if there’s
expected inflation? When prices are high, governments
and corporations of commodity-producing countries
invest more money in order to supply more. But at
some point, all those investments wind up contributing
to a glut — an oversupply of the commodity in
question. From there, the trend reverses. For oil, that
means less appetite for investing in new oil wells, new
refineries, and new pipelines and oil tankers.
Somewhere down the line, as the global economy
heats up, the world’s economies will pay the price. We’ll
return to a situation where there’s not enough supply
to meet all the demand from business and consumers.
Higher prices, and inflation, are one important result.
That’s the situation that America experienced in the
1970s. Not only were prices higher — people fell into
the expectation that prices would be higher still in the
following year, and the year after that.
If people begin to expect increasing inflation, they’ll
build that into future prices. The more it gets built
in, the more people try to account for it by increasing
prices further. If you have constant inflation, say 3
percent per year, at least you know what to expect. It’s
when expectations change that the Fed will lose control.
The following graph tells the story. U.S. price levels
from 1775 to 1940 were nearly constant. Sure, you
can see small blips on the chart where we experienced
some inflation during the major wars. All governments
 Special Report Warren Buffett’s Investment Survival Guide Page 11
Consumer Price Index (1775 - 2015)
1913, creation of
Federal Reserve
Revolutionary
War
War of 1812 Civil
War
WWI
1775 1820 1865 1910 1970 2000
choose to inflate their way out of the expense of war.
But notice two highlighted key dates: In 1913,
the Federal Reserve was created, which gave the U.S.
government the power to print money. In 1971,
President Nixon took the U.S. off the gold standard,
thus giving the Fed permission to print without limits.
The picture tells the story of what happens to a nation’s
currency when governments have that kind of power.
As the currency’s value falls, prices appear to rise. We get
inflation.
Buffett is right. Be prepared for a major economic
upheaval and inflation storm that lies ahead.
Quantitative easing is a sure sign that the government
has backed itself into a corner and has no choice but to
inflate its way from the biggest financial experiment in
history. To survive, remember Buffett’s Rule No. 1, and
don’t forget Rule No. 2.
Buffett’s Inflation-Fighting Plan
There’s more, if you follow Buffett closely, which
we do. Consider just a few more of his statements on
inflation from 2010 to 2015:
• February 5, 2015: In a Fox Business interview,
Buffett stated that the best way to hedge from inflation
was to take advantage of today’s low interest rates
before they increase. If rates somehow go lower, you can
refinance. It’s a no-lose situation.
“Buying a house really makes sense right now. I’m not
just saying that because we own real estate brokerage
firms. It’s not that big relative to Berkshire. But you can
borrow money at under 4 percent for 30 years. And if
it’s a good deal, you can keep that for 30 years. And if
for some reason rates go lower, you can refi and call it
off after 30 minutes. It’s a wonderful deal.”
• October 6-8, 2014: At
30
Fortune’s Most Powerful
1971, U.S. goes
off gold
Women Summit, Buffett said
standard
25 that if you’re looking to bet
against the dollar, you should
20 just take out a 30-year fixed
mortgage. “It’s a good way to go
15 short the dollar, short interest
rates.”
10
• February 28, 2014:
Buffett’s 2013 annual letter to
5
WWII shareholders expressed concerns
0 that the federal funds rate (the
rate at which banks loan money
SOURCES: Bureau of Labor Statistics. to one another) is extremely
low and should remain low
through 2015 according to the Federal Reserve. Buffett
warned shareholders that low interest rates combined
with inflation make bonds among the most dangerous
of assets.
• May 6, 2013: In a Fox Business interview, Buffett
warned that inflation was likely when the Fed stops
buying bonds (which it did, 18 months later, in October
2014). He noted that low interest rates make long-term
mortgages attractive to homebuyers, but said he expects
“significant inflation eventually.”
• March 25, 2011: At the annual Berkshire Hathaway
shareholders meeting in Omaha, Buffett said inflation
was “a cruel tax on people” and went on to add that the
best investment against inflation was to improve one’s
own earning potential. “That is the best protection,” said
Buffett, “against a currency that declines at a rapid rate.”
• Oct. 5, 2010: He pointed out that bonds had
formed a major bubble, warning specifically that rising
inflation will pop that bubble, damaging trillions in
wealth. “We are following policies that unless changed
will eventually lead to lots of inflation,” Buffett said at a
Washington, D.C., conference. “We have started down a
path you don’t want to go down.”
• Aug. 10, 2010: It was revealed that Berkshire
Hathaway shortened the duration of its bond holdings.
When inflation and interest rates rise, long-duration
bonds generally fall more than short-duration ones.
• June 2, 2010: Buffett warned at a public hearing
that a municipal bond meltdown would necessarily
lead to a federal bailout of some states, in his view.
Experts figure the states face hundreds of billions
in immediate shortfalls and trillions in unfunded
retirement obligations.
• May 1, 2010: In a televised interview, Buffett
explicitly warned that rising federal debt is a monster
 Page 12 Warren Buffett’s Investment Survival Guide Special Report

about the recovery, American

Federal Debt Held by the Public values, or the country’s bright
Shaded areas indicate US. recessions
14M
long-term prospects. And it
is clear that be believes the
12M danger is fast-rising, high
inflation.
10M
The world’s greatest

(Millions of Dollars)
8M investor is limited, of course,
in what he can say, since any
6M
opinion he shares has the
4M potential to move the market.
In that spirit, we believe the
2M
actions that he takes which
0 affect his investment portfolio
1970 1980 1990 2000 2010
carry even more weight than
SOURCES: US. Department of the Treasury. Fiscal Service. Research.stlousfed.org. his statements, and in recent
years we’ve not only heard
threat. Washington is unstoppable, he said then, and we Buffett talk about inflation but also seen him act to
are all in danger. protect his wealth.
We can learn from his actions. In the following
Kicking the Can Down the Road pages, you will learn what he looks for in picking
great investment plays for our inflationary times. It’s a
What Yellen and the Fed do going forward, in the combination of his tried-and-true value approach and
name of averting deflation, risks the possibility of some contrarian bets on higher-risk investment vehicles,
inflation spiraling out of control. Instead of the benign including investments abroad, and assets likely to
levels of inflation of the past 25 years, we could go back weather a declining dollar.
to the era of the 1960s and 1970s where interest rates
started to spiral upwards. Buy Stocks You Trust, With a
Meanwhile, politicians have no trouble with letting
the Fed deal with the current situation. They can
Foreign Kicker
continue to promise low taxes while also supporting Buffett-watchers are familiar with the concept of an
social programs. (If there’s any problem, Congress “economic moat.” This is Buffett’s term for a sustainable
can put the blame on the Fed rather than their own competitive advantage, the idea that a company has
policies.) pricing power — i.e., the ability to maintain prices and
In political circles, this policy is profit margins in the face of increased
known as “kicking the can down the competition.
road,” making future generations pay Buffett-isms . . . His investment in Coca-Cola is a
for yesterday’s and today’s spendthrift “It’s far better to buy a great example of this power. Coke
government ways. Anyone with wealth wonderful company at a fair is considered to be the most widely
will eventually feel either the squeeze price than a fair company at a recognized brand in the world; the
of higher rates of inflation or higher wonderful price.” logo has a 94 percent recognition
taxes to pay for all this government rate worldwide. Thanks to more
spending. For folks in the middle class, than a century of brand building, the
the squeeze will hit hardest. That’s why it’s important to company says its name is the second most understood
understand inflation and taxes, and how they relate to word in the world, just behind “okay.”
your investment portfolio. The prevalence of the product is indisputable with
Due to his investing philosophy, Buffett understands over 1.7 billion servings sold each day, in more than 200
more than anyone how to create impregnable security countries, with sales of nearly $100 million every day.
around his own wealth. In his deeds since 2010, it is Almost 19 cents of each dollar in sales is profit, a very
clear to us that the Oracle of Omaha is presuming the high margin for what is essentially a mix of water and
worst is ahead, whatever he might say to the media sugar.
 Special Report Warren Buffett’s Investment Survival Guide Page 13
Perhaps most importantly, Coke’s distribution
network ensures that consumers anywhere in the world
can get an ice-cold soda any time they choose. It’s hard
to imagine a spot anywhere on Earth where you’d be
more than an hour or two away from someone willing
to sell you a cold can of Coke.
And with corporate profits from foreign operations
that far outweigh U.S. domestic profits, Coke is a model
stock for inflation-fearing Buffett. Potential competitors
(and they do exist) face the daunting task of getting
past that moat. Many small soda producers create
quality products but lack the brand
recognition enjoyed by Coke. As a
result, many consumers reach past the Buffett-isms
unknown brands to grab the familiar “It’s never paid to bet against
red can. But even if consumers choose America. We come through
another brand, there’s a good chance things, but it’s not always a
it’s owned by Coke; it has over 3,500 smooth ride.”
different beverages — if you drank
one each day, it would take nearly 10
years to sample them all.
Building a similar distribution network would
require years and millions upon millions of dollars,
resources beyond the reach of most small companies —
and even many large ones. Coca-Cola enjoys significant
competitive advantages, and those advantages translate
into profits.
But Coke’s extra profit power comes from its
brand-power moat. One of the keys to Buffett’s long
record of investing success is his ability to spot these
moats. In hindsight, we can all see the wisdom of his
decisions and note the obvious advantages enjoyed by
the companies in which he chooses to invest. Buffett
invested about $1 billion in Coca-Cola in 1988.
Back then, Coke’s competitive advantage was clear to
anyone willing to notice it. It was already a household
name, and had been for generations. Buffett’s genius
is that he didn’t worry about being late to the party.
He ignored literally hundreds of “hot” small company
stocks with dazzling, sexy stories and bargain prices.
Instead, he looked ahead. As Buffett says, “It’s far better
to buy a wonderful company at a fair price than a fair
company at a wonderful price.”
To him, it was clear that people would continue to
drink soda for decades and decades to come. He was
right. In early 2015, the stock was selling at more than
$43 a share, over 26 times what Buffett paid two decades
earlier.
What Buffett sees in Coke is a long-term investment.
He bought it at a fair price in order to generate cash
over the complete business cycle — good times and
bad. After all, recession or not, who stops drinking
Coke? What’s the “right” price? Buffett’s long-time
business partner, Charlie Munger, points out that
it’s foolish to judge a firm’s prospects by short-term
movements in its share price, up or down. Commenting
on Berkshire’s own falling share price at the 2009
shareholders’ meeting, he told investors, “If you think
we’re in trouble because the stock price went down, you
don’t understand what’s going on.”
Munger’s point is that the stock price of Berkshire
Hathaway, or any company, often has nothing to do
with the underlying fundamentals
of the business. Most investors look
. . . at price first, as an indication of how
many shares they can buy. But this
is entirely the wrong approach; the
number of shares you can afford
doesn’t dictate the value — or future
performance — of the company.
Buffett and Munger approach it in
reverse. First, they analyze a business and decide what
they think it is worth.
Then, and only then, do they look at the stock price.
If the stock is priced below the value they have assigned
to the business, it is a buy. And because they understand
the business, they are able to stick with the investment
even when the stock price declines.
See, to them, price and value are two separate things.
As Buffett points out, “Price is what you pay. Value is
what you get.” If a company is correctly valued, Buffett
and Munger know its price will eventually rise to
match.
Despite all the negative effects of the 2008 credit crisis
had on the American economy, Buffett expressed his
confidence in U.S. business, writing that “fears regarding
the long-term prosperity of the nation’s many sound
companies make no sense. These businesses will indeed
suffer earnings hiccups, as they always have. But most
major companies will be setting new profit records five,
10, and 20 years from now.”
Confidence that he owns good companies makes it
easier for Buffett to sit through a bear market, up and
down business cycles, and smile as his simple analyses
prove him right.
Prepare for Inflation
As we detailed in the first part of this report, Buffett
increasingly has become concerned about the prospects
of inflation over the past few years. He cites the
unprecedented increase in the U.S. budget deficit and
 Page 14 Warren Buffett’s Investment Survival Guide Special Report
debt burden as potential causes of serious inflation
down the road.
When he said recently that he was buying U.S. stocks
in his personal account, he added that he was selling
government bonds to pay for those purchases. While it
is obvious that stocks will suffer in inflationary times,
any dollar-denominated long-term bond is a bigger
risk. As inflation rises, bondholders expect larger yields
to compensate them for holding bonds. If yields rise, it
pushes bond prices lower on existing bonds.
Speaking of the government stimulus and bailout
efforts, he noted, “We are certainly doing things that
could lead to a lot of inflation. In economics there is no
free lunch.”
Buffett’s investment activities in recent years should
be viewed through this prism of inflation.
In a move that received little press attention, Buffett
went on a foreign bond spree in the second quarter of
2009, buying $1.5 billion in foreign government bonds.
Clearly, Buffett was worried about U.S. government
debt instruments and worried about holding dollar-
denominated debt.
Another clue was Buffett’s major play for the
Burlington Northern Santa Fe Railroad. The $34 billion
move had many on Wall Street scratching their heads.
Why would Buffett invest such a huge wad of cash on
a boring, slow-growth railroad? In fact, Buffett broke a
number of his long-held investment strategies to buy
Burlington Northern.
First, he gave away valuable Berkshire stock to make
the deal happen. This is usually a no-no for Warren. He
then used up almost all his available cash to make the
transaction. Finally, he went into debt to close the deal.
Buffett hates debt with a passion.
Not long after the deal closed, Buffett settled the
mystery. In November 2009, he appeared on the PBS
Charlie Rose television show. Rose probed Buffett on
the Burlington deal, and what Buffett said was simply
astounding.
Here is the key excerpt from the show’s transcript:
ROSE: When you look at the future, there’s also the
argument made that (the Burlington Northern deal) is
something that goes with your philosophy today — get
out of cash and get into assets. Because we don’t know
what’s going to happen to the dollar.
BUFFETT: Well, cash is always a bad investment. I
mean, when people said cash is king a year ago, I mean
that’s crazy. I mean, cash wasn’t producing anything,
and it was sure to go down in value over time . . . we
came in with something over $40 billion in cash . . . and
we have got about $20 billion now, and we’ve had some
earnings. So, we — we’ve put a lot of cash to work. And
I like that. No, I’d much rather own a good business
than have cash.
ROSE: And it is a hedge against the dollar?
BUFFETT: Well, you can say all assets are a hedge
against the dollar. I mean, but — all you know is that
the dollar is going to be worth less 10, 20, 30 years from
now. I say “worth less.” Not worthless.
(LAUGHTER)
BUFFETT: You want to watch that. But it will be —
you know, and that’s true of almost every currency that
I can think of. The question is how much it depreciates
in value. But cash — cash is not a place . . .
ROSE: Now, why is that?
BUFFETT: Well, because . . .
ROSE: . . . that the dollar is going to be worth less?
BUFFETT: Because we’ll print more of them in
relation to the amount of goods that are moving. You
know, if we dropped — if we dropped a million dollars
of cash into every household in the United States today,
everybody would feel very good except the people that
invested in things that were denominated in dollars.
You know . . .
ROSE: Exactly. Got it.
BUFFETT: There will be no tendency toward
deflation in this country over time or — or virtually . . .
ROSE: A tendency toward inflation.
BUFFETT: Absolutely.
Burlington Northern represented Buffett’s largest
deal of the year. He announced the purchase at the end
of 2009 but didn’t complete the $34 billion acquisition
until the middle of 2010. The railroad had been in his
portfolio for at least two years before he decided to buy
the entire company. This is very likely to be one of those
slow and steady investments that, years later, Buffett
is most famous for. In his words, the Burlington buy
 Special Report Warren Buffett’s Investment Survival Guide Page 15
is “a bet on the U.S. economy.” Railroads have always
represented U.S. economic might. They made westward
expansion possible and amassed great fortunes for the
“robber barons” who built them, men such as Cornelius
Vanderbilt and Leland Stanford.
A large part of the economy still moves along railroad
tracks; nearly 40 percent of all shipping is done by
train. Buffett is not looking for a home run on this
investment, just a lot of steady growth. When asked
what he thought the returns would look like, he said,
“I think the return will be satisfactory but not mouth-
watering. It’ll be similar to our energy utilities.”
Consider, though, that given virtually unlimited
resources and unparalleled access to information
and economic analysis, Buffett chose to buy an old-
fashioned railroad. We can learn a lot from this single
investment.
The moat is obvious. Thousands of miles of rail
lines simply could not be built today. Environmental
concerns and zoning problems would actually make
the feat nearly impossible. But it’s also an ingenious
inflation hedge. Here’s why: Railroads move a
significant amount of goods, especially
raw materials. Buffett’s railroad is the
largest transporter of coal and grain Buffett-isms
in the country. The prices of these “We simply attempt to be
products will go higher as inflation fearful when others are greedy
rises. and to be greedy only when
Even at higher prices, though, others are fearful.”
demand for coal and grains will
be about the same. Coal is used to
generate electricity, both in the United States and
overseas. China is rapidly becoming dependent on
foreign coal supplies to meet its ever-growing electricity
needs.
Consumers may be reluctant to pay more for bread
or electricity. But they will pay, because they must. Thus,
in Burlington Northern, Buffett has acquired a major
inflation hedge: Rail traffic might slow, but it won’t
stop. The company will keep generating cash, even in an
inflationary environment, and Buffett likes companies
that produce cash more than anything else. Internal
cash flows fund his new investing activities, the driving
force of Berkshire’s long-term value.
As inflation rises, corporate profits can suffer.
Companies are faced with increased costs, yet many
are unable to pass along the full impact of these
higher costs, as consumers will substitute other goods
or services to save money. In the case of Burlington,
trucking offers an alternative to railroads, but the cost
of moving thousands of tons of coal by truck would
be prohibitive. Locating enough trucks to move grain
around the country would be impossible. These factors
mean that Burlington can raise prices and maintain
— even increase — profit margins. The ability to raise
prices as inflation roars is a moat shared by many of
Buffett’s investments. His collection of brand names
carries pricing power. Some consumers may move to
cheaper products, but many will not and Buffett will
continue to receive cash dividends to reinvest.
Foreign Companies & Multinationals
as an Inflation Hedge
Buffett is well known for distilling investment
principles into short sayings and is often assumed to
think little of diversification, which he has referred to
as a “protection against ignorance.” Diversifying “makes
very little sense for those who know what they’re doing,”
Buffett has argued. Many industry professionals agree
and refer to it as “di-worse-ification.” Buffett, of course,
knows what he is doing. Yet, he does in fact diversify
to avoid risk and, in 2010, made several diversification
moves intended to reduce inflation
risk.
. . . One of the relatively unknown
gems in the Berkshire family is a
small division called CTB. This
company describes itself as “a leading
global designer, manufacturer, and
marketer of systems and solutions
for the poultry, pig, egg-production,
and grain industries.” It was founded in 1952, but was
purchased by Berkshire Hathaway in 2002. Again, we
spot a company involved in delivering products that
are difficult to do without. It’s a common theme for
Buffett: a boring company in an industry that does well
in inflationary times.
In 2010, CTB expanded with the acquisition of a
plastics manufacturer. Basic materials, like plastics and
coal, tend to do well as inflation rises. Companies that
produce raw materials are at the front end of the supply
chain and their outputs go to manufacturers. It’s up
to manufacturers to raise praises on consumers. This is
why, for example, aluminum prices rise faster than final
products made from aluminum, such as airplanes.
Over the past year, inflation has been tame at the
retail level, but the prices of raw materials have risen
dramatically. Raw materials are always the first to
increase — and by a larger percentage — during
inflationary periods since they appear at earlier stages
of production. For example, if automobile prices rise
 Page 16 Warren Buffett’s Investment Survival Guide Special Report

sharply, steel prices will rise faster. That’s because raw
materials don’t have much value added to them, so any
increase in value shows up as a larger percentage. Corn,
wheat, and soybeans all saw gains of nearly 30 percent
in 2010, and farmers are the customers to which CTB
caters. The twist on this theme is that Buffett is growing
the company’s overseas presence. CTB expanded by
opening a sales office and warehouse in Malaysia, a fast-
growing Asian economy. Rapidly increasing commodity
prices are just the beginning of a long-term inflation to
work its way through the U.S economy and erode your
money further.
Combined with Buffett’s long-term concerns about
the health of the U.S. dollar, his investment in Asia is
not really a surprise. As he noted on a trip there with
billionaire buddy Bill Gates, the future is bright. “People
in India and China will be living better lives in 20 years
than today,” he said. Buffett clearly expects to profit from
those improvements.
After buying shares in Chinese oil giant PetroChina,
which he later sold at a huge profit (more on
PetroChina later in this report), Buffett next moved into
BYD, a Chinese company that has a promising future in
electric cars and battery technologies. BYD is a relatively
small investment for Berkshire, which acquired an
initial stake of 10 percent of the company for just $230
million.
As of 2015, this small investment had grown to
a market cap of $16.9 billion. Buffett’s stake is now
worth nearly $1.7 billion. What is surprising to Buffett
watchers is that he didn’t sell near any of the company’s
numerous peaks or troughs over the years. In the past,

What are Derivatives?

Derivatives are any number of
assets that derive their value from
another asset or index. While the
concept sounds complex, they are
quite easy to explain. Gasoline, for
example, is a derivative of oil. As oil
prices change, so too does the price
of gas. The price of gas is “tied to”
or “derived” from oil. We would say
that oil is the “underlying” asset; it
is the asset that largely determines
the price of gasoline. While there are
many types of derivatives, the most
common are options, futures, and
swaps.
Options are probably the fastest-
growing segment of all derivatives.
Options are simply agreements or
“contracts” that provide the right
to buy or sell shares of a stock (or
other asset), at a fixed price, through
a given expiration date.
Options come in two types: calls
and puts. Call options give the buyer
the right, not the obligation, to buy
shares of stock for a given price over
a given period of time. They give
the owner the right to buy or “call”
shares away from another investor.
Put options give the owner the
right, not the obligation, to sell
shares of stock, over a given period
of time. They give the owner the
right to sell or “put” shares back to
another investor.
You can think of a call option like
a rain check. If you go to Walmart to
buy an iPad for the $400 sale price,
the store may issue a rain check if
it is sold out. That slip of paper will
state the holder may purchase one
iPad for $400 for the next 30 days.
Of course, you’re not required to
use that coupon — it’s a right. But if
you choose to, your purchase price
is locked at $400 no matter how
high the price of iPads may rise. But
what if you decide to not use it? Is it
worthless? Not at all.
Somebody else may be willing to
buy it from you if the price of iPads
has risen, or is expected to rise over
the next 30 days. If the devices are
now selling for $450, your neighbor
may like to have that contract and,
theoretically, should be willing
to pay the $50 difference for it. If
your neighbor buys it for $50, and
iPads rise to $500, he may sell it
to another neighbor for the $100
difference.
Why is it worth $100? If that
second neighbor uses the contract
and buys the iPad, he paid $100 for
the contract plus the $400 “lock-
in” price, for a total of $500 — the
current market price. Your neighbor,
however, paid $50 and sold it for
$100, which is a 100 percent gain on
his money even though iPads rose
from $400 to $500, or 25 percent.
This magnification effect of returns
is called “leverage,” and one of the
key reasons investors are drawn
to options. Leverage, however, is a
double-edged sword. If iPad prices
fell from $500 back to $450, he
would lose 50 percent on his money
even though iPad prices fell 20
percent.
Notice too that iPad buyers could
trade the rain check around and
never take possession of an iPad.
This is, in fact, what happens most
of the time in the financial markets.
Put options are conceptually
identical to call options, but work
in the other direction. They become
more valuable as the underlying
asset falls. You can think of put
 Special Report Warren Buffett’s Investment Survival Guide Page 17

Buffett has been known to take quick gains and move
into other investments that offer greater long-term
potential.
Perhaps Buffett believes in the potential of electric
cars. More likely, he believes in China and wants to be
part of the long-term growth potential offered there. He
has repeatedly expressed bullishness about the future
of the American economy, but he positions himself for
growth overseas and he invests in companies with the
potential to withstand the pressures of significantly
higher inflation.
“China’s a very big economy and it’s going to get a lot
bigger,” making it a logical place for Berkshire to “put
large sums to work,” Buffett said during the visit.
Remember, we need to watch what Buffett does
just as much as we listen to what he says. Buffett’s
conviction that the U.S. dollar will enter a period of
long-term decline prompted him to make his first
overseas acquisition in 2006. It’s kind of startling,
considering for how many decades Buffett has been
active in the markets, that only recently has he seriously
been looking abroad.
Part of the reason, as he says, is that Berkshire does
not lack for great buys here at home, typically in
multinational companies that operate in dozens of
other countries. But, part of the reason, too, is that
buying dollar-denominated assets exclusively has begun
to represent an unnecessary long-term risk.
The faster-growing overseas markets, including
Brazil, India, and China, are of great interest to Buffett.
Since that first 2006 move abroad he’s become almost
addicted to foreign plays, frequently flying off to Asia

What are Derivatives? continued

options like an insurance policy. If
you insure your car, you can “put it
back” to the insurance company if
you wreck it. It’s not a requirement,
it’s a right if you choose to use your
policy.
How does a real call option work?
If Microsoft is trading for $30 per
share, you could purchase a contract
ranging in time from a week to
nearly three years. The more time,
the more expensive the contract.
Microsoft is the underlying stock;
it’s what determines the option’s
value. Say you purchase a $30 call
with 90 days to expiration. For that,
assume you must pay one dollar,
which is called the “premium.” The
$30 “lock-in” price is called the
“strike price” since that’s where the
deal was struck. Each contract gives
you the right to purchase 100 shares
of Microsoft. No matter how high
the price of Microsoft shares rise,
you will always be able to purchase
100 shares for the $30 strike price
at any time over the next 90 days.
Because each contract gives you
the right to buy 100 shares, the $1
price really means you will pay $1 x
100 shares, or $100 per contract. At
expiration, assume that Microsoft’s
price rises to $32. Because you have
the right to pay $30, that contract
is worth the $2 difference, or $200.
You made 100 percent on your
money even though the stock
price only rose from $30 to $32, or
7 percent. But if the stock’s price
is equal to the $30 strike price, or
below, at expiration, you would lose
your $100 investment. Again, the
percentage change in the stock’s
price is magnified in the option’s
price.
What if you bought the Microsoft
$30 put option for $1? As with the
call, it would cost $100 since the
contract controls 100 shares. If the
stock is $27 at expiration, you have
the right to sell for the $30 strike
price, so that contract is worth $3.
Here, you made 200 percent on your
money even though the stock price
fell from $30 to $27, or 10 percent.
But if the stock price is $30 or above
at expiration, you’d lose 100 percent
of your investment.
So far, we’ve just considered
buying calls or puts. If one investor
buys, another investor must sell. For
every option contract, there must
be one seller for each buyer. Option
sellers do not have rights; they have
obligations. If you sell a call option,
you have the obligation to sell 100
shares of the underlying asset for
the strike price at any time through
expiration. For that, the option
buyer pays you the option premium.
If you sell a put option, you have
the obligation to buy shares for the
strike price at any time through
expiration. When it comes to
options, the gains to the buyer are
exactly equal to the losses of the
seller and vice versa.
Berkshire Hathaway has typically
been a seller of index put options,
thus providing insurance against
losses of other institutions.
Futures contracts and swaps have
many similarities to options. There
are definite differences in their
mechanics, but the essence is that
buyers and sellers are avoiding or
accepting risk for a fee. Derivatives
provide a way for investors to
efficiently channel risk to those who
are most willing to accept it.
 Page 18 Warren Buffett’s Investment Survival Guide Special Report
and investing in Brazil, South Korea, and Israel. Why?
Buffett believes the most logical protection against a
declining dollar is to buy into the companies that feed
our voracious appetite for cheap foreign goods.
When asked at a shareholder meeting whether
Berkshire is looking at purchasing entire private
companies based in China or India, Buffett replied,
“We would like to. If we get lucky, we’ll buy one or
two in the next three or four years . . . But you will
see the day that Berkshire owns businesses in both
countries.”
Since then, Buffett hasn’t had luck finding the right
bargain in those countries. Instead, he has turned his
eyes toward Europe, with an acquisition in Germany in
early 2015. Why? Because the eurozone is going through
a debt crisis with member nations that have depressed
the currency. Buffett knows that this crisis will pass, and
valuations will ramp up. Emerging market investments
can wait until a similar crisis brews there.
Investing in these markets does require a special
expertise to evaluate companies and currencies. For
the average investor, Buffett points out, the best hedge
against inflation might be a large American company.
“I would buy businesses with lots of earnings
abroad, because that’s a better way, in my view, to play
bearishness on the dollar,” Buffett says. He has long
believed that major U.S. multinationals, such as Coca-
Cola, are a natural hedge against the dollar because they
earn large profits overseas, which he thinks “will be a
net plus over time.”
Buying U.S. multinationals is not a perfect substitute
for direct investment since the U.S. companies must
eventually “bring the dollars home” and, if the dollar is
weak, it can put a dent in those profits. However, it is a
hedge and certainly better than no foreign exposure.
In fact, the companies that make up the S&P 500
get about half of their sales and profits from overseas
markets. Coke is fairly typical with 52 percent of sales
and nearly 90 percent of profits coming from outside
the United States. Nevertheless, Buffett believes that
investors should keep the bulk of their portfolio in the
United States.
“Despite our country’s many imperfections and
unrelenting problems of one sort or another, America’s
rule of law, market-responsive economic system, and
belief in meritocracy are almost certain to produce ever-
growing prosperity for its citizens,” he says. This makes
U.S. multinationals good investments in his eyes, as well
as a partial hedge against a falling dollar.
A declining dollar is a reality. This means higher
inflation and, thus, better performance in overseas
markets also are certain to become a reality.
Sometimes a Stock Should Be Sold
Buffett has joked that his preferred holding period for
stocks is “forever,” but he does sell. He was once among
the largest shareholders of housing giants Fannie Mae
and Freddie Mac but sold long before the housing
meltdown decimated their stock prices.
Buffett also was once a large shareholder of
PetroChina. In his 2007 letter to investors, Buffett
explained why he sold it: “In 2002 and 2003 Berkshire
bought 1.3 percent of PetroChina for $488 million,
a price that valued the entire business at about $37
billion. Charlie and I then felt that the company was
worth about $100 billion.” He went on: “By 2007, two
factors had materially increased its value: the price
of oil had climbed significantly, and PetroChina’s
management had done a great job in building oil and
gas reserves . . . In the second half of last year, the market
value of the company rose to $275 billion, about what
we thought it was worth compared to other giant oil
companies. So we sold our holdings for $4 billion.”
That lesson was easy to understand: When the
market overvalues your stock significantly, sell it and
put the cash to work in a better opportunity. Buffett
sold near the top. PetroChina subsequently fell more
than 75 percent.
Swim Against the Tide
Buffett truly is a contrarian investor; he zigs when
Wall Street zags. As the Dow fell sharply in October
2008, Buffett wrote an op-ed in The New York Times
in which he stated, “A simple rule dictates my buying:
Be fearful when others are greedy, and be greedy when
others are fearful. And most certainly, fear is now
widespread, gripping even seasoned investors.”
Stocks fell for another few months and then staged a
remarkable rebound. Perhaps Buffett learned to become
an agile contrarian from his late father, Howard. As
Buffett junior tells the story, his father was prospering
as a stockbroker when the Great Depression hit. Young
Howard soon lost his job and was left, like many,
without hope of employment.
As others fled the stock-selling business, though,
his father dove back in, starting his own investment
company. His father believed that, though the stock
market had collapsed, there always would be a demand
for safe stocks and bonds for investors. He was right,
and his small, Omaha-based firm thrived.
 Special Report Warren Buffett’s Investment Survival Guide Page 19

accepting the risk that stock

Berkshire Hathaway “A” Shares Price 1990 - Today
1990 Today
Even later investors in Buffett’s Berkshire Hathaway holding company have seen their positions rise substantially.
Notice the “hiccups” right around the time of the dot-com boom (1998-2000) and, later, the 2008-2009 crisis. Both
times, Buffett’s holding company and the underlying investments powered their way back.
Derivatives are another area where we see Buffett’s
contrarian nature at play. As derivatives led to the
liquidation of large firms during the crash, he still felt
that these risky investments, which he famously had
labeled “financial weapons of mass destruction,” had a
place at Berkshire Hathaway.
Of course, the derivatives bet hammered Berkshire’s
stock price when that position was revealed. Within 60
days of announcing that Berkshire had large losses from
derivatives in the fall of 2008, the holding company’s
stock-market value declined by half.
It turns out that in the summer of 2008, with stock
prices near all-time highs in many markets, Buffett had
placed a $37 billion bet on world equity markets that
would come due starting in 2019.
He sold contracts for $4.85 billion protecting buyers
against declines in the S&P 500 and three other global
stock indexes. By Sept. 30, Berkshire had been forced to
write off more than $6 billion as stocks declined. Stocks
would fall and the write-offs would grow even more in
the next two quarters.
Yet Buffett again appears to have been right over the
long term. He even increased his positions when the
market neared its ultimate lows.
While option contracts are usually short term,
Buffett’s were for the very long term. These puts had
original terms of either 15 or 20 years and were written
at the market price. This means that even a one-point
increase in the value of the index at the end of the
contract would make them profitable for Berkshire.
Of course, markets fell sharply almost immediately
after the contracts were originated. However, for
markets would decline over a
250K
decade or more, Buffett received
premiums of $4.5 billion.
200K
If stock markets are higher
when the contracts expire
150K between 2019 and 2027 than
they were in 2008, Berkshire
100K will keep the entire premium.
Perhaps the biggest benefit of
50K writing the contracts to Buffett
is that he had more than $4
0 billion to invest for the next 10
to 20 years.
If history is any guide, he is
very likely to receive substantial
income from those investments.
SOURCE: ©Yahoo Finance In early 2009, Buffett calculated
that if stock prices remained
unchanged over the next 10 years Berkshire would face
a loss of $13.3 billion on the derivatives. The worst-
case loss would be $35.5 billion, which assumes all the
world’s stock markets go to zero over that time.
Independently, Bloomberg News calculated that
Buffett needed stocks to post average annual returns of
at least 6 percent just to break even on the contracts.
Not content, Buffett restructured his trades. In effect,
he sold some of the original contracts at a loss. He
will be able to use this loss to offset capital gains for
tax purposes, a move that will increase the wealth of
Berkshire shareholders.
Yet he was convinced, still, that stocks would move
higher in the long term. So he sold new put contracts
that will be profitable if the S&P 500 gains a total of
only 15 percent over a decade. Buffett told CNBC he
didn’t pay a dime to restructure his derivatives. This
means that he sold enough new contracts to offset the
losses he realized in the old contracts.
He is confident that the odds are in his favor and
he will realize a profit on the new contracts as well
as the old ones he still holds. Within three months of
announcing this revised deal, the markets were up more
than 20 percent and Buffett was once again showing a
profit on these positions.
Get In While the Getting’s Good
One piece of Wall Street wisdom that Buffett does
seem to follow is to “buy when there is blood on the
streets.” This oft-quoted adage is attributed to Philippe
de Rothschild, an heir of the wealthy family known for
 Page 20 Warren Buffett’s Investment Survival Guide Special Report
attaining financial control of Europe’s banks in the 19th
century.
Buffett almost seems to enjoy price declines because
they’re bargain-hunting opportunities for him. He
wrote in one annual report, “Overall, Berkshire and its
long-term shareholders benefit from a sinking stock
market much as a regular purchaser of food benefits
from declining food prices. So when the market
plummets — as it will from time to time — neither
panic nor mourn. It’s good news for Berkshire.”
Of course, Buffett is not one to simply buy “cheap”
stocks unless he sees exceptional long-term value. Yet, he
does know exactly how to get into the right business at
or near the bottom.
During the darkest moment of the mortgage mess, for
instance, municipal bond insurers ran into trouble, so
he jumped into the business.
As market leaders Ambac and MBIA reeled from
mounting losses, Berkshire stepped in and guaranteed
bonds for cities, counties, and states — a $2.5 trillion
market. At first, Buffett tried to bail out the ailing
industry. According to Buffett, he offered to assume
full liability for $800 billion worth of municipal bonds
that three major bond insurers covered. Under the
terms, Ambac Financial, MBIA, and Financial Guaranty
Insurance would transfer all liability to Buffett’s
Berkshire Hathaway in exchange for a one-time
payment of 1.5 times the premium they were receiving.
The companies declined the offer, leaving Buffett
with no choice except to compete with them. In less
than a year, the new, Berkshire-backed company grew to
become the third-largest player in the market.
According to press reports, Berkshire was able to
command a premium over the prices competitors
offered. Buffett later offered some insight on pricing
in the muni insurance market. Berkshire charges
municipalities a 2 percent premium, while the standard
premiums are about half that, he said. In what may be
an understatement, Buffett said, “We’re doing this to
make money.” But that’s the power of the Buffett’s name
and the Berkshire brand. By paying higher premiums,
these municipalities have the credibility of Buffett
backing their bonds.
The premium he had initially requested amounted
to $12 billion. Analysts say that the long-term default
rate for traditional munis is far, far less than 1 percent
(specifically, it’s .02 percent). This means Buffett could
experience losses of as little as $160 million. Even if
losses increased beyond historically high levels, Buffett
still would enjoy profits of more than $10 billion.
His timing was equally good as the credit crisis
spread. Goldman Sachs took part in the government
bailout of large financial firms about a month after
Buffett had made a $10 billion investment in the Wall
Street powerhouse. With the stock down nearly 25
percent in a month, many questioned Buffett’s timing.
In the end, it was revealed that he had gotten a better
deal than the government and made more money
on his investment than did the Treasury Department.
Buffett was sitting on a 40 percent profit when the
government cashed out nine months later with an
annualized profit of just 23 percent.
Back to Basics, With a Twist
If investing well was as easy and straightforward
as Buffett says it is, then anyone could become a
millionaire. The formula itself is simple: Buy stocks at a
price that is below fair value.
The “twist” is to do it at the right time and stick with
your analysis during the rough times. Even the math
behind Berkshire Hathaway’s investment decisions is
simple. Buffett and Munger perform their investment
analysis without spreadsheets and they eschew
computer models. It’s an intriguing fact when you
consider that Wall Street spends hundreds of millions
on proprietary computer models that search for value.
Buffett emphasized at a recent annual meeting that
if you need a computer to figure out if something
is cheap, you should move on to something that is
obviously cheap. Munger added that some of the worst
business decisions ever made have been rationalized
using needlessly complex financial models.
These models, Munger said, are developed in business
schools because professors and students at these schools
have to do something. The principles of value investing
work in any market. When he was a smaller investor,
Buffett made large profits trading in the commodity
markets. Buffett concedes that he is not infallible in all
things. His specialty, though, is buying undervalued
assets. But that doesn’t mean just beaten-down stocks.
Non-stock investing is not new territory for Buffett. In
the 1980s, he bought Washington Public Power Supply
System (WPPSS) bonds that were associated with what
was, at that time, the largest municipal bond default in
history.
WPPSS had issued other municipal bonds that were
used to fund different projects, but these were marked
down to reflect the default. Buffett astutely observed
they were still sound. Buffett bought these bonds when
they were paying a tax-free yield of between 15 percent
and 17 percent. He explained that very few investments
Special Report Warren Buffett’s Investment Survival Guide Page 21

at that time were selling at a discount to book value In 2009, he again turned to the municipal bond
yet were able to produce such a high after-tax rate of market. This market is actually larger than the stock
earnings. These bonds ended up doubling in value. market, with more than 2 million individual securities
In post-financial crisis SEC filings, Buffett has built a and more than 50,000 issuers. The total market cap is
large holding of municipal bonds. In his estimation, well over $3.5 trillion.
they had become too cheap to ignore, and he bought Not everyone can find the best investments in a
them in pursuit of potential capital gains rather than market like this. For individuals seeking to duplicate
tax-free interest, which most investors think about when this investment, Buffett advises buying an index fund.
considering munis. As his investment stake has grown “If you told me I had to go away for 20 years, I would
in size, though, he has needed to find larger markets to rather take an index fund over long-term bonds,” he
exploit mispricing opportunities. once said.
True enough, but readers of Financial
Intelligence Report have been far better
Top Public Companies Owned by Berkshire Hathaway off following the advice of the FIR
of December 31, 2014
portfolio, which follows the philosophy
of Buffett and other great investors.
Name of Issuer Symbol Stake in Business Sector Consequently, it has beaten index funds
Company
USG Corporation USG 26.59% General Bulding Materials handily and proved adept at finding
DaVita HealthCare Partners Inc DVA 17.92% Specialized Health Services value in stocks, bonds, commodities,
American Express Company AXP 14.62% Credit Services and currencies.
Moody's Corporation MCO 12.12% Business Services
Verisign, Inc.
Chicago Bridge & Iron Company N.V.
VRSN
CBI
10.96%
9.84%
Internet Information Providers
General Contractors
Be Ready to Invest —
The Coca-Cola Co KO 9.05% Beverages - Soft Drinks Have Cash
Wells Fargo & Co WFC 8.83% Money Center Banks
Another lesson from Buffett may
International Business Machines
Corp.
IBM 7.72% Information Technology Services
surprise everyone. Despite sitting on
WABCO Holdings Inc. WBC 6.90% Auto Parts
tens of billions at a time, Buffett feels
DIRECTV DTV 6.18% CATV Systems he has limited cash available to hunt
Charter Communications, Inc. CHTR 5.44% CATV Systems for bargains. After investing in GE and
Liberty Global plc - Class A Ordinary LBTYA 5.04% CATV Systems Goldman Sachs in October 2008 he
Shares wrote, “To fund these large purchases,
Deere & Company DE 5.01% Farm and Construction Machinery
I had to sell portions of some holdings
Torchmark Corporation TMK 4.94% Life Insurance
that I would have preferred to keep
U.S. Bancorp USB 4.42% Regional - Midwest Bank
(primarily Johnson & Johnson, Procter
M&T Bank Corporation MTB 3.97% Regional - Northeast Bank
Media General Inc MEG 3.47% Broadcasting - TV
& Gamble, and ConocoPhillips).”
Goldman Sachs Group Inc GS 2.83% Investment Brokerage - National
Selling involves not only cashing
General Motors Company GM 2.53% Auto Manufacturers - Major in when the market overvalues
Liberty Media Corp LMCK 2.30% Broadcasting your holdings but also looking at
Viacom, Inc. VIAB 2.10% Entertainment - Diversified comparative returns and going after
Precision Castparts Corp. PCP 2.00% Metal Fabrication the highest ones. Although Buffett
Bank of New York Mellon Corp BK 1.95% Asset Management may have wanted to hold his big
Procter & Gamble Co PG 1.93% Personal Products U.S. consumer and oil stocks, he felt
Wal-Mart Stores, Inc. WMT 1.86% Dscount, Variety Store that other investments offered better
Graham Holdings Co GHC 1.82% Personal Services
opportunities. In the 2008 annual
NOW Inc DNOW 1.76% Information Technology Services
report, he wrote, “I have pledged — to
Suncor Energy Inc. (USA) SU 1.53% Independent Oil and Gas
Liberty Global plc - Class C Ordinary LBTYK 1.31% Broadcasting
you, the rating agencies, and myself —
Shares to always run Berkshire with more than
National-Oilwell Varco, Inc. NOV 1.26% Oil & Gas Equipment & Services ample cash. We never want to count
Phillips 66 PSX 1.18% Oil and Gas Refining & Marketing on the kindness of strangers in order
Liberty Media Corp LMCA 1.15% Broadcasting - TV to meet tomorrow’s obligations. When
Costco Wholesale Corporation COST 0.97% Discount Variety Stores forced to choose, I will not trade even a
 Page 22 Warren Buffett’s Investment Survival Guide Special Report
night’s sleep for the chance of extra profits.”
Even though he believes “cash is earning close to
nothing and will surely find its purchasing power
eroded over time,” Buffett consistently has held more
than $20 billion in cash during the past several years
because he feels he needs that amount as an emergency
reserve. This is especially true because of his insurance
company liabilities.
Interestingly, this $20 billion represents close to six
months of “float” in his insurance companies. Financial
planners often tell individuals they should keep three
to six months’ worth of cash in an emergency fund.
Whether by accident or design, Buffett seems to be
doing the same thing. Given his extraordinary track
record, it seems unlikely that any of his financial
decisions are accidental.
Having cash available to take advantage of
opportunities in bull and bear markets is important to
Buffett. Few war chests are as large as the $20 billion or
so that Berkshire Hathaway has held for the past few
years. But one thing that many overlook is that Buffett
views each investment as an opportunity to generate
more cash.
For instance, purchases Buffett made of preferred
stock in GE and Goldman Sachs in late 2008 came
with a 10 percent annual yield, which will add at least
$800 million in cash to his pool of investment capital.
Although Buffett felt the prices of both companies
were fair, he no doubt looks forward to reinvesting the
dividend checks.
By design, though, Berkshire has never paid a
dividend to its shareholders, and that’s just fine
with them. As Buffett has explained, referring to the
Berkshire investment in candy maker See’s, “Just as
Adam and Eve kick-started an activity that led to 6
billion humans, See’s has given birth to multiple new
streams of cash for us. (The biblical command to
‘be fruitful and multiply’ is one we take seriously at
Berkshire.)”
A fairly recent example of this philosophy in
action involved the acquisition of 60 percent of the
Pritzker family holding company, Marmon Group,
for $4.5 billion. Marmon makes boring stuff, and lots
of it. Among its 125 operating lines are companies
that make wire and cable, railroad cars, flow-control
devices for plumbing systems, and metal fasteners.
It provides services to sectors of the transportation
and construction industries. The company employs
21,000 people across more than 250 divisions in North
America, Europe, and China. Marmon also makes lots
of money, more than $800 million on revenue of $7
billion, or 11.4 percent. That’s the interesting part of the
story. Based on that level of income, the purchase price
values Buffett’s stake at less than nine times earnings, a
relative bargain for a company with growing earnings
at a time when stocks were trading at about 16 times
earnings.
Less well known than Buffett, the Pritzker family is
among the nation’s richest. The total Pritzker fortune
is estimated to be at least $23 billion; the family wealth
comes largely from the Hyatt hotel chain. Eleven
members of the family are on the Forbes list of the “400
Richest Americans.”
Although they are noted philanthropists, it is
doubtful that they are looking to donate this business
in a below-market sale to one of America’s richest
men. This is the same family that had gotten top dollar
for Chicago’s Presidential Towers apartment complex
months before Buffett’s acquisition. That time the
family sold for $470 million, or 28 times earnings.
Other deals also have been done at premiums.
Fortunately for the Pritzker family, having cash
allowed Buffett to step in once again when others were
unable to take advantage of bargain pricing. Just as
Buffett looks at ways to generate cash with his holdings,
individual investors should do the same. Dividends
or interest payments can be used for additional
investments, compounding the growth of the original
capital many times over.
Investors seeking to emulate Buffett’s long-term
strategies should also prepare to have cash available to
invest when stocks go “on sale.” A simple strategy is to
purchase a portfolio of dividend-paying stocks.
Yes, it can be psychologically difficult to purchase
shares when you see prices are dropping. But having a
nice stockpile of cash and the discipline to scale into
positions over time makes it easier. If you have your
dividend income earmarked for future purchases, sale
prices end up being your friend!
Collecting cash from dividends carries two
additional benefits. First, because it takes time for
the cash balance to grow, it forces the investor to
be patient — plant a seed — and be the one sitting
in the shade in the future. It takes time. Collecting
dividends as part of your strategy allows you to get
paid to wait. Also, as dividends continue to grow,
stock prices generally follow. Wall Street loves well-
managed earnings, and companies that can manage
the earnings to produce steady dividends are rewarded
with higher stock prices.
Second, dividend-paying stocks offer a margin of
safety during market declines. Because the value of cash
 Special Report Warren Buffett’s Investment Survival Guide Page 23
doesn’t decline when share prices do, the cash offers a
portfolio hedge against price declines. Also, using the
dividend cash to buy more shares lowers your cost basis,
thus lowering your risk.
Which stocks should you select?
That can be a daunting question as there are
thousands of stocks to analyze. One of the easiest
ways to look for quality, safe dividend-paying stocks
with Buffett-like returns is in the pages of Financial
Intelligence Report.
The FIR Portfolio, updated in each issue of Financial
Intelligence Report, has seen significant gains come
from dividends. An emphasis on generating cash to
reinvest has been a central theme of Buffett’s career and
is worth keeping in mind when selecting investments in
your own portfolio.
Although the Berkshire portfolio continually changes
to take advantage of opportunities in the evolving
economy, some things never change. More than 35,000
investors and fans traveled to Omaha for the 2012
annual meeting despite a tepid economy.
A Trek to Omaha
At one Berkshire shareholder meeting in Omaha a
few years ago, Buffett explained how he and Munger
still evaluate investment opportunities. He told the
audience that the pair relies on three metaphorical
boxes: “In,” “Out,” and “Too Hard.”
They dismiss the last box as not worth the effort.
Meanwhile, they evaluate the “Ins” thoroughly and, if
those possibilities pass serious examination, they are
pursued, purchased, and moved into the “Out” box.
“We zero in on things we know, like whether people
will be buying more candy in five years’ time,” Buffett
told the audience. “We don’t play ‘big trends.’ They just
don’t mean that much. There is too much money to be
made year-to-year rather than waiting for the big trends
to expose themselves.”
Buffett and Munger ignore trends because, frankly,
they end, usually badly for the trend investor who gets
in too late, too big. “Being contrarian has no special
value over being a trend follower. You are correct
because the facts are right. In focusing on business and
investment decisions, look for things that are important
and knowable.”
Remember, Buffett says, “The market is there to serve
us, not instruct us. It just tells us prices. If something
is out of line, then you can do something about it
— the critical part is how you handle that piece of
information, how you play out your hand. Let the
market serve you rather than instruct you, and you can’t
miss.”
Keys to Profitable Investing
Which strategies does Buffett employ when picking
stocks? Each and every year, it hardly changes. Here’s a
list of additional attributes that Buffett looks for when
buying stocks:
Simple Businesses
Buffett likes to keep things simple — and he likes
his companies to do the same. Again and again, Buffett
has railed against the kinds of companies that seem too
complicated or are too difficult to value.
His avoidance of Internet and technology companies
during the dot-com bubble is the most famous
manifestation of Buffett’s “keep it simple” dictum. He
likes to base his stock picks on, among other things,
what a company will look like 10 years down the road.
Technology companies, he contends, are much too
volatile and risky for that kind of analysis. The 10-year
rule also applies inversely: Buffett will consider only
companies with a good 10-year track record. Most
technology companies haven’t been around that long,
and so they tend to fall off of Buffett’s radar because of
their lack of seasoning and earnings history.
Return on Equity
Another key criterion for Buffett is a company’s
return on equity (ROE). Again, he favors a 10-year
plan through which he can predict ROE a decade out.
Companies that can’t be gauged accurately don’t make
it into the Buffett portfolio.
Cash on the Barrel
The Buffett way is to go long on companies that have
deep pockets. Companies that have what Buffett refers
to as ample cash flow are those that have the financial
resources to pay their bills and to keep growing.
Low Debt
Companies that can limit and manage their debt
are high on Warren Buffett’s priority list. Insurance
companies (he owns both GEICO and General Re
Corporation) are particular favorites in this regard. For
Buffett, low debt means that there will be significant
room for growth. His emphasis on low debt is
grounded in reality. With limited debt, earnings growth
is based on shareholders’ equity, as opposed to borrowed
money.
 Page 24 Warren Buffett’s Investment Survival Guide Special Report
Emphasis on Value
Historically, Buffett targets investments in
undervalued companies with good long-term growth
potential. Identifying such companies isn’t easy, but
Buffett has mastered the technique. In a nutshell, he
favors stocks that are unjustifiably low, based on their
intrinsic worth.
He calculates intrinsic worth by analyzing a
company’s fundamentals. As with most bargain
hunters, Buffett targets companies that are good
revenue producers and are capably managed — though
underpriced. Buffett is also famous for his aversion
to reading stock market tea leaves. That’s not what
he’s about. Simply, he selects stocks solely on the basis
of their overall potential as a company. Once he has
added such stocks to his portfolio, he will hang on to
them for years, even decades. Buffett has no interest
in when other investors get around to recognizing
the company’s total value. His only concern is that
his companies earn money, and lots of it. The market
rewards productive companies with higher share prices
over time.
Avoid the Tax Man
The Sage of Omaha has been quoted saying that the
rich should be paying more in taxes. He complains
his own secretary pays a higher tax rate than he does!
But while Buffett is running to Washington with a
checkbook to make donations to the U.S. Treasury —
OK, not really — he does, in fact, grasp some very key
tax facts that can make you wealthy.
The first is that government does not tax wealth, it
taxes income. Warren takes very little income for his
chairmanship of Berkshire. His $100,000 salary hasn’t
changed in a quarter century.
Since Berkshire pays no dividends or capital gains,
he pays no taxes for the growth of Berkshire’s intrinsic
value. And the income that flows into Berkshire from its
myriad public and private investments and companies
is delivered with huge tax exemptions — sometimes as
much as 90 percent or more!
Buffett understands the formula to wealth creation is to
continually compound growth as you pay little or no tax!
The ‘Big Six’
There are other highly visible cues to take from the
Oracle on his investing philosophy. In fact, Buffett’s
investing criteria are outlined in his yearly reports to
shareholders. They are:
1) Large purchases (at least $75 million of pre-tax
earnings unless the business will fit into one of our
existing units)
2) Demonstrated consistent earning power (future
projections are of no interest to us, nor are “turnaround”
situations)
3) Businesses earning good returns on equity while
employing little or no debt
4) Management in place (we can’t supply it)
5) Simple businesses (if there’s lots of technology, we
won’t understand it)
6) An offering price (we don’t want to waste our time
or that of the seller by talking, even preliminarily, about
a transaction when price is unknown)
A recent Berkshire Hathaway annual report adds,
“The larger the company, the greater will be our
interest: We would like to make an acquisition in the
$5 billion to $20 billion range. We are not interested,
however, in receiving suggestions about purchases
we might make in the general stock market.” Buffett
has said candidly that if a company falls within these
criteria, don’t call an investment banker — call him.
Buffett can be a bit of a contrarian, sliding away from
his own investment philosophy from time to time.
In the end, though, Buffett’s investment philosophy
is simple. He believes investors should be buying a
business, not simply a stock. His annual reports are
highly readable — quite famously so — and perhaps the
best window into the way the man’s mind works. One
such report contained what is probably as clear a one-
paragraph summary of Buffett’s investment philosophy
as can ever be stated: “Whenever we buy common stocks
. . . we approach the transaction as if we were buying into
a private business. We look at the economic prospects
of the business, the people in charge of running it, and
the price we must pay. We do not have in mind any time
or price for sale. Indeed, we are willing to hold a stock
indefinitely so long as we expect the business to increase
in intrinsic value at a satisfactory rate. When investing,
we view ourselves as business analysts — not as market
analysts, not as macroeconomic analysts, and not even as
security analysts.”
On the one hand, this paragraph is so steeped in
old-fashioned values — largely vanished from trading-
obsessed Wall Street — that one can understand
immediately why Buffett has followers. On the other
hand, it’s clear that his investing style just isn’t that
 Special Report Warren Buffett’s Investment Survival Guide Page 25
difficult to understand. It’s nothing more than a
balanced, four-legged stool: Buffett cares about the
future prospects of the business. He wants to know that
management has both integrity and drive. He doesn’t
want to overpay for a company’s stock. And whether
the shares go up or down, he won’t sell, so long as the
fundamentals remain the same. It’s pretty simple, right?
So is it a bit over the top to call Buffett a modern-
day miracle worker? Perhaps, but it’s not too far off
the mark. It’s not as if he’s parting the Red Sea, though
his investment record, which boasts an average annual
gain of over 20.3 percent in book value since 1964, is
incredible compared to investing in an S&P 500 Index
fund. He is certainly a living, breathing antithesis of the
“random walk” theory beloved by economists who try
to rationalize market behavior.
The Buffett Paradox
As the experts like to tout, the random walk theory
holds that stock price changes are random because
all information about the prospects of a company is
already built into its share price. They try to explain
away Buffett’s unusual successes by pointing out that in
any game of chance someone has to come out on top —
and they say it just happens to be him.
Of course, everyone knows that’s not true. No, Buffett
has something we mere mortals have no real hope of
emulating. It is something that leads to the real Buffett
paradox, a phenomenon that is quite the opposite of the
supposed “random walk” theory of stock selection.
Just as a top athlete is far more likely to ascribe his
success to hard work than to his supernatural talent,
so too does the greatest investor of our time make
investing seem easier than it actually is. Listening to
Buffett speak, reading his many writings on investing,
absorbing his messages, and watching his investment
moves over the years, an investor is more likely to gain
hope than to lose it.
How difficult can it be, after all, to buy Coca-Cola
and hold it forever — a practice at the core of Buffett’s
investment methodology? It should make the average
investor feel a lot more confident to know that Buffett
firmly rejects all the fancy trading techniques so
beloved by modern Wall Street — the tenets that make
it seem as though the big boys have an insurmountable
advantage over the hoi polloi. Simplicity is the key.
So why doesn’t everyone invest like Buffett? For one
thing, very few people can stomach the ups and downs
of the market without wanting to jump on and off.
For most investors, it is difficult not to panic when the
market tanks, and it can be tricky to resist jumping on a
really hot stock.
The sort of even-keeled thinking necessary to be a
great investor is an extremely rare thing. But that is
Buffett in a nutshell. He is happy when markets tank —
because he can buy stocks at a cheaper price.
Buffettology 101
Simply following in Buffett’s footsteps can be very
profitable. One study found that if you took Buffett’s
lead and bought the same stocks he bought, you would
have beaten the Standard & Poor’s 500 Index by 100
percent over the past three decades.
Researchers Gerald Martin of American University in
Washington and John Puthenpurackal of the University
of Nevada, Las Vegas, found that, historically, investors
could have reaped a 24.6 percent annual return by
simply buying Buffett’s stock picks after he disclosed his
holdings in SEC filings. The S&P 500 rose 12.8 percent
a year in the same 30 years.
In other words, Buffett’s stock picks were so good
that investors could have bought stocks as late as four
months after Buffett did and still have made big returns.
The advantage of taking a cue from Buffett in selecting
stocks appears to be well-known to a significant
number of investors. Yet the second reason most people
don’t invest like Buffett is that his methods are a lot
more complicated than they appear.
When Buffett talks about the “economic prospects” of
a potential investment, he’s talking about the position
of the business 10 years down the road. So, if he can see
the business remaining dominant for the next decade,
he’ll consider buying the stock. Buffett and Munger
have an uncanny ability to predict very accurately which
companies will be dominant players in 10 years — a gift
not many investors can claim.
This acumen may be based partly on Buffett’s genius
when it comes to numbers. “Accounting,” he likes to
say, “is the language of business.” It’s a language in
which his own fluency is unsurpassed, giving him an
enormous competitive advantage. Usually, all he needs is
a quick glance at a balance sheet to know whether he’s
interested in buying a company or not — because he
finds meaning in numbers that most investors are not
capable of understanding.
Many students of “Buffettology” have struggled to get
their heads around accounting ideas that are second
nature to him. A classic example is “intrinsic value,”
which is Buffett’s way of evaluating the true worth of a
company. He describes it as “the only logical approach
to evaluating the relative attractiveness of investments
and businesses.”
 Page 26 Warren Buffett’s Investment Survival Guide Special Report
He has said that “intrinsic value can be defined
simply: It is the discounted value of the cash that can be
taken out of a business during its remaining life.” This
definition may be simple for Buffett, but it’s clearly not
that simple for the rest of the investment community,
as they bang their heads against the wall trying to play
catch-up to Buffett’s successes.
Succession Plans – Berkshire
Without Buffett
In 2015, Buffett will celebrate his 85th birthday. And
while he has spent the majority of his years looking
for great management of other companies, he’s now
doing the same for Berkshire Hathaway. While he
has no immediate plans to step down, he is making
arrangements for that day.
Currently, Buffett’s role is twofold: He is the CEO and
the chief investment officer. In the future, Buffett’s plan
is divide his role into two separate positions.
Regarding the CEO position, Buffett spells out his
criterial in the 2014 annual report:
“My successor will need one other particular strength:
the ability to fight off the ABCs of business decay, which
are arrogance, bureaucracy and complacency. When
these corporate cancers metastasize, even the strongest
of companies can falter. The examples available to prove
the point are legion, but to maintain friendships I will
exhume only cases from the distant past.
“In their glory days, General Motors, IBM, Sears
Roebuck and U.S. Steel sat atop huge industries. Their
strengths seemed unassailable. But the destructive
behavior I deplored above eventually led each of them
to fall to depths that their CEOs and directors had
not long before thought impossible. Their one-time
financial strength and their historical earning power
proved no defense.
“Only a vigilant and determined CEO can ward off
such debilitating forces as Berkshire grows ever larger.
He must never forget Charlie’s plea: ‘Tell me where I’m
going to die, so I’ll never go there.’ If our non-economic
values were to be lost, much of Berkshire’s economic
value would collapse as well. ‘Tone at the top’ will be
key to maintaining Berkshire’s special culture.”
A few names have been floated for the CEO position.
There’s been no official announcement — and there
likely won’t be until after Buffett either retires or passes
away. In the past, Buffett has hinted that at least two
possible successors have been presented to the board of
directors. The names may have changed over the years,
as some of Buffett’s lieutenants have retired or moved
on. Among the current top managers, however, the
smart money is on two men.
The first is Greg Abel, who runs Berkshire Hathaway
Energy. With experience running large, heavily
regulated industries, Abel is a good fit for the CEO role,
which involves delegating most decisions to the heads
of subsidiary companies.
Another name often floated to be the next CEO is
Ajit Jain. Running Berkshire’s reinsurance division, he’s
been touted as one of Buffett’s best managerial picks,
turning a potential financial black hole into one of
Berkshire’s most profitable divisions.
A distant third possibility is Buffett’s son Howard.
Howard sits on the board of directors. More than any of
Buffett’s other children, he has business experience and
has been directly involved with Berkshire for decades.
With the investment role spun off, the company may
opt to keep a Buffett as head honcho.
One name you won’t hear is that of Vice-Chairman
Charlie Munger. He has expressed no interest in the
position, and at the age of 91 seems happy with his
lighter role as it gives him time to enjoy his hobby of
architectural design.
The more interesting of Buffett’s roles at Berkshire,
that of chief investment officer, has already been getting
attention in recent years with the addition of two
superstar capital allocators.
In 2010, Buffett announced Todd Combs would
join Berkshire in 2011. Buffett said, “If I die tonight,
the board has something in place.” Just as with his
investments, Buffett is always looking to hedge
unexpected risks, and his job is no exception. In 2012,
another fund manager, Ted Weschler, joined.
Both would be investment officers, handling
significant portions of the $100-billion-dollar portfolio.
Most speculate that Combs and Weschler will end up
managing the Berkshire portfolio jointly after Buffett’s
reign.
Todd Combs is a Sarasota, Florida, native who ran
a successful hedge fund called Castle Point Capital,
based in Connecticut. While he has many great qualities
necessary for managing the Berkshire portfolio, some
question if his style is, in fact, a good fit. While running
Castle Point, Combs used a combination of long and
short stock positions, mostly in the financial sector.
Ted Weschler, is a native of Charlottesville, Virginia,
who runs another highly successful hedge fund called
Peninsula Capital Advisors. Since its inception in 1999,
Weschler has returned double-digit annualized returns,
while the S&P 500 index was essentially flat. Weschler’s
stellar performance is partly due to investing in W.R.
 Special Report Warren Buffett’s Investment Survival Guide Page 27
Grace (NYSE: GRA), a chemical company where he once worked.
The company filed for bankruptcy due to legal filings for asbestos
damages. He was buying shares as low as $2 per share, which ended the
first quarter of 2013 at $77.51 as the company exited bankruptcy and
returned to profitability.
But his fund’s performance is also tied to shorting stocks — and
using leverage. Short positions, interestingly, do not have to be
filed with the Securities and Exchange Commission (SEC), so it’s
difficult to say how much of his fund’s performance is due to these
speculative, leveraged positions.
The question is, are these the necessary skills for running a long-
term portfolio of stocks like Coca-Cola, Dairy Queen, Fruit of the
Loom, Heinz, See’s Candies, Nebraska Furniture Mart, and The
Washington Post?
Berkshire was originally formed when two textile companies
merged: Berkshire Fine Spinning Associates, and Hathaway
Manufacturing Company. Despite the company’s roots in
textiles, Buffett said that purchasing Berkshire Hathaway was the
biggest investment mistake he had ever made, saying it cost him
compounded returns of over $200 billion over the past 45 years.
Buffett claimed that had he invested that money directly in insurance
businesses instead of buying out Berkshire Hathaway, those
investments would have paid off several hundredfold.
It may well be that the traditional Buffett-like investments are not
where the future of Berkshire lies. It will be, instead, in the financial
sector – especially insurance – where the company has derived its
core revenue since it acquired GEICO in 1996 and then General Re
in 1998. Today, Berkshire receives about 23 percent of its revenues
from its insurance divisions.
Both Weschler and Combs performed well in 2013, handily
beating the S&P 500. Both earned praise from Buffett in his February
2014 annual report to shareholders, in which he said, “I must again
confess that their investments outperformed mine.” But the two
protégés failed to live up to such praise in their 2014 investments.
Both came up short. Weschler notched a gain of 6.7 percent with his
stock picks. Combs’ positions lost a little less than a half-percent.
But one thing is certain: Whatever his choice for CEO, portfolio
managers, or investments, it’s never a good idea to bet against Buffett
or his team of corporate managers and capital allocators. When the
day arrives for Buffett to leave, Berkshire Hathaway will replace him
with new management. It will continue making new investments.
And it will take advantage of new opportunities.
But one thing that will never be replaced is Buffett’s time-tested
values and strategies. Those seeds will sprout and, years later, provide
investors with shade and safety from the risks of Wall Street. And
many will wonder just what kind of person it took to plant such a
magnificent tree. 
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