BUFFET ON CORONAVIRUS SCARE: "We certainly won’t be selling."

Mr. Kim is the Chief Operation Officer and Chief Compliance Officer for Kirr
Marbach & Co. LLC, an investment adviser based in Columbus IN. Please visit
www.kirrmar.com.

Berkshire Hathaway CEO Warren Buffett is well known as the
“Oracle of Omaha” to a legion of investing disciples who eagerly await the
last Saturday in February, when his annual letter
<www.berkshirehathaway.com/letters/2019ltr.pdf> to shareholders is
posted. Buffett’s letters always contain valuable historical perspective
and timeless investment advice, which are critically important during scary
times like now.

Stocks represent business ownership sliced into small
pieces. Buffett noted in his just-released letter that long ago, buyers
“usually thought of their shares as a short-term gamble on market
movements.” Further, “even at their best, stocks were considered
speculations.” In fact, that’s unfortunately still true for a great many
“investors” today.

“We constantly seek to buy businesses that meet three
criteria,” said Buffett. “First, they must earn good returns on the net
tangible capital required in their operation. Second, they must be run by
able and honest managers. Finally, they must be available at a sensible
price.”

“When we spot such businesses,” he continued, “our
preference would be to buy 100% of them. But the opportunities to make
major acquisitions possessing our required attributes are rare. Far more
often, a fickle stock market serves up opportunities for us to buy large,
but non-controlling, positions in publicly-traded companies that meet our
standard. Whichever way we go-controlled companies or only a major stake by
way of the stock market-Berkshire’s financial results from the commitment
will in large part be determined by the future earnings of the business we
have purchased.”

On Berkshire’s 10 largest stock-market holdings (American
Express, Apple, Bank of America, Bank of New York Mellon, Coca-Cola, Delta
Airlines, J.P. Morgan Chase, Moody’s, U.S. Bancorp and Wells Fargo), Buffett
said “it is certain that Berkshire’s rewards from these 10 companies, as
well as from our many other equity holdings, will manifest themselves in a
highly irregular manner. Periodically, there will be losses, sometimes
company-specific, sometimes linked to stock-market swoons. At other times,
our gain will be outsized.”

Most importantly, Buffett and Vice-Chairman Charlie Munger
do not view Berkshire’s holdings as a “collection of stock market
wagers-dalliances to be terminated because of downgrades by ‘the Street,’ an
earnings ‘miss,’ expected Federal Reserve actions, possible political
developments, forecasts by economists or whatever might be the subject du
jour.”

This takes us to the subject du jour, the Coronavirus Scare
of 2020.

We would never claim to be as skillful as Buffett, but also
approach buying stocks by taking the perspective of owning 100% of the
underlying business. The owner of the business is entitled to the future
cash flows generated by the business. The intrinsic value of the business
is simply the cumulative amount of those future cash flows, discounted back
to today (i.e. the discounted present value of the future cash flows). We
look for stocks priced well below our calculation of intrinsic value, with
the intent of holding the stock/owning the business for 10 or more years.

Importantly, while stock prices can be extraordinarily
volatile (like recently), the intrinsic values of the underlying businesses
are much less so. “If you’re buying a business, and that’s what stocks
are.you’re gonna own it for 10 or 20 years, ” he said in an interview on
MSNBC following the release of his letter. “The real question is: ‘Has the
10-year or 20-year outlook for American business changed in the last 24
hours or 48 hours?'” I’d ask, “If you owned a thriving family business for
20-years, would you sell it for dramatically less versus two months ago
simply because of Coronavirus fears?”

I think the answer to both questions is an emphatic “NO!”
Nobody knows how long and far the Coronavirus outbreak goes or how it ends.
The uncertainty is scary. In a global economy, near-term cash flows will be
negatively impacted, but cash flows going out 10- or 20-years will not be
harmed. In other words, we’re confident this will prove to be a temporary
and not permanent impairment of intrinsic value and a better buying
opportunity.

Indeed, in the interview Buffett noted Berkshire is a net
buyer of stocks over time, just like he is a net buyer of food, so he
welcomes times when stock and food prices decline. “Who wouldn’t rather buy
at a lower price than a higher price?” he pondered. “People are really
strange on that. They should want the stock market to go down-they should
want to buy at a lower price. We certainly won’t be selling.”