Recently I came across an article about a Caribbean Investor who invested as far as China. His name is Richard Azar, and here is some details about him and his successes even in China. Richard Azar of the Republic of Trinidad and Tobago, the two southernmost islands of the Caribbean, has exemplified the concept that anyone anywhere in the world who makes a rigorous study of Buffett can succeed. Certainly he has. Azar has been actively investing since he was 17. His father loaned him $100,000 at the time, and Azar paid his father back two years later by buying Berkshire and making currency trades. Azar retains a significant stake in Berkshire stock today. Educated in Canada and the U.S., Azar was turned down at Harvard Business School, but said it was a blessing in disguise, as he used those years for intensive study of books about Buffett and value investing and continued business success. He kept right on piling up stunning returns, vaulting him into the top ranks of businessmen in Trinidad. If Azar lived in America, he would be one of the wealthiest Americans for his age and could be in Fortune’s list of the 40 wealthiest people under 40. The CEO of West Indies Stockbrokers Ltd., Peter Clarke, said this about Azar “[His] extensive knowledge of industries gained through reading literally hundreds of annual reports a year provides him with an insight that few can match. He is the largest independent individual investor on our local stock market.” Azar first read about Buffett in Peter Lynch’s One Up on Wall Street. He also collected and studied the books and many articles written by Ben Graham. He bought books on value investing and did an intensive study of that topic. One of Azar’s claims to fame is that he was buying Wal-Mart at the time Buffett turned out to be doing the same thing. Azar began buying Berkshire in late 1987 (after the crash)and had his first look at a Berkshire annual report. Said Azar, “God sent me a blessed gift when I got the Berkshire report. It immediately set me on a new course in my business life.” Azar added, “Prior to that I was following Peter Lynch’s philosophy and was much more diversified. As Mr. Buffett advised, I adopted a more concentrated approach to my business and investment transactions. “My concentration levels were at various times 40% to 50% of my net worth and today the four major positions I own represent 85% of my net worth. I became much more focused, and the threshold of knowledge and understanding underpinning each investment idea increased dramatically. I had learned from Mr. Buffett that most of the fortunes of the world had been made with a few securities that were well understood by their owners and held for a very long time. This seems evidently clear when one looks at the Forbes list of wealthiest Americans every year. “It was clear to me from my first reading of the Berkshire Annual Report that Mr. Buffett was a very honest and honorable businessman. His thoughts and ideas were clear in terms of buying a piece of a business, ‘its stock,’ or the entire business, both of which he understood on the basis of their strengths and weaknesses and those of their competitors. He also demonstrated how certain economic characteristics made certain businesses more successful and rewarding than others. Obviously the right price and the right management made the investment all the more attractive.” Azar’s broker, Vincent Vella, in Fort Lauderdale, added to the Azar story, saying he met Azar in 1985 after Azar had received some money from his father and was interested in investing. “He was very eager to learn and wanted to know everything about the investment markets. He had a few bumpy times at the beginning, but as his education and knowledge increased, he began to become a very wise investor,” Vella said. “He really gained enlightenment when I gave him annual reports from Berkshire Hathaway.... From that point on, Richard became a Warren Buffett aficionado and began to look at investments and business in an entirely different way. His investment skills and analytical capabilities began to grow at geometric rates. He also started making few, but very large investment decisions, concentrating in areas he could understand.” Vella said that Azar made very profitable currency trades in addition to creating his own companies in Trinidad. “I have witnessed his success over the years and watched him turn a small amount of funds into a net worth in the low nine figures,” Vella added. In 1990, Azar founded a dairy business, which now controls 50% of the powdered milk market for dairy products. “The amount of detail of his knowledge regarding the dairy industry and milk in general was astounding for a person who had no formal training as such in the field,” said Kieran Lonergan of Lakeland Dairies in Ireland. Azar also owns the largest shopping mall on the western part of the Island of Trinidad, The Falls of Westmall. He has sold a major stake in an insurance company, but maintains the largest individual stake in the Caribbean’s largest bank, RBTT Financial Holdings Ltd. Over the years, Azar has had brief correspondences and personal encounters and meetings with Professor Louis Lowenstein of Columbia University, Buffett, and Munger. At one point when Azar was thinking of applying to Columbia Business School he wrote to Lowenstein, a professor of finance and law. Lowenstein replied: “Buffett likes to say that those who encounter the Graham-and-Dodd analysis for the first time come away from it with one of two reactions: either a light bulb goes off and they see business and finance thereafter in new and different terms, or no amount of repetition will make it sink in. Obviously you are one of the first group, which remains dismayingly small. I am not sure why you want to go to business school....” Lowenstein invited Azar to New York. Later Azar met with Lou Lowenstein in New York and gave him his collection of Ben Graham articles dating back to the 1930s and 1940s. Lou Lowenstein passed the collection on to his son, Roger, who was writing Buffett: The Making of an American Capitalist, in which Azar is mentioned. Azar first met Buffett in person at Borsheims during his initial trip to Omaha for Berkshire’s annual meeting in 1992. He met Buffett again there in 2004. Also, he was among the international shareholders who met with Buffett and Munger in 2004. At the 2004 meeting, Azar described to Buffett the method of discounted cash flow he was using to arrive at Berkshire’s intrinsic value. Buffett replied, “I see you’ve done your homework,” and a round of applause followed. Once Azar wrote Buffett and mentioned that he was a nonexecutive chairman of a telecommunications company in Trinidad called TSTT and was receiving a $1-a-year salary. Buffett wrote back: “Thanks for your TSTT report. I held a ‘dollar-a-year’ job at Salomon a few years ago, so I know what it’s like to be overpaid.” Azar’s chairman’s letter to TSTT shareholders had the distinct flavor of being influenced by Buffett’s reports to shareholders. Another time Azar wrote to Munger about valuing businesses. Munger replied: “In a stable business, we tend to use real cash flows for shareholders, (1) usually reported earnings minus compulsory maintenance expenditures of franchise, or competitive position in excess of reported depreciation and minus compulsory net increases in required working capital, but sometimes, (2) reported earnings plus amortization charges for goodwill. An expanding business with high returns on equity and good cash flow characteristics (apart from what is spent expanding) then becomes x dollars in cash flow (real for shareholders, as if not expanding) growing at y% per year, never projected to infinity. A business not expanding in physical units, but able to grow with inflation in cash generation without capital added is a plus, incorporated in projection now requiring projection (forecast) at an inflation rate.” Finally, Munger said, “There is no magic formula.” Azar says Buffett’s and Graham’s three main ideas of investing, the true fundamentals, remain as important as ever: (1) when buying a stock, think of it as a “piece of a business,” (2) have a margin of safety in regards to the purchase price, and (3) keep emotional Mr. Market in mind, knowing he is there to serve not guide you. However, there’s a fourth pillar to investing, one that Buffett has not talked about much but has demonstrated over and over again throughout his career, said Azar. The final element is courage. Graham himself said the last ingredient is courage. Graham said you must “have the courage of your knowledge and experience. If you have formed a conclusion from the facts and know your judgment is sound, act on it even though others may hesitate or differ.” Graham said you are neither right nor wrong because the crowd disagrees with you. You’re right because your data and reasoning are right. Many people have the concepts of value investing in their head, Azar said, but lack the courage to execute their ideas. Azar thinks the fourth item, along with the other three, is the crucial one and stresses that Graham himself, who was writing The Intelligent Investor for defensive investors, said, “In the world of securities, courage becomes the supreme virtue, after adequate knowledge and tested judgment are at hand.” In 2006, Azar bid $485,000 for lunch with Buffett, but another bid was higher. Buffett wrote Azar a note saying. “Maybe the price of the lunch will experience what they call in the stock market, a ‘correction’ next year and you will get your opportunity.” On June 30, 2006, Azar calculated Berkshire’s intrinsic value to be about $128,000 and on June 30, 2007, figured it to be about $144,000. Here’s Azar’s work as of June 30, 2007: Based on the two 10-year discounted cash flow tables, on the following two pages, which are very conservatively calculated, Berkshire’s intrinsic value could be in the range of $121,000 to $131,000 dollars per share. I used my conservative core earnings assumption for 2007—between $8.3 billion and $8.9 billion as the range or “core operating after-tax earnings” for my 2007 estimate. I say “could be” because intrinsic value is pretty nebulous and it is no exact science. If I went out further into the future in terms of the cash flow forecasts, the numbers sort of disconnect from the real world, so I like to keep it simple and did a 10-year assumption. However, a more simplified approach is taking the liquid assets of Berkshire at 6/30/2007, which was $40 billion of cash, $25 billion of fixed maturity securities, and $73.610 billion of equities, a total of $138.6 billion of liquid assets divided by 1,545,206 shares outstanding in $89,696 per share of investments alone. If you then take my forecasted operating after-tax earnings (not counting any investment gains or losses) of $8.3 billion minus $3.4 billion of aftertax insurance investment income, you get to $4.9 billion of core operating earnings (not counting income from those liquid investments) divided by 1,545,206 shares outstanding is $3,171 of core earnings per share * 17 times earnings (for the quality of company); and that is $53,908 per share plus the $89,696 of investments, which is a total of $143,604 per share—not far off the range of value in DCF [discounted cash flow] analysis (with straight core operating after-tax earnings) of $8.3 billion inclusive of Insurance Investment Income but not realized gains. You have a diverse group of earnings from companies with very strong competitive advantages. That facilitates owning more assets than your equity “would otherwise” provide with no risk of leverage, run by the greatest investor of all time. Berkshire is selling for $184 billion with $140 billion of liquid assets at 6/30/07, and about $5 billion of operating earnings unassociated with Insurance Investment Income, from those liquid investments. Berkshire is still at the lower end of the valuation band. Mr. Buffett taught me that a DCF should never have to be done, and Ben Franklin used to say the most exquisite folly is “wisdom spun too fine,” so I think even doing the DCF analysis makes me feel a little foolish. My conclusion: Hold on for dear life! Read more in the Book Of Permanent Value The Story of Warren Buffet.