Friday, July 4, 2008

Buffetology - Mary Buffett & David Clark

Another Warren Buffett book ? You must be wondering, what's so interesting about this book. The book was written by Warren's daughter in-law which was divorced after 12 years of marriage. She was able to watch and learn from the world's most famous investor. Sort of like insider view of how Warren works !

Secret of Warren's success
1. Invest in companies whose future earnings he can reasonably predict
2. That kind of company generally has excellent business economics in his favor. This allows the business to make lots of money that it is free to spend either by buying new businesses or by improving the profitability of the great business that generated all the cash to begin with
3. High Return of shareholders equity, strong earnings, presence of consumer monopoly and management that functions with shareholder economic in mind
4. The price you pay will determine the return you can expect on your investment
5. Choose the kind of business he would like to be in and then lets the price of the security and expected rate of return
6. Investing at the right price in certain businesses with exceptional economics will produce over long term an annual compounding rate of return of 15% or better
7. Acquire other people's money to manage so that he could profit from his investing expertise

Warren's winning way !
1. What to buy - know what you want
2. At what price - wait for it to be real cheap

9 Questions to help determine if a business is an excellent one
1. Does the business have an identifiable consumer monopoly ?
2. Are the earnings of the company strong and having upward trend ?
3. Is the company conservatively financed ?
4. Does the business consistently earn a high rate of return on equity ?
5. Does the business get to retain its earnings ?
6. How much does the business have to spend on maintaining current operations (capex) ?
7. Is company free to reinvest retained earnings in new business opportunities, expansion of operations, share purchases ? How good a job does the management do this ?
8. Is company free to adjust prices to inflation ?
9. Will the value added by retained earnings increase the market value of the company ?

Where to look for excellent businesses ?
1. Business that make products that wear out fast or used up quickly, that have brand name appeal, merchants have to carry or use to stay in business
2. Communications businesses that provide a repetitive service manufacturers must use to persuade the public to buy their products
3. Business that provide repetitive consumer services that people and business are consistently in need of

Other interesting topic
1. The magic of compounding
2. Margin of safety - Value of the business having 25% or better projected return from Net Asset.
3. Mediocre business - identify commodity vs excellent business similar to Blue Ocean Strategy
4. Ways to find company to invest in
5. When a downtown in a company can be investment oppurtunity
6. Myth of diversifications versus the concentrated portfolio
7. When should you sell your investments

Mathematical tests
1. Test for predictability of earning
2. Initial rate of return
3. Earning Per Share growth (EPSG) rate

Famous quote on portfolio
1. On concentrated portfolio approach - A person would make fewer bad investment decisions if he were limited to making just ten in his lifetime. Just ten ! You would put a little work into making those ten decisions, don't you think ?

In conclusion, there's no rocket science to Warren's way of investing. One have to be patient to wait and look for oppurtunity available in the market. With the current bearish market condition, the time is ripe to enter the market gradually and find the right equity. It's a good title to start with for investing. Come to think of it, now everything is making sense now that most company in Bursa Malaysia that have high ROE i.e. Public Bank, BAT etc commanding a high price.

The title gets a 7.5 out of 10 for investing type of book. The title explains a lot of basics fundamental on the way of investing the Buffett way.

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