Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett The Worlds

Paperback | May 26, 1999

byMary Buffett, David Clark

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In the world of investing, the name Warren Buffett is synonymous with success and prosperity. Learn how Warren Buffett did it—and how you can too.

Building from the ground up, Buffett chose wisely and picked his stocks with care, in turn amassing the huge fortune for which he is now famous. Mary Buffett, former daughter-in-law of this legendary financial genius and a successful businesswoman in her own right, has teamed up with noted Buffettologist David Clark to create Buffettology, a one-of-a-kind investment guide that explains the winning strategies of the master.

* Learn how to approach investing the way Buffett does, based on the authors'' firsthand knowledge of the secrets that have made Buffett the world''s second wealthiest man
* Use Buffett''s proven method of investing in stocks that will continue to grow over time
* Master the straightforward mathematical equipments that assist Buffett in making investments
* Examine the kinds of companies that capture Buffett''s interest, and learn how you can use this information to make your own investment choices of the future

Complete with profiles of fifty-four "Buffett companies" -- companies in which Buffett has invested and which the authors believe he continues to follow -- Buffettology can show any investor, from beginner to savvy pro, how to create a profitable portfolio.

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From Our Editors

Get the most out of your money, with the help of family secrets from the world’s most famous investor. Buffettology examines the techniques and knowledge of Warren Buffet’s investment secrets. Author Mary Buffet is his former daughter-in-law and teaches readers what Buffet looks for when evaluating a company. As a bonus, readers learn about 50 companies the author believes Buffett watches and inve...

From the Publisher

In the world of investing, the name Warren Buffett is synonymous with success and prosperity. Learn how Warren Buffett did it—and how you can too.Building from the ground up, Buffett chose wisely and picked his stocks with care, in turn amassing the huge fortune for which he is now famous. Mary Buffett, former daughter-in-law of this legendary financial genius and a successful businesswoman in her...

Mary Buffett is an internationally acclaimed writer and lecturer on Warren Buffett's investment techniques. She is also the CEO of a multimillion-dollar-a-year commercial and film editing company with clientele that ranges from Coca-Cola to Madonna. She currently makes her home in Santa Monica, California.

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Format:PaperbackDimensions:320 pages, 8.44 × 5.5 × 1.1 inPublished:May 26, 1999Publisher:ScribnerLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:068484821X

ISBN - 13:9780684848211

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From Chapter 2 How to Use This Book Folly and discipline are the key elements of Warren Buffett's philosophy of investing -- other people's follies and Warren's discipline. Warren commits capital to investment only when it makes sense from a business perspective. It is business perspective investing that gives him the discipline to exploit the stock market's folly. Business perspective investing is the theme of this book. This discipline of investing from a business perspective has made Warren the second richest business person in the world. Currently Warren's net worth is in excess of $20 billion. Warren is the only billionaire who has made it to the Forbes list of the four hundred richest Americans solely by investing in the stock market. Over the last thirty-two years his investment portfolio has produced an average annual compounding rate of return of 23.8%. As humans we are susceptible to the herd mentality, and so we often fall victim to the emotional vicissitudes that propel the stock market and feed enormous profits to those who are disciplined, like Warren. When the Dow Jones Industrial Average has just dropped 508 points and all the sheep are jumping ship, it is investing from a business perspective that gives Warren the confidence to step into that pit of fear and greed we call the stock market and start buying. When the stock market soars to the stratosphere, it is the discipline of investing from a business perspective that keeps Warren from foolishly allocating capital to business ventures that have neither hope nor prospects of giving him a decent return on his investment. This book is about the discipline of investing only from a business perspective. Together we will explore the origin and evolution of this philosophy. We will delve into the early writings of Warren's mentor Benjamin Graham and the ideas of other financial luminaries of this century, and travel to the present to explore the substance of Warren's philosophy. Warren made his fortune investing in the securities of many different types of businesses. His preference is to acquire 100% ownership of an enterprise that has excellent business economics and management. When he is unable to do that, his next choice is to make a long-term minority investment in the common stock of a company that also has excellent business economics and management. What confuses people who are trying to decipher his philosophy is that he also makes investments in long-, medium-, and short-term income securities. And he is a big player in the field of arbitrage. The characteristics of the businesses that he is investing in will vary according to the nature of his investment. A company that he is willing to invest in for arbitrage purposes may not be the kind of business in which he wants to make a long-term investment. But regardless of the type of business or the nature of the investment, Warren always uses the basics of business perspective investing as the foundation for his decision. Most people have the intellectual capacity to understand Warren's philosophy of investing from a business perspective, but few have the dedication and willingness to work to learn the tools of his craft. The purpose of this book is to lay out, step by step, the foundation of Warren's philosophy and the manner in which he applies it. This book is a tool to facilitate the task of learning, and it is our intention to teach you Warren's philosophy so that you may acquire the skills to practice this discipline yourself. Before we start, I would like to introduce a few concepts and terms that will be used throughout the book and give you an idea of where we will be heading as we voyage through the seas of high finance. First of all, let's take the term "intrinsic value." Its definition has been debated for the last hundred years. It fits into our scheme because Warren will buy into a business only when it is selling at a price that makes business sense given the business's intrinsic value. Determining a business's intrinsic value is a key to deciphering Warren's investment philosophy. To Warren the intrinsic value of an investment is the projected annual compounding rate of return the investment will produce. It is this projected annual compounding rate of return that Warren uses to determine if the investment makes business sense. What Warren is doing is projecting a future value for the business, say, ten years out; then he compares the price he is going to pay for the business against the business's future, projected value, and the length of time required for the business to reach that projected value. By using an equation that we will show you later in the book, Warren is able to project the annual compounding rate of return that the investment will produce. The annual compounding rate of return the investment is projected to produce is the value he uses to determine if the investment makes business sense when compared to other investments. In its simplest manifestation it works like this: If Warren can buy a share of stock in X Corporation for $10 and can project that in ten years the share will be worth $50, he can then calculate that his projected annual compounding rate of return will be approximately 17.46% for the ten-year period. It is this projected annual compounding return of 17.46% that he will then compare to other investments to determine whether the investment in X Corporation makes business sense. You may be wondering: If Warren's intrinsic value model requires a projection of a business's future value, then how does he go about determining that future value? That, my friends, is the crux of solving the enigma of Warren's investment philosophy. Just how does one determine the future earnings of a business in order to project its future value and, thus, its intrinsic value? This problem and Warren's method of solving it will be the focus of much of this book. In short, Warren focuses on the predictability of future earnings; and he believes that without some predictability of future earnings, any calculation of a future value is mere speculation, and speculation is an invitation to folly. Warren will make long-term investments only in businesses whose future earnings are predictable to a high degree of certainty. The certainty of future earnings removes the element of risk from the equation and allows for a sound determination of a business's future value. After we have learned what Warren believes are the characteristics of a business with predictable earnings, we will learn how to apply the mathematical calculations he uses for determining the business's intrinsic value and what the return on his investment will be. The nature of the business enterprise and whether it can be bought at a price that will yield a sufficient return will determine the investment's worth and whether or not we are investing from a business perspective. Copyright © 1997 by Mary Buffett and David Clark

Table of Contents

CONTENTS
Disclaimer
PART I: THE ART OF BASIC BUFFETTOLOGY
1. Before You Begin This Book
2. How to Use This Book
3. Roots
4. Investing from a Business Perspective
5. What Is Businesslike Investing?
6. Warren's View of Earnings
7. The Price You Pay Determines Your Rate of Return
8. The Corporation, Stocks, Bonds -- a Few Useful Explanations
9. Valuing a Business
10. The Only Two Things You Need to Know About Business Perspective Investing: What to Buy -- and at What Price
11. What We Can Learn from Warren's Secret Weapon: The Magic of Compounding
12. Determining What Kind of Business You Want to Own
13. The Theory of an Expanding Intrinsic Value
14. The Mediocre Business
15. How to Identify the Excellent Business -- the Key to Warren's Good Fortune
16. Nine Questions to Help You Determine If a Business Is Truly an Excellent One
17. Where to Look for Excellent Businesses
18. More Ways to Find a Company You Want to Invest In
19. What You Need to Know About the Management of the Company You May Invest In
20. When a Downturn in a Company Can Be an Investment Opportunity
21. How Market Mechanics Whipsaw Stock Prices to Create Buying Opportunities
22. Inflation
23. Inflation and the Consumer Monopoly
24. A Few Words on Taxation
25. The Effects of Inflation and Taxation on the Rate of Return, and the Necessity to Obtain a 15% Return on Your Investment
26. The Myth of Diversifications Versus the Concentrated Portfolio
27. When Should You Sell Your Investments?
28. Warren's Different Kinds of Investments
PART II: ADVANCED BUFFETTOLOGY
29. The Analyst's Role in Ascertaining Earning Power
30. The Mathematical Tools
31. Test #1, to Determine at a Glance the Predictability of Earnings
32. Test #2, to Determine Your Initial Rate of Return
33. Test #3, to Determine the Per Share Growth Rate
34. Determining the Value of a Company Relative to Government Bonds
35. Understanding Warren's Preference for Companies with High Rates of Return on Equity
36. Determining the Projected Annual Compounding Rate of Return, Part I
37. Determining the Projected Annual Compounding Rate of Return, Part II
38. The Equity/Bond with an Expanding Coupon
39. Using the Per Share Earnings Annual Growth Rate to Project a Stock's Future Value
40. How a Company Can Increase Its Shareholders' Fortunes by Buying Back the Company's Stock
41. How to Determine If Per Share Earnings Are Increasing Because of Share Repurchases
42. How to Measure Management's Ability to Utilize Retained Earnings
43. Short-Term Arbitrage Commitments
44. Bringing It All Together: The Case Studies
Gannett Corporation, 1994
Federal Home Loan Mortgage Corporation, 1992
McDonald's Corporation, 1996

45. How Warren Got Started: The Investment Vehicle
46. Fifty-four Companies to Look At
47. Waiting for the Perfect Pitch
Epilogue
Index