Buffettology has ratings and 67 reviews. David said: A beginners guide to value investing21 April I just clicked on Mary Buffett’s name on. Download the eBook for Buffettology by Mary Buffett, David Clark. Read excerpts, book reviews, & watch videos at Simon & Schuster. David Clark and Mary Buffett’s bestselling book Buffettology, as the name suggests, belongs to the latter category, but the reason it stands out is.
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There are dozens of books written on the topic of An investment strategy aimed at buying financially healthy companies at a discount to intrinsic value. The most successful investor of all time. Buffett was a student of Benjamin Graham, and has earned a place in the top 3 richest people on earth by applying sound value investing principles.
As a value investor, you should always try to buy companies below their An estimate of the ‘true’ value of a company, assuming that the market price does not always reflects this value correctly. This is the cornerstone of the value investing strategy. Graham was an absolute pioneer in the field of value investing, and Warren Buffett soaked up all of his knowledge and started applying this strategy himself.
At least, until Buffett’s brilliant business partner Charlie Munger convinced him that it is more important to buy a good business than a cheap business. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and huffett his methods were designed to keep that at bay.
Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it mmary never work with the kinds of sums of money we have. But he was a very good writer and a very good teacher and a brilliant man, one of the burfett intellectuals — probably the only intellectual — in the investing business at the time.
With the help of Munger, Buffett seriously improved upon Graham. The key realization was that if you only focus on getting something for the cheapest possible price, you will end up with crappy companies in your portfolio which never realize their value, or even worse, see their value decline over time, because many of these cheap companies are cheap for a good reason!
If, on the other hand, you purchase a great company with a durable competitive advantage, what Buffett calls a consumer monopolyand which is able to consistently compound its returns at above average rates, the price you pay becomes less of an issue, because such a company will see its value steadily increase over time.
In Buffett’s own words:. So what is the main characteristic of a wonderful business? The book says they are like toll bridges: Some examples are credit card companies, Google AdWords, and brand name consumer products shops have to carry, like Coca-Cola.
That’s why Buffett does not necessarily look at the discount to intrinsic value, but instead focuses on the so called Annual Compounding Rate of Return. This sounds more difficult than it really is. All this rate tells you is buffetg much you can expect to earn each year by purchasing stocks of a certain company at a certain price. To figure this out, you’ll need to estimate how much a company should realistically be worth five years from now, and such an estimate is only possible if a company has consistent earnings.
For this reason alone it is important to look for great, stable companies. You can calculate this rate of return using the following formula:. However, it might be even more useful to determine your preferred annual return, and then calculate at what price you have to purchase a stock to actually have a chance of earning that return.
This is what I call the Max purchase price in my premium Value Spreadsheetand you can calculate it with the following formula:.
Besides the profitability and value of a business, Buffettology reveals that inflation and taxes are also two things Buffett takes very seriously. This way he is essentially able to let his tax money work for him by letting it compound until he finally decides to sell his stocks.
That’s why his favorite holding period is forever. This brilliant maneuver has allowed Buffett to maximize his returns by minimizing the amount of taxes he has to pay.
Buffettology eBook by Mary Buffett, David Clark | Official Publisher Page | Simon & Schuster AU
The book also mentions another very interesting idea: Well, a company with a consumer monopoly generally produces high rates of return on a small net tangible An asset is something a company owns which generates money. Examples of current assets are cash, inventory, and maru receivable. Examples of fixed assets are equipment, buildings, and real-estate.
But the book reveals even more tactics which hardly any other book about his strategy seems to cover: In order to earn serious money on the stock market, you need a serious sum of money to start with. Warren Buffett did not have such a sum of money himself, so he decided to use the money of others instead! The initial way he approached this was to start his own investment partnership. So why exactly was this so brilliant?
Well, because an insurance company receives monthly payments from the people it ensures, but only has to pay this money out sporadically. In other words, insurance companies are sitting on a pile of idle cash, waiting to be paid out if necessary. This gigantic pile of Other People’s Money is called insurance float. Buffett used this float to massively increase the amount of money b for investments, which drastically increased his absolute returns.
Some say that Buffett’s success is not just due to the fact that he is a great stock picker, but also because he has been able to finance his investments with cheap money. The amount of earnings left after dividends have been paid to shareholders. This money can then be reinvested into the company.
The amount of net income returned as a percentage of buffettologh equity. It is a measure of how profitable a company is able to buffettilogy its equity.
Buffett believes all earnings are his, either through dividend payments or retained earnings, since he is part owner of the companies he invests in. According to the authors, Buffett places a tremendous importance on retained earningswhich is the The amount of money a company earned after deducting all costs of doing business, often referred to as ‘the bottom line’.
Net income can be found on the income statement and is the most commonly used figure for assessing how profitable a company is. However, be wary of the fact that this figure is highly susceptible to manipulation by management. It is not difficult to see why, because retained earnings is the money that a company can reinvest into the company for future growth, and the return on equity determines to a large extend the extra income that will be generated from these investments.
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So the higher the retained earnings and the higher the return on equity, the faster the intrinsic value of a company will grow over time. In a Forbes bkffettology, which the book quotes, Charlie Munger summarized Berkshire Hathaway’s strategy as follows:. After taxes this works out to a Notice that Buffett and Munger prefer companies which do not pay a dividend. This is because dividends lower retained earnings and therefore limit future growth.
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A company should only pay a dividend, according to the authors, if it has no better way of allocating the money, for example if a company has grown to the size of Apple AAPL and therefore has limited room for growth left. I could go on forever, since the book is packed with thought-provoking insights, but to keep things neat and orderly, here are the 10 most important lessons I learned from Buffettology:. Sustainable competitive advantages are advantages that are not easily copied and, thus, can be maintained over a long period of time.
We covered a lot of ground in this article and I hope you learned a thing or two from it. If you are interested in learning more about Warren Buffett’s approach to investing, then enter your name and email address in the form below to subscribe for my weekly investment newsletter, which includes exclusive content which can’t be found anywhere on the blog.
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