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Buffetology by Mary Buffett and David Clark

20/08/2013

Despite being written by Warren Buffet’s ex daughter in law Buffetology is not a scandalous expose of the inner sanctum of one of the world’s richest men (and perhaps most succesful investor) but instead a detailed account of the strategy he has employed to obtain this success.

The Buffet formula is based upon ‘value investing’ and can essentially be boiled down to a few key elements when deciding a business represents a value prospect or not.

What do you want to buy?


Whilst nanotechnology and silicon valley industries might have great sex appeal there is little point in sticking your money in them if you have no understanding of what these firms actually do. This first most obvious point is simply to choose businesses you understand.

Consumer monopolies

Mainstream economists often look at monopolies and view a state that produces a socially inefficient outcome and therefore undesirable. The value investor (concerned chiefly with making good returns on investments) like Buffet looks at consumer monopolies and sees opportunity. A consumer monopoly (Ms Buffett cites McDonalds or Coca Cola) who have cornered the market in a particular area represents the likelihood of stable and predictable returns to the value investor over the long term.  This is contrasted with commodity industries (such as petroleum) which are considered unstable and harder to predict because of greater competition, possible regulatory uncertainty and geopolitical issues.

The price you pay determines your rate of return

According to Buffetology, the macro picture (such as the state of the global economy, interest rates and fiscal policy) is less important to the value investor than whether the business is a value prospect or not. A good business with sound fundamentals (including low debt) selling a product that people want to buy and are likely to continuing buying will remain a sound prospect regardless of the macro economic environment. However a good business is not a value prospect at any price because the stock market factors in these judgements over the long term in determining the intrinsic value of a business. So, a company may be a bad buy at $20 per share but a very good one at $10 per share.

Conclusion

The arguments for Buffetology are fairly neat, intuitive and easy to grasp. For a potential investor with little knowledge of the stock market such as myself, the book offers a good introduction to the principles which Warren Buffett employed to great success. Some readers may be disappointed to learn that alas having read the book I don’t know all the secrets to becoming super rich like Mr Buffett. However, the book offers a good background to the strategy of value investing and is a good starting point for those who want to dip into the stock market.

 

 

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