Investors
Book Review
The
Warren Buffett Way: Investment...
Quite
possibly one of the most useful books I have read.
The book talks openly about Buffetts methods of beating
stock market averages year in year out. While most
“men in red braces” have different reasons
for buying and selling stocks. The book states that
this is possibly to do with following what everybody
else is doing. The idea being that if they pick the
one stock that takes off then they are a hero for
a while, conversely if they pick the one stock that
fails miserably, they’ll be looking for a new
job – its easier to follow what everyone else
is doing.
Buffett
has three key areas that he looks at when he purchases
a stock – He looks at ;
1.
Business Tenets – a) is it simple and understandable,
b) does the business have a consistent operating history
and c) does the business have favourable long-term
prospects
2. Financial Tenets – follows these basic principles
a) Focus on return on equity, not earnings per share,
b) Calculate “Owner Earnings” to get a
true reflection of value, c) Look for companies with
high profit margins and d) For every dollar retained,
make sure the company has created at least one dollar
of market value
3. Market Tenets – a) What is the value of the
business, b) Can the business be purchased at a significant
discount to its value.
|
“The
most distinguishing trait of Buffett’s investment
philosophy is the clear understanding that, by owning
shares of stock, he owns businesses, not pieces of
paper. The idea of buying stock without understanding
the company’s products and services, labour
relations, raw material expenses, plant and equipment,
capital reinvestment requirements, inventories, receivables,
and working capital needs – is unconscionable”,
says Buffett. This mentality is reflected in the attitude
of business owner as opposed to a stock owner. In
the summation of another book, The Intelligent Investor,
Benjamin Graham wrote, “Investing is most intelligent
when it is most businesslike.” These words are,
Buffett says, “the nine most important words
ever written about investing.”
As
a sidenote, compared to Buffetts’ stockmarket
returns (average of 17%), I would still rather place
my cash in property as some of my returns on capital
invested are well above that figure. |
