Below are notes that my student Clayton took about ” The Warren Buffett Way ” while listening to the audiobook.
You can also download the notes in Microsoft Word format here.
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Clayton’s notes from “The Warren Buffett Way” audiobook
(Quickly typed out while listening to the audiobook)
Also, watch our video review of “The Warren Buffett Way” here:
https://youtu.be/w_CT70g296g
Background
(5min)
Worked for his father, and then joined a group. Had about 100k$ to invest, but controlled maybe just 100 himself.
1969 he stopped stocks because market got tough. Company value was 25mil at that point
He really didn’t like the “Nifty-fifty” stocks that were so popular. He sought value.
Great statement: …”stick with what you know and don’t chance speculative profit, etc.” (gist)
But he bought and kept a textile company. In 1980 it was hard. In 1985 he closed it. Kind of a failure… but learned 1) that it’s hard to turn a company around; and 2) that insurance is a great business… monthly income that can be put into investments.
Wingman, Charles Munger.
Buffett nicely aligns incentives at BH. Cuts checks as rewards for meeting targets for one’s specific job.
23min
Buffett Education
Benjamin Grahm – financial analysis. 1934 book. And Intellegent investor (1949)
Hired buffett for some time. Taught at Columbia. Ruined by crash. Worked with David Dodd. Security Analysis (1934) ; “margin of safety”; Determined “intrinsic value” of a company. There are some measurable factors: (quality of management is not so measureable), fixed assets, dividends, current and historic earnings… and others are measureable.
Phil Fischer
Need product potential, and look for long-term.
Invest in things you know.
Gram and Fischer are kind of different. Gram wants potential and measurables. Fischer wants what you know without so much focus on …
Buffett learned from Gram that others invest on emotion. And If you can insulate yourself from that emotion and impulse, you can capitalize off others’ irrational behavior. Fischer gave the methodology for finding longterm investments. … Buffett synthesized Gram and Fischer and implements the strategies well.
35min
Fear or Greed means that price is not equal to value… but it will eventually go back to the price.
Must master your emotions.
37min
Mr. Market allegory(1987 annual report) : Mr. Market is emotionally unstable, and is randomly bullish or bearish. And he does not mind being snubbed. Take advantage of him. Don’t take any of his “advice” though.
He doesn’t but any faith in the talking heads or fads. Only in his own method.
Buffett Way 2
What he’s invested in in the past…
Bought general foods and coke. 3x and 4X gains. Bought when nobody saw it. Also saw inflation coming to raise food prices, etc.
Two things to watch:
Inflation does have an effect on returns, so it has to be considered.
Budget deficit is ok, but trade deficit is not… because it will drive inflation…
4min
Avoid companies that could be hurt by inflation…
That means avoid fixed asset companies. No fixed asset companies suffer less from inflation.
Economic good will is not hurt by inflation…
Seas Candy Shop. Good company. Had a good reputation. So it could price above the cost. This good will is really important, because its benefit goes up with inflation.
Portfolio management… how to buy explained in 1991 report… first, long term character, second, management ability, finally, reasonability of stock price.
Had just 3 companies in 1987…
Then coke in 1988…
Coke , geico, gillett, … guiness…
76%in top 4 companies
11min
Invested in: Consumer staples, financial goods, consumer cyclicals, capital goods…
Willingness to say “no”
Gram only did if all signs pointed to yes.
A few homeruns. Just 20 big decisions in life. Wait for a great opportunity.
15min
What you do with earnings is much more important. So don’t get so caught up in earnings reports. He made “lookthrough earnings” to show a better picture of earnings…
17min
4 Tenets
Business
Management
Financial
Market
Biz.
1) simple? Understandable?;
2) consistent history? …same product over many years
3) favorable long-term prospects? … price flexibility of franchises… good-will, (commodities don’t have goodwill or price flex… today, computers are commodities)
Management
1) behave like owners… rational… allocate capital in a growth mindset
2) fully honest about company? Communicate earnings and other clearly? Discuss failures?
3) resist “institutional imperative”? The habit of one company copying others’ habits.. A kind of group think
Financials
1) focus on return on equity, not earnings per share. (at 26min)..without debt/leverage
2) calculate owner earnings… cashflow is not a perfect measure… foolish stock price… Formula at 29min…
3) high profit margins. Low cost operations always find a way to cut costs… always… naturally… corporate overhead is bad…
Market. (31 min-ish)
1) for every dollar retained, one dollar of market value should be there… If a company’s earnings are not invested well, then it will show…
When to invest.
Rational Investing:
1) good value? 2) good price/time to buy?
33min
John Burr Williams. : “The theory of Investment value”
Buffett says if you get the right variables you can
Discount is US gov’t bond rate in Buffett’s equation…
Growth vs Value investors.
Today, Buffett thinks they are tied at the hip…
36min
Mistakes stem from:
Margin of safety is useful. In case you mis-appraise a company, you’ll do well still.
Be a “business owner” not a “stock” owner… don’t look at it as a piece of paper.. Look at it as being part of a company that you need to understand.
END
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