The New Buffettology - The Proven Techniques for Investing Successfully in Changing Markets, by Mary Buffet & David Clark (Rawson Associates Scribner, 2002).
This investor's manual for value investing provides step-by-step techniques used by the super-rich investment guru Warren Buffett to pick value stocks.
The term "Buffettology" may not have secured a place in the Webster dictionary yet, but it sure is the magic word in the dictionary of investing. There have been so much coverage of his decades old wisdom in numerous books, magazines, and all channels of media. His investment principles are as simple as using common sense and understanding the power of compound interest. Yet, many turn a blind eye to them in search of quick profits. Just following the steps that this book teaches could earn a return, better than the market average.
How to Pick Companies to Buy, Rather Than Stocks to Trade
In the first few chapters, the book explains how Warren Buffett stands to differ from the crowd in picking stocks to buy. Most of the investors buy on good news and sell on bad news. Buffett buys on bad news. People are skeptical of a stock when it is beaten up to its lows. But this is when Buffett sees the opportunity of a lifetime. He starts looking deep into the company fundamentals to see if the underlying business model is sound and that the negative even is just a one-time occurrence. Once he is confident in the business he goes and buys with all the cash he can use. He does not believe in buying a little to avoid downside risk. When in doubt he moves on. The author defines this approach as contrarian investment strategy. What Buffett practices is the selective contrarian strategy, where he buys a part or whole of a company which has a competitive durable advantage and its stock price is beaten up due to bad news or recession.
Buy Only Companies With Competitive Durable Advantage
Buffet classifies companies into two types. One is price-competitive-commodity business and the other is competitive-durable-advantage business. Buffet avoids the first type of business, as there are several companies offering the same product or service and the profit margins are narrow due to price competition. Second type of business is the one who has less competition, or has a strong brand name, or has a high inventory turnover to compensate for the low prices. Competitive durable advantage is the strategy that this book emphasizes all over. A company with durable competitive advantage should have earned a consistent return on equity (ROE) of over 12% for at least in the past 10 years. Should have a positive trend in the earnings.
Choosing the Right Opportunity to Buy a Stock
The book gives some great practical tips on when to buy a stock once a company is determined to have competitive durable advantage. It does not mention about looking into a stock chart anywhere. It teaches you how to estimate the underlying book value of a company. And if the stock price is below that at any point of time, it is a great buying opportunity. The market is fearful. That's when Buffett buys them in huge numbers. He lets go if the price is not right. Because according to his principle, the price one pays for a stock determines ones' rate of return. Such buying opportunities come during a bear market, a recession, a calamity, or bad news about a company.
How to Interpret the Financials, Using a Check List, Getting Into And Getting Out of the Game
The book teaches when financial information to look for in a company like Return of Equity, Return of Total Capital, Earnings per Share. It also provides the sources that Buffett uses for his research. It gives a 10 point check list to use before picking a company to buy. The last chapter provides a wonderful template of questions about a company. Answering all the questions will help one decide whether to buy a stock or not. The book also lists all the companies that Buffett had or has invested in in the past few decades and also the rationale behind them. Even he has made his share of mistakes. But was very smart to learn from them.
This book should be in the desktop of all those who seek to invest in the stock market. One additional attribute that the book needs from the reader is patience. This book doesn't speak of a short-term quick buck, but rather long-term, solid wealth creation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.