Buffettology, Mary Buffett
2/28/07
Excellent take on how Warren Buffet evaluates, not stocks, but businesses. Easy to forget that that is what the strock market is, the buying and selling of parts of companies. Buffet sees two “parts” to the market, the near term speculative market and the longer term investment market. He has no interest in the speculative market.
When evaluating a company buffet looks first at what he wants to buy (type of company) and then evaluates qualitative properties followed by quantitative prosperities. That is, what to buy, and then, at what price.
Qualitative (p 101):
1. Does the biz have an identifiable consumer monopoly?
2. Are the earnings of the company strong and showing an upward trend?
3. Is the company conservatively financed?
4. Does the business consistently earn a high rate of return on shareholders’ equity?
5. Does the business get to retain its earnings?
6. How much does the business have to spend on maintaining current operations?
7. Is the company free to reinvest retained earnings in new business opportunities, expansion of operations, or share repurchases? How good a job does the management do at this?
8. Is the company free to adjust prices to inflation?
9. Will the value added by retained earnings increase the market value of the company?
Consider business capital and the cost to replace, the candy company vs. car company.
Quantitative
Test 1 – Determine, at a glance, predictability of earnings… are they going up?
Look at rate of equity growth and consider the rate of increase, project fut value.
Do the same with earnings
Alternative Investments
When not in a good investment, the following are used:
· Long-term fixed-income securities
· Medium-term fixed income securities
· Short-term cash equivalents
· Short-term arbitrage commitments (favorite)
Arbitrage
G, expected gain, if a gain
L, expected loss, if a failure
C, changes of success, percentage
Y, expected time of holding, in years
P, current price
Annual return = (CG-L(100%-C))/(YP)
