[ Pobierz całość w formacie PDF ]
The New Buffettology
Mary Buffett and
David Clark
Rawson Associates
RAWSON ASSOCIATES
SCRIBNER
1230 Avenue of the Americas
New York, NY 10020
Copyright ¨ 2002 by Mary Buffett and David Clark
All rights reserved, including the right of reproduction in whole or in part in any form.
SCRIBNER and design are trademarks of Macmillan Library Reference USA, Inc., used under license by
Simon & Schuster, the publisher of this work.
Set in New Baskerville
Manufactured in the United States of America
Library of Congress Cataloging-in-Publication Data Buffett, Mary.
The new Buffettology: the proven techniques for investing successfully in changing markets that have
made Warren Buffett the world's most famous investor / Mary Buffett and David Clark. p.cm.
Includes index.
1. Investments. 2. Buffett, Warren. I. Clark, David, 1955. II. Title.
HG4521.B7692 2002
332.6-dc21 2002068110
ISBN 0-7432-3411-1
Visit us on the Word Wide Web:
Pluralitas non est ponenda sine neccesitate.
This book is dedicated to Charlie Munger and Billy Occam, who gave, respectively, to investing and
science the idea that the simplest explanation is usually the best.
Contents
Acknowledgments
Disclaimer
Foreword: A Few Personal Things About a Very Private Billionaire
Introduction: How Warren Buffett Turned $105,000 into $30 Billion
1. The Answer to Why Warren Doesn't Play the Stock MarketÏ and How Not Doing So Has Made Him
America's Number One Investor
2. How Warren Makes Good Profits Out of Bad News About a Company
3. How Warren Exploits the Market's Shortsightedness
4. How Companies Make Investors Rich: The Interplay Between Profit Margins and Inventory Turnover
and How Warren Uses It to His Advantage
5. The Hidden Danger: The Type of Business Warren Fears and Avoids
6. The Kind of Business Warren Loves: How He Identifies and Isolates the Best Companies to Invest In
7. Using Warren's Investment Methods to Avoid the Next High-Tech Massacre
8. Interest Rates and Stock PricesÏ How Warren Capitalizes on What Others Miss
9. Solving the Puzzle of the Bear/Bull Market Cycle and How Warren Uses It to His Advantage
10. How Warren Discerns Buying Opportunities Others Miss
11. Where Warren Discovers Companies with Hidden Wealth
12. Financial Information: Warren's Secrets for Using the Internet to Beat Wall Street
13. Warren's Checklist for Potential Investments: His Ten Points of Light
14. How to Determine When a Privately Held Business Can Be a Bonanza
15. Warren's Secret Formula for Getting Out at the Market Top161
16. Where Warren Buffett Is Investing Now!
17. Stock Arbitrage: Warren's Best-Kept Secret for Building Wealth
18. For the Hard-Core Buffettologist: Warren Buffett's Mathematical Equations for Uncovering Great
Businesses
19. Thinking the Way Warren Does: The Case Studies of His Most Recent Investments
20. Putting Buffettology to Work for You
Also By Mary Buffett And David Clark
Buffettology
The Buffettology Workbook
Acknowledgments
We wish to thank first and foremost Warren Buffett; although he did not participate in the writing of this
book, we are forever indebted to him for his wisdom and generosity over the years. His genius as an
investor will someday be overshadowed by his tremendous philanthropy. The Buffett Foundation, the final
repository for the masterpiece he calls Berkshire Hathaway, will ultimately be the world's wealthiest
charitable foundation, providing future generations with the benefits of his earthly passion for investing.
We also wish to thank our publisher, Eleanor Rawson, for her inspiration and guidance. She is the best of
her breed and we would be lost without her. We also would like to thank our editor, Lisa Considine, whose
pen kept ours straight and true. She is a credit to her craft. And a special thank you to our assistant editor,
Anne Bartholomew, and our amazing copy editor, Steve Boldt. We would also like to thank Simon &
Schuster attorneys Jennifer Weidman and Emily Remes for their skillful guidance. These people are solid
proof that the staff at Simon & Schuster is the best in the business.
We owe an enormous debt of gratitude to: Sam, for being Mary's knight in shining armor. To Erica and
Nicol, for being wise beyond their years and two of the best daughters a mother could ever ask for. To the
girls' father, Peter Buffett, for the wonderful years that we had together. To the magical and mystical
Sabrina Benson, who, with a simple wave of her wand and a phone call, makes the impossible happen. To
Kitty O'Keefe and Shih'hua Liu, for their friendship and brilliance. To Patti, for her love and support. To
Cindy Connolly Cates, who suffered through our earlier drafts and who remains always the silent third
author. We could not and would not write without her. To Ben Platt, for helping us burn out the demons
after a hard day's night. To Jessica Schemm, for playing the enchanting muse. To Eric Hoffman, for being
the best poet and proofreader that any author could ask for. To Gerry Spence, John Johnson, and Robert
Rose, for their words of encouragement when they were much needed. To Tim Vick, the most
intellectually honest man on Wall Street, for his insight and thoughts. To Pauline Macardican, for being an
angel in disguise. To Fritz Perlberg and Rob Gritze, for their friendship and wisdom. To Valerie Schadt, for
being everything that counts. To Roger Lowenstein, the best writer on Wall Street, for his reflections on
Warren and Berkshire Hathaway. To Andy Kilpatrick, for being the consummate Berkshire historian and a
charming Southern gentleman. To Andy Clark, for the historical research. To Vincent Waldman at Manatt,
Phelps & Phillips, for making the deal happen. To Terry Rosenberg, for his creative spirit. To Robert E.,
for his constant friendship and support through the most trying of times. And most important, to the
beautiful Kate Benecke for her love.
Disclaimer
This publication contains the opinions and ideas of its authors. It is not a recommendation to purchase or
sell the securities of any of the companies or investments herein discussed. It is sold with the
understanding that the authors and publisher are not engaged in rendering legal, accounting, investment, or
other professional services. Laws vary from state to state and federal laws may apply to a particular
transaction, and if the reader requires expert financial or other assistance or legal advice, a competent
professional should be consulted. Neither the authors nor the publisher can guarantee the accuracy of the
information contained herein.
The authors and publisher specifically disclaim any responsibility for any liability, loss, or risk, professional
or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any
of the contents of this book.
Foreword
A Few Personal Things About a Very Private Billionaire
In the annals of investment history the name Warren Buffett towers above all others. He turned an initial
stake of $105,000 into a $30 billion fortune, by investing in the stock market. This is an unparalleled feat.
Who is this man and what is his obsession with getting and staying rich?
Warren was conceived during the stock market crash of 1929, which nearly bankrupted his father's
investment firm. Like so many children who grew up in a family financially strapped by the Depression,
Warren developed an early fixation on money. As a child his favorite toy was a money changer. He carried
it everywhere. He was consumed by mathematical calculations about the compounding of dollars. At six,
he entered into his first business operation by buying bottles of Coca-Cola, six for a quarter, and selling
them for five cents apiece to fellow vacationers at Lake Okoboji, Iowa. He memorized the book A
Thousand Ways to Make $1,000 and began saving most of what he made delivering the Washington Post
and running a pinball business. Warren was so desperate to make money that in 1938, in the sweltering
summer heat of Nebraska, he walked miles to the racetrack where he spent hours on his hands and knees
scouring the sawdust-covered floors for discarded racing stubs, hoping to find a winning ticket.
Warren made his first stock market investment at eleven (three shares of Cities Service), and by the time
he had graduated from high school, at seventeen, he had amassed the princely sum of $6,000. He made it
through college in three years and then applied to MBA programs at both Harvard and Columbia. Harvard
said no. Columbia said yes.
Everyone has a defining moment in youth that sets the course for adulthood. For Warren this happened at
Columbia during a class taught by the legendary dean of value investing, Benjamin Graham. Warren and
Graham had an instant intellectual rapport. "Sparks were flying," recalls classmate Bill Ruane, now head of
the Sequoia Fund. "You could tell then that Warren was someone who was unusual." As if Graham had
lifted a shroud from his eyes, Warren suddenly saw a way to make the money he had dreamed of as a
child. Graham would be his guiding light.
After graduating, Warren tried to talk his former teacher into hiring him as an entry-level investment
analyst at his Wall Street investment firm. Graham said no. Warren, who had learned well the theory of
value investing, responded by offering to work for free. Graham contended that even at that bargain price
Warren had overvalued his talents. Warren, however, continued to pester the master and eventually
Graham relented and hired him.
Warren worked for the firm until Graham's retirement in 1956. Then, homesick for his beloved Nebraska,
Warren returned to Omaha, where he beat the pavement trying to raise money to form an investment
partnership similar to Graham's. Hounding everyone he knew for money, he gave lectures to investment
clubs and even knocked on neighbors' doors. He finally convinced eight people that he was worth
gambling on. With $105,000 of their money, as well as his own, Warren founded Buffett Partnership. Over
the next thirteen years, the partnership produced a 30Ô average annual compounding return. As Warren's
reputation as an investor grew, so did his desire to raise even more money to manage. He would often give
potential investors a copy of the partnership's tax return to show how much he was making his backers.
With 100Ô of his own wealth invested in the partnership, Warren ate his own cooking, as he said. He didn't
do anything with his investors money that he wasn't willing to do with his own.
By 1969, however, Warren discovered that the raging bull market of the late sixties had produced a vastly
overbought, and thus overpriced, stock market. He also saw that in this environment it was impossible to
practice the value-oriented investment style that was working so well for him and his partners. Perceiving
this, he the new buffettology did something quite unorthodox. Warren informed his partners that because
of the overpriced stock market he could not maintain the stellar results he had been providing, and instead
of adopting a new investment strategy with which he was uncomfortable, he was closing down the
partnership and returning their money. In liquidating the investment partnership Warren gave his investors
the option of either cash or shares in the companies in which the partnership held an interest.
One business in which the partnership held a controlling interest was the publically traded textile company
Berkshire Hathaway. The partnership had acquired a majority interest in Berkshire in 1967. Once the
partnership had control, Warren commandeered Berkshire's working capital to buy the first of many
insurance companies it was to acquire over the next thirty years. After liquidating the partnership in 1969,
Warren slyly bought up his partners' shares in Berkshire, which totaled 27Ô of the company, then
continued to buy more shares on the open market until he personally controlled the company.
Warren wanted this for two reasons. The first was that Berkshire was acquiring insurance companies,
which Warren knew would provide him with a pool of money called an investment floatÏ this pool of
capital is created by insurance premiums paid into an insurance company. The second reason was taxes. At
that time personal income tax rates were much higher than corporate tax rates. By using an insurance
company as an investment vehicle, Warren could take advantage of lower corporate tax rates, thus making
it easier to accumulate capital. The insurance company also provided him with a method to avoid the little
known "accumulated earnings tax," which was designed to keep people like Warren from hiding from high
personal income tax rates by using a corporation as an investment vehicle. Insurance companies are one of
the few business operations that are exempt from this tax.
With control of Berkshire's investment float and protection from high personal income tax rates, Warren
used his investment knowledge to grow Berkshire assets and his net worth unhindered by traditional
constraints. Because of his stunning performance investing his company's assets, Berkshire has over the
last thirty years seen its book value grow at an average annual rate of 23Ô, from $19 a share to more than
$40,000, and its stock market price increase at an average annual growth rate of 29Ô, from $13 a share to
approximately $70,000.
Warren Buffett's initial investment in Berkshire Hathaway has grown from approximately $7 million to
more than $30 billion. He created this wealth solely through his superior ability to make investment
decisions and with his clever use of an insurance company as an investment vehicle. In addition to making
him one of the richest people in the world, this also makes him the single greatest investor of all time.
[ Pobierz całość w formacie PDF ]