After learning a bit more about Buffett...
Just reading some of his materials and getting a general sense of how the man thinks, it's clear that on most topics related to business and economics, if you pose a question, he will give you an informed opinion. Obviously, experience is critical to that, and Buffett and others have plenty of that. But for someone who's starting with a relatively blank slate and attempting to get to that point, what is a good way of getting there? Any books you guys recommend, or should I just dig up some macroeconomic textbook and plow in? I could just read WSJ every day but I want to make a conscious effort to learn. Apologies for the relatively vague question.
Just start reading stuff, and anything you dont get look up.
I just saw something at B+N today that called itself the business encyclopedia it was a huge blue hardcover book that claimed to have everything you need to know. Summaries of over 100 major business books, interviews, letters, histories, etc. Shoulda bought it, maybe I will tomorrow.
Its hard to deny Buffett's capabilities. But there is a strong element of luck involved here.
You can be 100% right about an investmen, but other variables can change and for the worse...
"Its hard to deny Buffett's capabilities. But there is a strong element of luck involved here. "
A track record of success, over 45+ years, shared by the others who learned under graham is tough to call 'luck'. find the article about in the '85 hermes article about the superinvestors of graham and doddsville.
Luck is a short-term element in investing and diminsihes over time (especially in Buffet's case). While luck has been a contributing factor to his success it is in no way a significant aspect of his track record. The same can be said for Graham as both are value investors who focus on out of favor under-valued assets (with a built in margin of safety).
For the OP, a macro-econ text book may provide you with a general perspective of how things work in various situations I think you would be better served reading books by Peter Lynch, Benjamin Graham, Buffet, Bogle, and if you want to learn about i-banking and finance I would pick up SCOOP Books Practitioner's Guide to Investment Banking. For finance fiction I would check out the pre-reqs Liar's Poker, Monkey Business, Predator's Ball, Money Culture, Barbarians at the Gate, etc.
Book - 'The Warren Buffett Way' Very good read
Didn't really understand OP's original question - are you looking to learn about Buffet's investing methods? If that's the case, I'd echo the recommendation for "The Warren Buffet Way". Also "Buffetology" and "The New Buffetology" aren't bad. Unfortunately, none of the Buffet books out there are very good for someone with a finance background.
His valuation is pretty straight-forward (and he has said before he can value a company in his head). He basically does a DCF analysis, using 10 year averages for earnings growth, cap ex, etc. He uses the 10-Year T-bill rate for his discount rate. He uses something called "owner earnings", which is net income + depreciation/amortization - cap ex. That may be too simple, but someone else can correct me. =)
Also keep in mind Buffet takes into account fundamental analysis as a significant portion in his investment decision making period (i.e. does he understand what the company does). You can see this in the type of companies he invests in (i.e. Geico, Amex, etc) and when he buys into the company.
To add to that freeloader's comment above: he must understand the business ("circle of competency"), it should be dominant in the industry and have a "moat" (i.e. one newspaper in town, power of Coke's brand), it should have a strong balance sheet with little to no debt, minimum 10 years consistent performance, ROE should be consistently high (he prefers management to reinvest instead of paying out dividends because of double tax of dividends), often management has a significant stake in the company, also management has a strong trend of cost-cutting (i.e. Geico's reduction of policy underwriting when costs in the industry become too high instead of continuing to grow revenue).
His minimum annual growth rate is 15%. He views every share as an ownership stake in the business, and the "owner earnings" as his (hence the ROE requirement). He prefers a margin of safety in his purchase price (Graham), but he'd "rather own a great business for a good price than a good business for a great price". He's been quoted as saying his favorite holding period is forever, and of course his #1 rule of investing is "don't lose money." (so he never chases growth companies or story stocks).
Also keep in mind, this is his strategy for investing in businesses and is what is written about, because it's the easiest to understand. He also pursues other strategies as well.
According to Munger, Buffett has never done a DCF in his life.
Read the letters to shareholders. Then read Graham.
Seconded. They're free on Berkshire's website.
From his 1989 letter, right at the top:
"What counts, however, is intrinsic value - the figure indicating what all of our constituent businesses are rationally worth. With perfect foresight, this number can be calculated by taking all future cash flows of a business - in and out - and discounting them at prevailing interest rates. So valued, all businesses, from manufacturers of buggy whips to operators of cellular phones, become economic equals."
Sounds like DCF to me (although I'm sure you're absolutely right in that he's never projected out financial statements or done a DCF model in Excel).
yup, that's right.....
buffett and munger once bought a company and munger said he would have paid the ibankers not to see the rubbish they put together.
Reducing premium volume (policy underwriting) isn't cost-cutting. Also, please learn the difference between i.e. and e.g.
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