Buffettology - A Review Part I

I've recently bought a book called Buffettology by Mary Buffet and David Clark. Its about the techniques that have made Warren Buffett the world's most famous investor. It was written by Mary Buffett, a former daughter-in-law of Mr. Buffett and also a legendary businesswoman in her own right, in collaboration with a noted Buffettologist David Clark.

So who is Warren Buffett? Warren Buffett was born August 30, 1930 in Omaha, Nebraska to a stock broker and United States Representative father, Howard Buffett and Leila Buffett. He had a entrepreneurial spirit since his childhood. He began working for his father's stock brokerage at age of 11 and also in that same year, made his first stock purchase, buying Cities Services preferred shares for $38 each. When the price of the share reached $40, he sold them, only to watch as the price rocketed to $200 a few years later. From this he learned an important lesson, that it was important to invest in good companies for the long term. When he was 14, he used the $1200 he had saved up from two paper routes to buy 40 acres of farmland which he then rented to tenant farmers. Remember, this is sometime in the 1940s, $1200 is a large sum of money back then!

Warren Buffett graduated from Columbia Business School with a Master's degree in Economics in 1951. Along the way, he became interested in investing after reading The Intelligent Investor by Benjamin Graham, a well known investor at the time. Eventually, he bought over a textile manufacturing company called Berkshire Hathaway for $8 per share in 1962 and turned it into multi-billion dollar company whose share prices rose to a all time high of $8000 per share. Warren Buffett net worth, as estimated by Fortune Magazine on June 25, 2006 to be $44 billion, making him the second riches man in the world, after Microsoft founder Bill Gates.

In June of 2006, Warren Buffett announced plans to contribute 10 million Berkshire Hathaway Class B shares to Bill and Melinda Gates Foundation, a charitable organization run by Microsoft founder Bill Gates and his wife Melinda Gates. The shares were worth approximately US$30.7 billion as of June 2006, making it the largest charitable donation in history.

Warren Buffett practices a modified form of investment call Value Investment, an approach he learned from Benjamin Graham. From the book Buffetology, Warren Buffett secret to successful investment can be summed up in the following seven points:

1. He will only invest long-term in companies whose future earnings he can reasonably predict.

2. He found that companies whose earnings he can reasonably predict generally have excellent business economics working in its favor.

3. These companies' strong business economics can be seen through there consistent high returns on investors' equity, strong earnings, the presence of strong consumer monopoly and a management which functions with the investors economic interest in mind.

4. The price you pay for an equity determines the amount of returns you will receive on your investments. The lower the price, the bigger is your returns. The higher the price you pay, the lower will be your returns.

5. He chooses the type of business he would like to acquire first. Then he waits for the price and rate of returns he desires to determine his buy point.

6. He has come to believe that investing at the right price in businesses with strong economics in their favor will produce in the long term an annual compounding rate of return of 15% or more.

7. He found a way to acquire other people's money to manage so as to profit from his investment expertise. He did this by starting investment partnerships and acquiring insurance companies.

How Warren Buffett actually decides what companies he wants to buy and at what prices he is willing to pay for them is the subject of the rest of the book.

In my next post I will explore Warren Buffett's philosophy of investing from a business perspective.

Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett The World's Most Famous Investor