WARREN BUFFETT and the INTERPRETATION of FINANCIAL STATEMENTS (ISBN 978-1-84737-437-0)
I'd say that this book, written by Mary Buffett & David Clark and first published in 2008, is a MUST-READ for anyone interested in the pursuit of meaningful Fundamental Analysis.
It explains, in very clear and easy to follow language, what Buffett extracts from a company's three Financial Statements, viz. Income Statement, Balance Sheet & Cash Flow Statement, in order to determine which companies are exhibiting his requirements for DURABLE COMPETITIVE ADVANTAGE.
It also explains the differences in approach between Ben Graham and Warren Buffett.
Graham believed that if he bought oversold businesses below their long term intrinsic value, the market would eventually acknowledge its mistake and revalue them upward. At that stage Graham would sell them for a profit.
BUT Graham, apparently, didn't really care about what kind of business he was buying. In his world every business had a price at which it was a bargain.
In addition, if the price of the business didn't go up in a two year period he would sell it anyway.
I believe there are quite a few folk at several of the "Value Investing" boards who follow this approach.
Now, even though Buffett had Graham as his mentor, there were a few things about Graham's teachings that he found troubling ...
1) Not all of Graham's undervalued business were revalued upwards.
2) Some of these businesses actually went into bankruptcy.
3) With every batch of winners came quite a few losers which dampened performance.
4) Graham tried to protect against this scenario by running a broad portfolio of, sometimes, a hundred or more companies. Buffett doesn’t favour portfolios of so many companies.
5) Buffett discovered that a handful of companies, purchased and sold under Graham’s 50% rule (Graham sold after its price increased by 50%), continued to prosper year after year.
For example, in 1973 Buffett invested $11mil. in The Washington Post and holds that stock today. After 35 years that $11mil. has grown to $1400mil. ... and he hasn’t, as yet, had to pay a cent of tax on his profits.
Graham, using his 50% rule, would have sold for about $17mil. and would have paid a Capital Gains Tax of 39% on his profits.
As a result, Warren decided that he could improve on the performance of his mentor, Graham, by learning more about the business economics of companies from the perspective of what made them fantastic long term investments.
The book explores Warren’s two revelations ...
1) How do you identify an exceptional company with a durable competitive advantage ?
2) How do you value a company with a durable competitive advantage ?
.... and it clearly explains how his unique strategy works and how he uses Financial Statements to put his strategy into practice.
IMHO it does an excellent job in this regard.
For those who own this book, or who have already read it, I'd be interested to read your opinion(s)/comment(s). |
