Mr. Buffet and Companies

A return of 12,460% in one of the investments.

I know this seems like an unachievable task. But one man did it. The man who is the master of investment.

Obviously, I am referring to Mr. Warren Buffet. He has achieved this remarkable feat in his investment in The Washington Post Company. It is a newspaper agency.

We all try to cherry pick the stocks according to our analysis, Mr. Buffet has also got a trick to cherry pick his stocks. And the trick is nothing but to invest in companies which have a competitive advantage.

What is that?

This technique is actually an improvement over the concept of value investing developed by his guru, Mr. Benjamin Graham (who is the author of famous book “The Intelligent Investor”).

“Some men read Playboy. I read annual reports.” (Mr. Buffet)

He improved his guru’s technique through studying thousands of financial statements of superstar companies. He realized that if a company’s competitive advantage could be maintained for a lengthy period of time, then the underlying value of company would keep on increasing. And such are the companies to invest and that too for long term.

This became the holy grail of his investment style.

Even though I am a risk-averse person and hence very selective and inactive on stock purchasing activity, I was really curious to know the strategy of Mr. Buffet.

And as always when the student is ready, the teacher will appear.

So, I found this wonderful and easy to read book titled “Warren Buffet and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage” written by Mary Buffet and David Clark.

Even after finishing this book, I am still not highly interested in the stock market. But I have got the hang of analyzing the financial statements. Yes, I have started to look at the statements with a fresh perspective.

For example,

• The expense section in Income statement has become crucial as Warren recommends that the great secret to make more money is to spend less of it.
• I pay focus on interest or finance cost as it reflects the total debt that company is carrying on its books. More the debt, more interest the company needs to pay. As per Mr. Warren, the company with a competitive advantage carry little or no interest expense. He believes that such companies are capable enough to fund its operations on its own.

These are some of the aspects to look out among other items which are there in Income statement, Balance sheet and Cash flow statement.

Refer the below picture which shows the key elements (on the left) and the insight which can be drawn (on the right).

Hope my hand writing is comprehendible.

I would totally recommend this book as a weekend read.

(PS – It is a great read even for people with no finance background.)

Disclaimer: The expression above is personal in nature.