I introduce readers to Mary Buffett's 'The New Buffettology." The authors call the book, "The first comprehensive, fully updated, in-depth guide to Warren Buffett's selective contrarian investment strategy."
Takeaways from 'The New Buffettology'
- Warren Buffett has separated the world of businesses into two categories: healthy, durable-competitive-advantage businesses and sick, price-competitive-commodity businesses. A company with a durable competitive advantage usually produces a brand-name product or occupies a unique position the marketplace that allows it to act like a monopoly.
- Warren Buffett thinks that the best kind of business to own is one with high profit margins and high inventory turnover. Warren Buffett believes that the second-best kind of business to own is one with either high profit margins or a high enough inventory turnover to compensate for lower profit margins
- The price-competitive, "sick" business is easy to identify because it usually sells a product or service whose price is the single most important motivating factor in the consumer's decision to buy, e.g. Internet portal companies, Internet service providers, memory-chip manufacturers, airlines, producers of raw foodstuffs, steel producers, gas and oil companies, The lumber industry, paper manufacturers, automobile manufacturers, etc. Many price-competitive companies carry the added weight of huge amounts of long-term debt because they are constantly upgrading their plant and equipment to stay competitive
- Having a low-cost durable competitive advantage (keep its competitive advantage well into the future without having to expend great sums of capital to maintain it) is important to Warren Buffett for two reasons. The first is the predictability of the business's earning power. The second reason why lost-cost durability is important is that it enhances the company's ability to use the superior earnings that a competitive advantage produces to expand shareholders' fortunes as opposed to simply maintaining them
- When stock market analysts and media pundits proclaim that earnings are no longer important in valuation, the bull market is in its final phase. This is where it begins to bubble. The bubble is about to burst when you read that value-oriented fund managers are quitting the business because they can't compete with momentum-fund managers.
- Bad-news situations come in five basic flavors: stock market correction or panic, industry recession, individual business calamity, structural changes and war.
- Warren Buffett has discovered four basic types of businesses with durable competitive advantages: 1) Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. 2) Advertising businesses, which provide a service that manufacturers must continuously use to persuade the public to buy their products. 3) Businesses that provide repetitive consumer services that people and businesses are consistently in need of. 4) Low-cost producers and sellers of common products that most people have to buy at some time in their life.
- The Warren Buffett Screen:
(1) Does the company show a consistently high return on shareholders' equity (above 12%)?
(2) Does the company show a consistently high return ontotal capital (12% or better)?
(3) Do earnings show a strong upward trend?
(4) Is the company conservatively financed?
(5) Does the company have a brand-name product or service that gives it a competitive advantage in the marketplace?
(6) Does the company rely on an organized labor force?
(7) Can the company increase prices along with inflation?
(8) How does the company allocate retained earnings?
(9) Does the company repurchase shares?
(10) Are the company's share price and book value on the rise?
- Situations like a change in the business environment, a change in a company's business model and reaching a stock's target price can dictate a sale.