Numbers, numbers, numbers. Just as realtors subscribe to the idea of "location, location, location,"Â Warren Buffett (Trades, Portfolio) loves numbers. In chapter 12 of their book “The New Buffettology,” authors Mary Buffett and David Clark went so far as to call Buffett “obsessed” with numbers.
As a child, he memorized license plate numbers and even counted the number of times a specific letter of the alphabet appeared in the newspaper he was reading. While sitting in church, the young Buffett would calculate how long members of the clergy lived.
As a young adult, he obviously found a way to apply that obsession when he discovered the rewards of investing. As an investor, Buffett has spent about 80% of his time reading annual reports filled with financial statistics. He even has a reputation for taking financial reports on family vacations and to social events. What’s more, the authors said Buffett “loves” to do his own income taxes!
When not reading financial reports, he may have his nose in the Wall Street Journal, New York Times and Washington Post, all of which he reads daily. Then there are business sections in several regional newspapers and prominent business magazines
Nor does he neglect specialty financial publications: At the time “The New Buffettology” was published in 2002, he was reportedly reading Value Line Investment Surveys and Moody’s Stock Guides. While the book obviously cannot tell us what he reads now, I’d like to think it includes GuruFocus, which not only provides voluminous financial statistics but also tools with which to mix and match the data (disclosure: GuruFocus pays me for articles).
And, we’re still not finished, according to the authors. They list numerous other print publications to which Buffett gives his attention. They added he has “taken full advantage of all the Internet has to offer.” As internet services became available in the late 1990s and early 2000s, Buffett regularly used Bloomberg’s Professional Service and the Value Line Investment Survey.
The latter, at least in its print platform, was created by a contemporary of Benjamin Graham’s: Arnold Bernhard. In 1931, Bernhard wanted to establish a “standard value for stocks” and, while he agreed with Graham’s concept of intrinsic value, he was not satisfied with his calculation methods for individual businesses.
In a 1981 speech, perhaps around the 50th anniversary of Value Lines’ founding, Bernhard explained his system this way:
“The Value Line Rating I designed was a correlation between the monthly prices of a stock over a period of 20 years on the one hand, and its concurrent annual earnings and book values on the other. United States Steel, for example, might be described as having been worth 1/3 of its book value and 6 times earnings. When the price deviated markedly from the standard thus derived, as in 1929, it was determined that the deviation was a measure of overvaluation. When it declined down below the line, a measure of undervaluation.”
The authors reported, “Value Line covers thirty-five hundred companies and lists key financial figures dating back fifteen years. It’s a key tool in the game that Warren uses regularly. Value Line is full of important figures such as the earnings per share and return-on-equity computations.”
In addition, he has been a “prodigious user” of the EDGAR database maintained by the Securities and Exchange Commission; it provides access to 10-K reports (annual) and 10-Q reports (quarterly).
In researching a specific company, Buffett gathers these resources:
- Most recent 10-Ks and 10-Qs.
- The annual reports.
- News and financial information from many sources.
The authors said he wants to see the most recent news stories and at least a decade’s worth of financial data. This allows him to build up a picture of:
- The company’s historical annual return on capital and equity.
- Earnings.
- Debt load.
- Share repurchases.
- Management’s record in allocating capital.
Also in chapter 12, the authors drew our attention to a concept Buffett calls the “circle of confidence.” For example, there is his relationship with Bill Gates (Trades, Portfolio), the founder of Microsoft (MSFT), a relationship in which Buffett could learn about the computing industry. Buffett never invests in a business he does not understand, and with Gates' help, he would have been able to gain some insights. He has never invested in Microsoft, however, fearing his close, personal friendship with Gates could lead to perceptions of insider trading or preferential treatment.
While not looking for insider information, he does pursue what’s known as “scuttlebutt,” a process in which he calls competitors and customers of a potential investment target. Buffett himself makes phone calls to many people with some connection to the company, asking them multiple questions. He is known to ask CEOs about the competitor they feared most; Peter Lynch, the legendary mutual fund manager, used the same technique. Lynch asked the manager of a Holiday Inn that question and consequently discovered La Quinta (LQ); its superb stock performance helped build Lynch’s reputation.
To illustrate how seriously Buffett takes to gathering information, consider this true story: When Buffett was a graduate student at Columbia University, he heard that his favorite professor, Benjamin Graham, was chairman of the Government Employees Insurance Company (Geico). Buffett traveled to Washington D.C. on a Saturday right after learning about Geico from Graham. Since it was a Saturday, the doors were locked, but Buffett pounded loudly enough to attract the attention of a janitor, who reluctantly took him the chief investment officer. Buffett spent hours talking with the other man and, as the authors wrote, “Warren became totally enamored of the company. As we have noted, he later added Geico to his circle of confidence and over the next forty years earned more than $1.6 billion on a $45 million investment in the company.”
Finally, we can all profit by immersing ourselves in facts and information, as Buffett has. We may not be able to read as widely and deeply as he does, but we can all help ourselves by focusing on a limited number of stocks and giving all our attention to them.
About
Buffett and Clark are the authors of “The New Buffettology: The Proven Techniques for Investing Successfully in Changing Markets That Have Made Warren Buffett the World’s Most Famous Investor.”
(This article is one in a series of chapter-by-chapter reviews. To read more, and reviews of other important investing books, go to this page.)
