Creating Warren Buffet Wealth

Recently I read Warren Buffet Wealth by Robert Miles. I liked this book a lot because the concepts were relatively easy to understand, and I can imagine ways to implement them using the tools at my disposal. Here are some notes from the book.

Buffet Criteria for Selecting a Company to Buy

• At least $50,000,000 in consistent annual earnings
• Little debt
• Good managers in place
• Simple, old-economy business
• Attractive offering price

Stick with what you understand. Look for old-economy products that are needed by families. The average founding year of a Buffet company is 1909.

Determine what the company will earn over the next 10 years and discount that to today's Present Value (PV). There should be demonstrated, consistent earnings: future projections are meaningless.

Buy companies with shares priced at a discount to their intrinsic value. Buy for less than you think it is worth.

Some Buffet definitions:

• Book value = assets minus liabilities
• Intrinsic value = lifetime earnings of the business
• Market value = current asking price

Think like a business owner, not a market trader. Buying an entire company or a piece of a company are almost the same thing, so look for similar criteria. The main difference is that when you own only a share, you benefit from "look-through" earnings (LTE) rather than actual earnings.

LTE is less tangible than actual earnings but ultimately pays off with renewed financial strength of company and increased dividends. When LTE goes up, EPS goes up. Potential look-through earnings (LTE = #shares x EPS)

Buy $1 of assets for $.50 (or even $.40), or $1 of annual earnings (look-through) for $1. Look at the asset worth of a company and its outstanding stock value. Divide stock value into asset value (its "beta").

Other considerations:

• What percentage of price are Earnings per Share (EPS)?
• What is the Return on Equity?
• What are the Profit Margins?
• What percentage of Net Worth is the company's Debt Load?

General Strategies

The minimum holding period of any stock should be at least three years. Ten years is even better. Don't invest unless you can watch market value decline by 50% with equanimity.

Don't lose capital. Given the previous note, I take this to mean "don't sell at a loss."

Make twenty investment decisions over a lifetime.

Ignore the crowd. Don't fall for the obvious, and don't be in a hurry. If it's too good to be true it probably is.

Forget age-based allocation, and don't diversify. Buy a few companies that you understand. Stick to local stocks. Become a satisfied customer of the company first.

Buy a lot of a few, concentrated amounts of stock. Choose companies you know something about that have good financial statements. Have the courage to put 10-40% of net worth in one stock.

Always spend less than income! Track your investment performance with book value, not market value.

Visit the business, talk to management, count how many customers are on the premises, and come up with your own estimate of annual earnings. Read everything you can about the business. Do the research and think about it. (On the other hand, he also says to not get bogged down in too much information, or paralysis by analysis.)

Look for management buying back shares (adds value to existing shares). Look for management that owns stock in its own ventures. Look for CEOs who admit their errors.

Stock splits are meaningless. All they do is increase brokerage sales commissions.

Businesses need a durable competitive advantage. Invest in the right industry. Don't buy if it can be outsourced to Asia.

Work only with people you like, trust, and admire!

Further Reading Recommended in Warren Buffet Wealth

B. Graham and D. Dodd - Security Analysis
B. Graham - The Intelligent Investor
R. Miles - 101 Reasons to Own the World's Greatest Investment