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I came across this gem of a book while browzing in a local library. It is unlike any other book that I’ve read on the rich and the famous of the stock market. The book, written by Warren Buffet’s ex daughter-in-law reveals the previously unexplained techniques which have made Warren Buffett world’s most famous investor. Starting with a capital of just $105,000 in his limited partnership, he has today assets worth $20 bn, through a 32 year old investment portfolio which has given him a 23.8% return p.a.

The book describes with glee Warren’s total disregard of wall street banter and predictions of sooth sayers etc. "Infact he acts as if the entire stock market didn’t exist" says the book. The basic tenents of Buffettology rest on knowing what to buy and then waiting to buy it at the right price. This forms the basic premise of investing only with a business perspective. Buffet based this business perspective on the predictability of future earnings of a company. This philosopher investor, has also based his style of investing on legends like Benjamin Graham, from whom he learnt to invest with a business perspective with price as a major motivating factor in selecting investments. From Philip Fisher, from whom he took the concept of excellent business economics, Lawrence Bloomberg from whom he adopted the concept of superior investment value of a consumer monopoly.

The first half of the book deals with Warren’s investment rationale. Elaborating on the concept of Investing from a business perspective, the book states that it is a negative art which tells you what not to buy rather than what to buy. It states that when investing in a stock think of it as an investment, as an owner of the business and then buy this excellent business at a price which makes business sense i.e. the venture invested in will offer you the highest predictable annual compounding rate of return possible with the least amount of risk.

When it comes to judging the earnings of a company simply dividend was not the criteria, rather retained earnings ploughed back by the company to give higher returns in the business was also regarded as returns. Because Warren believed that retained earnings thus employed would be recognized by the market and reflected in the valuation of the stock eventually.

He also placed great weight on quality of management and stated that one way of determining the quality of management was to see what the management does with the earnings of a company - does it profitably employ them or squander them on dreams of grandeur. He picks his companies by deciding which businesses have superior economics - and then buying those which are selling for less than their intrinsic values. Intrinsic value has been defined in the book as the projected annual compounding rate of return the investment will produce. He then waits for the price to come down to acceptable levels and invests in them.

He also divides businesses into basically commodity type business, a NO company, which he found consistently produced inferior results and the excellent business, which possessed consumer monopoly. The excellent business must be selling some product or service, with distinctive attributes that are particularly attractive to buyers, who form an attachment to the company and the product it sells. Along with this if the company’s earnings are strong and show an upward trend, the company is conservatively financed, the company has yielded good returns on retained earnings reinvested by it and is free to adjust the price of its product to inflation, then it is a YES company.

Normally YES or excellent businesses fall into three categories - businesses that make products that wear out fast or are used up quickly and have a brand name appeal, or communications businesses that provide a repetitive service manufacturers must use or persuade the public to buy their products, and lastly businesses that provide repetitive consumer services that people and businesses are consistently in need of.

The latter half of the book deals with complex formulas and real life case studies which are pretty hair raising. But they make interesting reading and one thing about the book is that it definitely broadens your thoughts and views on how to invest.

SECRETS OF SUCCESSFUL INVESTING - WARREN BUFFET STYLE

• Invest long term in companies whose future earnings can be reasonably be predicted.

• The company should have excellent business economics working in its favour which allows the business to make money which is then spent for new business acquisitions or is ploughed back into the income generating business i.e - cash surplus businesses.

• The evidence of the excellent business economics lies in the consistently high returns on share holders equity, strong earnings and stem from what is called a consumer monopoly and a management that functions with the shareholders interest in mind.

• The price you pay for a security will determine the return you can expect on your investment. The lower the price, the higher the your return, the higher your price the lower the return.

• Determine the kind of business you would like to be in and then let the price of the scrip and thus expected rate of return decide the buy decision.

• Investing at the right prices in certain businesses with exceptional economics working in their favor will produce over a long term an annual compounding rate of return of over 15% p.a.

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