All the PDF books you need, now at your fingertips on this book site! In the world of investing, the name Warren Buffett is synonymous with success and prosperity.
Learn how Warren Buffett did it—and how you can too. Building from the ground up, Buffett chose wisely and picked his stocks with care, in turn amassing the huge fortune for which he is now famous. Mary Buffett, former daughter-in-law of this legendary financial genius and a successful businesswoman in her own right, has teamed up with noted Buffettologist David Clark to create Buffettology, a one-of-a-kind investment guide that explains the winning strategies of the master.
With it, he has created one of the great fortunes in contemporary history. Although Warren readily espouses this philosophy— be it as the chief executive officer of Berkshire Hathaway, his publicly traded holding company, or in an occasional college lecture— its subtleties seem to have eluded the investment profession and public up until now.
One would think that anyone whose profession is investing would make Warren a serious case study and analyze and dissect his philosophy. But the investment profession and its academic brethren seem to prefer to label him a four-star enigma, and pay essentially only lip service to his real gifts as an investment genius. What few people realize is that Warren is first and foremost a thinker, a philosopher whose subject matter and realm of expertise are the world of business.
He is a man who has taken the investment and business philosophies of some of the greatest minds that have addressed the subjects of commerce and capital and synthesized an absolutely new approach based on these old lessons. His approach is in many ways contrary to conventional Wall Street wisdom. This is an eclectic group, whose writings span nearly a hundred years of thought on the subject of investing in securities.
Graham was aware of all these philosophies, but it took Warren's extraordinary and unique turn of mind to synthesize them into a strategy that would excel each of their individual efforts.
Warren is not afraid of anyone discovering his secret for success, for like any great chef he leaves out a thing or two when discussing the recipes for his best dishes.
Warren is an extremely intelligent and competitive individual. He is not about to give away the store. He has always maintained that great ideas in the realm of investing are few and far between and should be considered proprietary and guarded. He will discuss the details of his philosophy only with members of his family and inner circle. To the rest of the world he feeds tidbits, and then only enough to pique interest. He freely asserts that Graham's Security Analysis is the best book ever written on investing, but he may fail to tell you that Graham's philosophies are not the only ones he embraces today.
Graham may have provided the foundation, but he is not the house. Graham gave Warren the basics, and from there Warren went forward, borrowing and creating as all great geniuses do. One may have been influenced by the other, but in reality they are entirely different beasts. Warren did not happen into investment genius overnight. His voyage began with Graham's edition of Security Analysis and has continued through a maze of financial thought to the present.
Any strategy used in a highly competitive field requires the ability to adapt and change as the environment evolves. What worked for Graham in the s and s ceased to work for Warren in the s and s.
Schloss runs an expansive and diversified portfolio, often holding more than a hundred different stocks. He lets price be the dominant force in the reasoning that goes into his buy decision. He searches for stocks selling at a price below their intrinsic value. Schloss, practicing a traditional Grahamian philosophy, then sells any investment that has reached its intrinsic value, thus ending the romance of the economic benefits of a great business and at the same time inviting the tax man to the party.
Warren, on the other hand, runs a far more concentrated portfolio, with the economic nature of the business weighing in just as heavily as price in his determination of what to buy. Warren is also willing to hold a stock forever as long as the economics of the business remain at least the same as when he bought it. This ensures that he will benefit from the compounding effect of retained earnings. It ensures also that he will avoid the profit-eroding taxes that would be imposed if he sold his investment.
Although pure Grahamian philosophy continues to have an exploitable niche in the investment world, its greatest value is as a foundation upon which to learn the investment process. Graham's Security Analysis is more than just a treatise on investing. It is a running historical commentary on the techniques used to evaluate securities for investment purposes. Between and , Graham wrote four editions of Security Analysis, each deciphering and analyzing old and new methods of security analysis as applied to the present.
One learns through experience, and if not from experience, from those with experience. That is what Graham provides us with. While working for Graham, Warren made a vow that he would not make another investment until he had read Graham's book twelve times. To this day he keeps all four editions next to his desk, and he still finds subtleties that escaped his eye in past readings. As with the Bible, worldly experience enhances each reading of Security Analysis, sparking revelation upon revelation.
Truly, Graham was a man who planted trees so that others could sit underneath them and feast upon their fruit. Thus, it seems only appropriate that we begin your education in Buffettology with the basic tenet of Graham's philosophy and one that Warren holds as the foundation of his own thinking. As you read through this book you will come to see that having a business perspective on investing is more about discipline than philosophy, and once the concept is understood, it demands absolute devotion.
Stray from it, and you will wander the financial lunar landscape, forever dancing to the folly called forth by fear and greed. Adhere to its wisdom, and the foolishness of others becomes the field in which you reap your harvest. In short, other people's follies, brought on by fear and greed, will offer you, the investor, the opportunity to take advantage of their mistakes and benefit from the discipline of committing capital to investment only when it makes sense from a business perspective.
But be warned: it is not an all-encompassing discipline, on which the practitioner can rely in any situation in order to produce a profit. It is, rather, as Graham said in reference to bond selection, "a negative art. You will find that almost everything that relates to business perspective investing is alien to Wall Street folklore.
Warren is seeking value, but not in the same mode or framework in which Graham did. So let's begin by looking at the history of the thought process that Warren used to reach his revolutionary approach to investing.
We will travel back in time to an earlier part of this century and look at the roots of Warren's strategy. We will discuss the financial philosophies of that time and how they influenced Graham and how Graham, in turn, influenced Warren. We will see the evolution of Warren's thinking as he digests not only his successes and losses but also wisdom bestowed upon him by two of the greatest thinkers of modern finance, Philip Fisher and Charles Munger.
We shall see where Warren breaks with Graham and has, as in the words of the poet Rainer Maria Rilke, a "conflagration of clarity," which gives birth to Warren's new synthesis of Graham's original idea that investment is most intelligent when it is most businesslike.
What does "Investment is most intelligent when it is most businesslike" mean? It means that one stops thinking of the stock market as an end unto itself and begins thinking about the economics of ownership of those businesses that the common stocks represent. Your stockbroker calls you up and says he thinks XYZ stock is a timely buy and that in the last week it has moved up three points!
Stop right there. A common stock is a partial ownership interest in a business enterprise. That's right, a business. Your stockbroker is trying to entrap you in the enthusiasm of the horse race of numbers found every morning in the Wall Street Journal. But common stocks are in fact tangible representations of the equity owner's interest in a particular business. It was Graham who taught Warren, instead of asking a in what security? This puts the line of questioning into a more businesslike perspective.
Warren's chief idea is to buy excellent businesses at a price that makes business sense. So, what makes business sense? In Warren's world, making business sense means that the venture invested in will offer you, the investor, the highest predictable annual compounding rate of return possible with the least amount of risk.
The reason Warren is able to do this better than other investment managers is that he is motivated by the long term— like a business owner— and not, like most Wall Street investment professionals, by the short term. Think of it this way. If I offer to sell you the local corner drugstore, you would look at the accountant's books and determine how much money the business is making. If you see that it's profitable, you would then try to figure out whether the profits are consistent or they vary a great deal.
If the answer is no, you would ask what the store is selling for. Once you know the asking price, you then compare it with the drugstore's yearly earnings and determine what kind of return you would get.
You would, in effect, be comparing rates of return. If it looks attractive, you make your purchase. This is how Warren works. Whether he is buying an entire business or fractional portions, he asks himself: How much money can this business predictably earn, and what is the asking price? When he gets the answers to these questions, he can do some comparison shopping. This is not how the prevailing Wall Street wisdom would have you operate.
Warren and the buyer of the drugstore anticipate holding the business for a long period of time in order to get full advantage of ownership. Wall Street, on the other hand, looks at business from a short-term perspective. It wants the quick kill. In the game of money management, a few bad quarters can mean the end of your career, so today outweighs tomorrow in importance.
Wall Street would take it in a heartbeat. Warren wouldn't. If I cash out, I might be stuck reinvesting my money in lower-paying investments! Warren, like any good businessman, likes to keep a good business.
To Warren, ownership of the powers of production of the right businesses is of greater value over the long term than the short- term profits usually promoted by Wall Street. Warren believes that the stock market will, over a period of time, acknowledge this increase in the company's underlying value and cause the stock's price to increase.
This differs from the view most Wall Street professionals hold; they don't consider earnings theirs until the earnings are paid out via dividends. The increase in the market price of the stock came from an increase in the underlying value of the company, caused by Warren's profitable reinvestment of Berkshire's retained earnings.
All Berkshire Hathaway examples in this book are in reference to Class A. Warren believes also that since dividends are taxed as personal income, there is a tax incentive to letting the corporation retain all its earnings.
Wall Street has long been prejudiced against companies that retain all their earnings and don't pay dividends. This prejudice is rooted in the early part of this century, when the majority of people bought bonds instead of stocks for investment purposes. People felt more comfortable with bonds because they were secured with the assets of the businesses, which meant that bondholders had first claim on the assets of the company if it went bankrupt. Bonds paid interest to investors on a quarterly basis, so investors knew there was trouble with the company if the interest check wasn't in the mail.
Common stocks at that time were considered dangerous for the financially naive, because of a lack of accounting regulations; majority owners and managements had enormous leeway to monkey with the books. A good portion of Benjamin Graham's edition of Security Analysis explains how the security analyst can discover accounting fraud and such scams as pyramiding.
But as Graham points out in later editions, the creation of the Securities Exchange Commission in caused this kind of abuse to all but vanish, which greatly improved the investment status of common stocks, which, in turn, gave birth to a new era for investing in common stocks as a whole. But even though the investment status of common stocks has greatly improved, people retain their prejudice for getting that check in the mail. Be it for bonds or for common stocks, Wall Street and its minions shy away from companies that don't pay a dividend.
They see it as a sign of weakness. To this day it is not uncommon for some security analysts to assign a higher value to companies that pay a dividend than to those that don't. This is true even when the company that is retaining all its earnings is an infinitely better enterprise. This strange form of prejudice was one of the reasons why in the early eighties Warren's holding company, Berkshire Hathaway, traded at or below book value. As we know, for Warren, common stocks have always represented ownership in the underlying business, and ownership means the company's earnings belong to you, the investor.
This arrangement places a great deal of emphasis on the integrity of the company's management to do what is best for the shareholders of the company. Dishonest management can often manipulate a board of directors into fulfilling management's desire to build grandiose empires that enrich the management but do little or nothing for the financial benefit of the shareholders.
One way to determine the quality of management is to see what it does with its earnings. Does it pay out dividends, or retain them? If it retains them, does it profitably employ them, or does it squander them on dreams of grandeur? For example, let's say company A has a great business that makes lots of money. Now, if the management can profitably put to work the money that the great business earns, then it would make sense to let management continue its course and improve the fortunes of the company.
But if management makes foolish investment decisions with the company's earnings and ends up losing money, then the shareholders would have been better off taking earnings out of the company and investing them on their own.
Additionally, the dividend payment would put the earnings in the hands of the investor, which would thus burden him with the problem of reallocating the capital to new investments.
Following this line of thinking, Warren has come to the conclusion that common stocks bear a resemblance to bonds that have variable rates of return, depending on their earnings for a particular year. And he has realized that some common stocks have underlying businesses that create consistent enough earnings to allow him to project their future rate of return.
In Warren's world the common stock takes on the characteristics of a bond, with the payable interest being the net earnings of the business.
He calculates his rate of return by dividing the company's annual net per share earnings by the price he pays for the stock. Understand, though, that the integrity of this calculation is wholly dependent upon the predictability of the company's earnings.
In real life, if you were to buy a local business you would want to know how much it earned each year and how much it was selling for.
With those two numbers you could calculate the annual rate of return on your prospective investment by simply dividing the business's yearly earnings by its asking price.
Warren does this type of analysis whether he is buying an entire company or one share of a company. The price he pays determines his rate of return. This is the key that you should wear around your neck at all times. It is the one tenet of Graham's that Warren lives by. Before I go any further on the subject of price and the rate of return, I must warn you that I am going to simplify a few things for the sake of explanation. I know that a great many of you have some experience in the world of finance and will be biting to debate me on certain points.
To those of you who fit this description, I can say that later in the book I will go into detail on the finer points. But for now I must get past a few of the basic concepts so that everyone can easily grasp the later chapters without getting the glazed look that comes from reading an accounting text.
So let's use a very oversimplified hypothetical case to start. You of the experienced category should also pay attention to the following because some of the basic tenets are contrary to the conventional wisdom peddled by Wall Street.
To determine this you need to shop around a bit. The higher the price, the lower the rate of return. The lower the price, the higher the rate of return. Pay more, get less. Pay less, get more. Financial analysts use a mathematical equation called discounting to present value to solve problems like this. This equation allows them to plug in the future value as in our example , the rate of interest desired, and the time period, and to come up with the present value.
Using this equation is extremely time consuming, often involving a series of calculations and the use of tables. To fully understand its use one must usually take a college course in finance or business math. Fortunately, as mentioned, the folks at Texas Instruments have programmed the equation into the BA Solar calculator, so you and I have only to learn how to punch buttons to come up with the present value. Or, if we want, we can find out the future value of a sum growing at a rate of X for Y number of years.
We can even figure out the annual compounding rate of return on an investment if we know 1 the present value, 2 the future value, and 3 the holding period of the investment.
And since projecting an annual compounding rate of return on an investment is the key to understanding Warren, I recommend that you acquire one of these useful and reasonably priced instruments now. Wal-Mart carries them, as well as most office supply stores and university bookstores.
If you can't find one at a store near you, you can order one over the phone by calling Office Depot at Please note: Several other financial calculators out there will also perform similar calculations.
In case you are wondering, Wall Street analysts long ago quit cranking out present and future value calculations by hand. They also use financial calculators today. He takes the yearly per share earnings and treats them as the return that he is getting for his investment.
The price you pay will determine the rate of return. One thing that should be readily apparent is that strength and predictability of earnings are an important consideration if you are considering holding a stock for any length of time. What Warren wants is companies with business economics and management that create reasonably predictable earnings. Only then is it possible for Warren to predict the future rate of return on his investment and the investment merit of a company.
Don't worry. We will go over all of this in greater detail later in the book. The three variables you will constantly address when using Warren's system of analysis are: 1 the yearly per share earnings figure 2 its predictability 3 the market price of the security The higher the market price, the lower the rate of return, and the lower the market price, the greater the rate of return.
The higher the per share earnings, the greater the return, given the market price for the security. All this may make perfect sense to you.
Then again, it may not. Let's look at a real example of how this works. Since General Foods' earnings were growing at an average annual rate of 8. If interest rates— the rates of return on, for example, long-term U. And because we are projecting that General Foods' annual per share earnings are going to continue to grow at an annual rate of 8.
Thus, your share of General Foods stock, with its initial rate of return of If you are making a strict business decision, based on projected performance, an investment in General Foods appears to be a much better investment than the government bond. This is much lower than the initial rate of return of Likewise, a 7.
Choosing between the General Foods stock and government bonds becomes a tougher question. The price you pay determines your rate of return. The lower the price, the higher your rate of return. Price determines everything. Once a price is quoted, it is possible to figure your expected rate of return and then compare it to other rates of return.
They are simple comparisons to make. That is why Warren is famous for making extremely fast business decisions. A nice number in anybody's book. Now, I know that some of you with advanced degrees in Buffettology are probably thinking that I have oversimplified things, which I have; but if I stormed off the deep end of financial esoterica, some of us would be forever lost when we get to the really heady stuff.
Yes, it gets much more convoluted, and there are many subtleties to Buffettology, but for the moment we must concentrate on laying the foundation so that we can start building the house. In fact, many people who own stocks would be hard pressed to explain what a corporation is. Not that you are in this group. It's just that you never know who is going to pick up this book.
So I feel that a brief run-through on the corporate form of organization and its history is appropriate here. It is something that Warren has a good appreciation of, and it is something that will benefit any investor. The earliest commercial records now intact are found in the clay tablets of Babylonia. These include the correspondence of the great mercantile families as well as the records concerning property that belonged to the temples. The records show that in Babylonia under the great ruler Hammurabi who lived around — B.
Early commerce involved individuals or groups of people organized into partnerships. The Phoenicians a people who occupied a strip of land on the coast of Syria and Palestine and the Greeks give us some of our earliest examples of business partnership formation. A merchant wanting to engage in trade outside his town or country would gather together a group of merchants, who would in turn hire a captain and charter a ship to send their wares to another locale to trade for goods that were needed in their home port.
Oil, figs, honey, wool, and marble were some of the things that early merchants traded. The Greeks enjoyed many great trading opportunities that resulted from Alexander's conquests, which stretched from Greece to India. India long enjoyed a more developed textile industry, and Greek merchants saw the opportunity to profit from trading goods with their Indian counterparts.
Indian silks and cottons became the textiles that clothed the rich and fashionable Greeks of the day. And a Greek merchant lacking in sufficient capital to hire his own caravan could organize a group of merchant partners who would combine their resources and employ a caravan for a trading venture to India. They usually lasted the duration of the journey to and from the foreign ports of call. The earliest embodiment of the corporation concept can be found during the s in Venice, which enjoyed great fortune and power by becoming a center for trade with the Middle East.
It had a splendor that can still be seen in the magnificent palazzi that line its canals, palaces that were built by the great Venetian merchant and banking families. Venice was known for early development of bookkeeping and banking, which added to its importance and gave new dimensions of financial power to the realm of the merchant. Often the sons of wealthy merchants in other parts of Europe were sent there to learn the art of commerce.
In fact, double-entry bookkeeping was invented by Luca Pacioli, a friar who lived in Venice during this period. You can see how strong an influence Venice had when you think of all the words related to commerce and banking that are rooted in Italian words like: conto, conto corrente, porto, disconto, netto, deposito, and folio.
The corporate form of organization that developed in Venice during this time can be called a joint-stock company. Larger than the earlier partnerships and joint ventures, these joint-stock companies could gather large groupings of small merchants to form large, permanent capital bases to finance enterprises that, because of their size and financial power, enjoyed greater commercial opportunities. And greater commercial success meant a more secure political and financial position. The joint-stock company took on many permutations as the great companies of old struggled with the church and with kings for power.
The church and the kings needed the merchants for their financial advancement, while the merchants needed the church and the kings to protect their goods from thieves and their markets from competitors. If you want a modern parallel, just look to the kingdom of Kuwait, which likely would have lost all its wealth to the kingdom of Iraq if the kingdom of America hadn't stepped in and pushed back the Iraqis. Kuwait businesses, that is, the oil empire, got American companies like Bechtel, which builds oil infrastructures, to lobby for armed intervention— a case of merchants pressuring their king to protect them from pirates and thieves.
As corporations became more and more powerful, they started to usurp the power of the kingdoms. Thus, kings soon realized that it was in their best interest to limit the power of organized capital; they created laws that forbade the organization of joint-stock companies without the approval of the crown.
Early examples of crown-approved joint-stock companies are the East India Company and the Hudson's Bay Company, both with colorful and fascinating histories.
It was an extraordinary business operation that paid high dividends for a time, but its earnings were necessarily precarious, for they came not from the ordinary operations of commerce and colonization but from armed attacks on the Spanish silver fleets.
The character of the company is evident in its charter, which actually opposed peace between the Netherlands and Spain.
In reality it was a corporation of pirates who gathered the capital of their investors to build and staff pirate ships to rob Spanish ships carrying gold and silver from the New World.
And those people on Wall Street think they know how to conduct a hostile takeover! The meager amounts of capital that the butcher, barmaid, cobbler, or day laborer saved were placed into hiding, and no one profited from their savings.
This was due in part to the medieval religious doctrine that made it wrong to take interest on loans, but this doctrine lost its force when it appeared that loans were wanted by merchants, the pope, and kings.
Thus the ruling class concluded that it was wise to encourage lending money by permitting the lender to take interest for it. There is, however, a great difference between the lending of money by an ordinary individual who has more than he or she knows what to do with and the business of lending as practiced by a banker. The difference is this— the banker has made lending a profession. The banker steps in between the people who have capital but lack the ability or inclination to employ their savings profitably and the people who have the ability and inclination to conduct business enterprises but lack the desirable amount of capital.
The banker is a specialist in this profession, and by his or her special knowledge can do more than anyone else to collect the surplus capital and place it where it can be used to the best advantage.
Thus even the teenager working at a summer job can profitably employ his or her saved capital by entrusting it to the local banker, who will then loan out the money to a member of the community who is willing to commit legally to paying back the money plus interest. A banker spends a lifetime making money off the spread between the interest he pays the individual depositor and what he can lend the money for. One person's paycheck may not seem like much, but multiply that by fifty thousand depositors and the numbers start to grow.
So a bank is really a large pool of people who have loaned their money to the bank in exchange for a portion of what the bank can earn reloaning the money to other individuals and businesses. When banks loan money, anyone who borrows that money is in debt. Businesspeople abhor debt because if things go bad and business gets slow the bank may foreclose and liquidate the business. Many businesspeople prefer to finance their operations by selling to the public partial ownership interests in their operations, called equity or stock.
In the days of old, these transactions were done in what is called a market. A market back then was a specific place, designated by the local authorities, in which business transactions could take place. The reason for this was to create a public record of the transaction. It also ensured that the government could efficiently collect its taxes from the merchants doing business. Markets were designated for certain days at specific sites, and anyone caught trading outside these boundaries would have his goods confiscated.
One of the markets that developed was the stock market, a place in which partial ownership interests in different companies were traded between different investors. The New York Stock Exchange is the modern equivalent of the markets of old. This is what Wall Street is about. Instead of a bank asking individuals to loan it money so that it can loan it to a business, a very special kind of bank called an investment bank, like Merrill Lynch or Salomon Brothers, acts as middleman for a business looking for wealthy individuals or institutions to invest in it.
The investment may be in the form of a loan, which would manifest itself by the company selling a bond to an investor. Or the company may choose to sell an ownership interest— stock— to the investor.
The investment bank finds the individuals and institutions willing to buy the bonds or stocks of the company seeking to raise the money. The investment bank makes its money by charging a fee for the amount of capital it can raise for the business.
When General Motors wants to raise a large sum of money for plant expansion, it can go to one of the investment banks, like Salomon Brothers or Merrill Lynch, and have them sell to investors a GM bond debt or stock ownership interest in the company. The first time that a business sells an ownership interest to the public, it is called an initial public offering, or IPO. The second time, it is called a secondary offering. Once stock is sold to the public, individual investors who own it may become enthusiastic or pessimistic about the future of the company and either buy more of the stock or sell it, depending on how they feel about the business's prospects.
The New York Stock Exchange is a place where people gather to buy and sell ownership interests, or stocks, that were once sold to the public by a business through an investment bank.
It is an auction market, where buyer and seller gather. The buyer bids a price and the seller asks a price, and when they meet, a transaction occurs and the ownership interest changes hands. He is either trying to raise money for General Motors or he is acting as an intermediary between you and another investor, who wants to sell his General Motors stock.
With one sale your Merrill Lynch broker is earning a commission by raising money for General Motors. With the other he is earning a commission for bringing a buyer and a seller together. Naturally, stockbrokers tend to be very enthusiastic people because if there isn't a transaction, they don't earn a commission. Let's call it Katie's Baking Company. To get the money to start the business, you can either borrow from friends or a bank or you can sell stock to investors.
Stock represents ownership in the business, and debt represents only a promise to pay. In order to sell shares in a company, you must have incorporated the business. That means you file incorporation documents with the department of corporations in the state of incorporation. Every corporation that exists in America has filed incorporation documents in some state.
The great thing about being a corporation is a thing called limited liability. This means that if Katie's Baking Compay serves up a rotten cookie and is sued for poisoning one of its customers and damages are awarded, the shareholder owners of Katie's are protected from any judgments. True, the judgment may take all the company's capital, but the plaintiff can't come after the shareholders. One other great thing about a corporation is that the ownership can be divided up and sold to raise capital to start or add to the business.
Ownership, like Katie's pies, can be cut into as many pieces as one likes. And the more cuts in the pie, the smaller the pieces of pie. Likewise, the more shares issued, the smaller the portion of ownership the shares represent.
Cut a pie into two equal pieces, and each slice represents half. But back to Katie's. After much investigation you find that your sister is willing to invest in your business venture if you are willing to put the same amount of money up. These one hundred shares of stock represent all of the stock the bakery has outstanding.
Kind of like the pie. Since you and your sister own the business, you must elect a board of directors to oversee the running of the company. As in most businesses that are owned by several large shareholders, you elect yourself and your sister to the board. The board of directors then hires management to run the company. In this case, since neither you nor your sister has any baking experience, you hire a local baker named Janet Sweetbreads to run Katie's.
Sweetbreads is the chief executive officer CEO of the company and reports directly to the board. If the board doesn't like the way Ms. Sweetbreads is doing things, it can fire her and hire a new CEO. Net earnings divided by the number of shares outstanding gives you the per share earnings figure.
If Katie's Baking Company needs to raise additional money, it can either sell more shares or borrow the money from someone. If it sells more shares, there will be a dilution of the ownership interests in the company. This doesn't sound very good to you as an owner. So at the next board of directors meeting you tell your CEO, Ms. Sweetbreads, that instead of selling stock she should sell bonds to raise any new capital the company needs. A bond is a promise to pay.
When you go to a bank for a loan, you are essentially selling it a bond. You give it a piece of paper saying that you borrowed X number of dollars and that you agree to pay it all back, plus interest.
When the bank borrows money from you, it sells you a certificate of deposit, which is really a kind of bond. It contractually agrees that if you lend it money, it will pay it all back to you at a future date, plus a fixed rate of interest. Large companies like General Motors not only borrow money from banks; they also issue bonds to the public. No small sum. Merrill Lynch in return charges GM a fee for providing this service.
But the lender-lendee relationship is between GM and the thousands of people who buy the GM bonds. One other way Merrill Lynch can raise money for a company is to sell that company's common stock to Merrill's customers. Now, your sister just doesn't have that kind of money, so you put together a business plan and go see the investment bankers at Merrill Lynch. Merrill Lynch, liking your idea, says that it can convince its clients to invest in your company.
The answer is yes: Warren Buffett's value investing strategies make money. Designed to teach investors how to decipher and use financial information like Buffett himself, this one-of-a-kind guide walks readers step-by-step through the equations and formulas Buffett uses to determine what to invest in and, just as importantly, when.
Authors Mary Buffett and David Clark explore Buffett's recent investments in detail, proving time and time again that his strategy has earned enormous profits at a time when no one expects them - and with almost zero risk to his capital.
They clearly outline Warren Buffett's strategies in a way that will appeal to newcomers and seasoned Buffettologists alike.
Inspired by the seminal work of Buffett's mentor, Benjamin Graham, this book presents Buffett's interpretation of financial statements with anecdotes and quotes from the master investor himself.
Learn how Warren Buffett did it—and how you can too. Building from the ground up, Buffett chose wisely and picked his stocks with care, in turn amassing the huge fortune for which he is now famous. Mary Buffett, former daughter-in-law of this legendary financial genius and a successful businesswoman in her own right, has teamed up with noted Buffettologist David Clark to create Buffettology, a one-of-a-kind investment guide that explains the winning strategies of the master.
Each of Buffett's current stock investments is analyzed in detail with information as to why Buffett found these attractive businesses and how he determined that they are good long-term investments. Each company will analyzed using the criteria outlined in Buffettologyand Warren Buffett and the Interpretation of Financial Statements. The reader can then apply these techniques to a variety of other stocks and see if they meet Buffett's criteria.
Although information about Warren Buffett's stock portfolio is available on-line, it is merely listings of the stocks Warren owns. No one else explains the criteria Warren uses to determine how and when to buy and sell.
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