Mary Buffett - The New Buffettology: The Proven Techniques for Investing Successfully in Changing Markets That Have Made Warren Buffett the Worlds Most Famous Investor

The New Buffettology

Mary Buffett and

David Clark

Rawson Associates

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Copyright 2002 by Mary Buffett and David Clark

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Set in New Baskerville

Manufactured in the United States of America

Library of Congress Cataloging-in-Publication Data Buffett, Mary.

The new Buffettology: the proven techniques for investing successfully in changing markets that have made Warren Buffett the world's most famous investor / Mary Buffett and David Clark. p.cm.

Includes index.

1. Investments. 2. Buffett, Warren. I. Clark, David, 1955. II. Title.

HG4521.B7692 2002

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Pluralitas non est ponenda sine neccesitate.

This book is dedicated to Charlie Munger and Billy Occam, who gave, respectively, to investing and science the idea that the simplest explanation is usually the best.

Contents

Acknowledgments

Disclaimer

Foreword: A Few Personal Things About a Very Private Billionaire Introduction: How Warren Buffett Turned $105,000 into $30 Billion 1. The Answer to Why Warren Doesn't Play the Stock Market and How Not Doing So Has Made Him America's Number One Investor

2. How Warren Makes Good Profits Out of Bad News About a Company 3. How Warren Exploits the Market's Shortsightedness

4. How Companies Make Investors Rich: The Interplay Between Profit Margins and Inventory Turnover and How Warren Uses It to His Advantage

5. The Hidden Danger: The Type of Business Warren Fears and Avoids 6. The Kind of Business Warren Loves: How He Identifies and Isolates the Best Companies to Invest In 7. Using Warren's Investment Methods to Avoid the Next High-Tech Massacre 8. Interest Rates and Stock Prices How Warren Capitalizes on What Others Miss 9. Solving the Puzzle of the Bear/Bull Market Cycle and How Warren Uses It to His Advantage 10. How Warren Discerns Buying Opportunities Others Miss

12. Financial Information: Warren's Secrets for Using the Internet to Beat Wall Street 13. Warren's Checklist for Potential Investments: His Ten Points of Light 14. How to Determine When a Privately Held Business Can Be a Bonanza 15. Warren's Secret Formula for Getting Out at the Market Top161

16. Where Warren Buffett Is Investing Now!

17. Stock Arbitrage: Warren's Best-Kept Secret for Building Wealth

18. For the Hard-Core Buffettologist: Warren Buffett's Mathematical Equations for Uncovering Great Businesses

19. Thinking the Way Warren Does: The Case Studies of His Most Recent Investments 20. Putting Buffettology to Work for You

Also By Mary Buffett And David Clark

Buffettology

The Buffettology Workbook

Acknowledgments

We wish to thank first and foremost Warren Buffett; although he did not participate in the writing of this book, we are forever indebted to him for his wisdom and generosity over the years. His genius as an investor will someday be overshadowed by his tremendous philanthropy. The Buffett Foundation, the final repository for the masterpiece he calls Berkshire Hathaway, will ultimately be the world's wealthiest charitable foundation, providing future generations with the benefits of his earthly passion for investing.

We also wish to thank our publisher, Eleanor Rawson, for her inspiration and guidance. She is the best of her breed and we would be lost without her. We also would like to thank our editor, Lisa Considine, whose pen kept ours straight and true. She is a credit to her craft. And a special thank you to our assistant editor, Anne Bartholomew, and our amazing copy editor, Steve Boldt. We would also like to thank Simon & Schuster attorneys Jennifer Weidman and Emily Remes for their skillful guidance. These people are solid proof that the staff at Simon & Schuster is the best in the business.

We owe an enormous debt of gratitude to: Sam, for being Mary's knight in shining armor. To Erica and Nicol, for being wise beyond their years and two of the best daughters a mother could ever ask for. To the girls' father, Peter Buffett, for the wonderful years that we had together. To the magical and mystical Sabrina Benson, who, with a simple wave of her wand and a phone call, makes the impossible happen. To Kitty O'Keefe and Shih'hua Liu, for their friendship and brilliance. To Patti, for her love and support. To Cindy Connolly Cates, who suffered through our earlier drafts and who remains always the silent third author. We could not and would not write without her. To Ben Platt, for helping us burn out the demons after a hard day's night. To Jessica Schemm, for playing the enchanting muse. To Eric Hoffman, for being the best poet and proofreader that any author could ask for. To Gerry Spence, John Johnson, and Robert Rose, for their words of encouragement when they were much needed. To Tim Vick, the most intellectually honest man on Wall Street, for his insight and thoughts. To Pauline Macardican, for being an angel in disguise. To Fritz Perlberg and Rob Gritze, for their friendship and wisdom. To Valerie Schadt, for being everything that counts. To Roger Lowenstein, the best writer on Wall Street, for his reflections on Warren and Berkshire Hathaway. To Andy Kilpatrick, for being the consummate Berkshire historian and a charming Southern gentleman. To Andy Clark, for the historical research. To Vincent Waldman at Manatt, Phelps & Phillips, for making the deal happen. To Terry Rosenberg, for his creative spirit. To Robert E., for his constant friendship and support through the most trying of times. And most important, to the beautiful Kate Benecke for her love.

Disclaimer

This publication contains the opinions and ideas of its authors. It is not a recommendation to purchase or sell the securities of any of the companies or investments herein discussed. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting, investment, or other professional services. Laws vary from state to state and federal laws may apply to a particular transaction, and if the reader requires expert financial or other assistance or legal advice, a competent professional should be consulted. Neither the authors nor the publisher can guarantee the accuracy of the information contained herein.

The authors and publisher specifically disclaim any responsibility for any liability, loss, or risk, professional or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this book.

Foreword

A Few Personal Things About a Very Private Billionaire

In the annals of investment history the name Warren Buffett towers above all others. He turned an initial stake of $105,000 into a $30 billion fortune, by investing in the stock market. This is an unparalleled feat.

Who is this man and what is his obsession with getting and staying rich?

Warren was conceived during the stock market crash of 1929, which nearly bankrupted his father's investment firm. Like so many children who grew up in a family financially strapped by the Depression, Warren developed an early fixation on money. As a child his favorite toy was a money changer. He carried it everywhere. He was consumed by mathematical calculations about the compounding of dollars. At six, he entered into his first business operation by buying bottles of Coca-Cola, six for a quarter, and selling them for five cents apiece to fellow vacationers at Lake Okoboji, Iowa. He memorized the book A Thousand Ways to Make $1,000 and began saving most of what he made delivering the Washington Post and running a pinball business. Warren was so desperate to make money that in 1938, in the sweltering summer heat of Nebraska, he walked miles to the racetrack where he spent hours on his hands and knees scouring the sawdust-covered floors for discarded racing stubs, hoping to find a winning ticket.