Buffett taught by Mary #61
Mary Buffett was the daughter in law of Warren Buffett. The ex-wife of his son Peter. She was not a financial expert but a close observer of the family. Therefore I thought that she might have caught one thing or two that I haven’t already read in other books. I picked this one up, “the interpretation of financial statements” last year and found it ok for beginners. It sums up well the key focus on what makes a great business. And it gives useful examples on a few of the crown jewels in the Berkshire’s portfolio such as Coke and Moodys.
Reminder: the objective is to buy at a fair price, without overpaying for growth, a business with a strong, consistent, long-term competitive advantage that will give steady earning, with little risk of disruption.
Maybe easiest to remember it this way, a business should have
Stable, high and increasing:
- Gross profit margins (ideally in the 50% region, if below 20% then the Industry might be too competitive)
- Net profit margins
- Per-share earning
- % of organic growth
- Return on invested capital
- Free cash flows
While also having low and stable:
- Selling and administration cost as percentage of sales (anything under 30 percent is fantastic)
- R and D expense as % of sales in absolute terms and vs. peers
- Debt, (on or off balance sheet, ideally long-term debt to net income ratio is inferior to 3)
- Working capital
- Capital expenditures to earnings (target below 25%)
Bottom line: buy such businesses when they face a one-time solvable issue, and their price is inexpensive.
However I wish the authors had expanded more on the heart of the problem. How do you know if a business problem is a one-time solvable issue or a permanent one? You are always taking chances. The trick is a conservative assessment of the risk, a good margin of safety and an asymmetry between risk and reward. Head you win, tail you don’t loose much.
My purpose in life is independence, fulfilment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog I hope to keep track of my learning about investing, business, decision making, entrepreneurship and self development while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. Join my Journey. John.