Steve the Owl's Blog

Warren Buffett is someone who has held a position is one of the three richest men in the world for several years, most recently holding down the number three spot. Warren Buffett made his fortune through revolutionizing the world of business investment, buying the company Berkshire Hathaway in 1961 and turning it into a holding company that ultimately became the first company to trade on the NYSE for over $100,000 per share. In the book Warren Buffet and the Interpretation of Financial Statements, Buffett’s former daughter-in-law Mary Buffett and David Clark examine what makes a company a great company to own that will provide a secure retirement.

Warren Buffett’s Revolutionary Idea

When Warren Buffett began his career, the dominant idea in investing in the stock market was to invest in a company that was undervalued, and sell the stock as soon as its value had increased by 50%. However, Buffett argued that it is better to look for a longer investment that will eventually yield much better returns if, instead, someone looks for a company with what he termed a “long-term competitive advantage.” This way, it is possible to keep a stock for years and years and watch it rise to the top. While other investors try to time the waves, Buffett avoids doing so and focuses on longer term gain. (NOTE: this blog post does not endorse either idea. In the author’s opinion, each method has its merits, but the point is merely to explain Warren Buffett’s methods as derived from the book being reviewed.)

How to Find a Long-Term Competitive Advantage

Buffett insists that the best way to find the right stock is through looking at the financial statements. Any company that trades publicly on the New York Stock Exchange is required to provide this information. A simple search will find companies that have low overhead, low research-and-development, and enough liquid assets to survive any storm, just to name a few. When one finds these companies, the time to sell is either if the industry has changed and lost a competitive advantage, or if a company’s stock has shown to be overvalued. However, this is something that should not be done very often according to Buffett, due to taxation purposes and issues trying to time a wave.

Stock Markets and Network Marketing

One of the more interesting questions for anyone seeking a position in network marketing is the question of whether a company that is publicly-traded is a positive or negative sign. On one hand, being publicly traded means that there is some accountability with the company. Rather than having to rely on the word of the powers that be in the company, it is possible to find these numbers and examine the company to see whether the claims of its success, volume, and viability are accurate.

However, one cannot ignore the fact that, once a company becomes publicly traded, there is now another group with a vested interest in personal and company success. Looking at the first criteria in Warren Buffett and the Interpretation of Financial Statements, one will see that a lower payout to employees is considered beneficial to investors. This is because a company with an advantage can charge whatever it wants, or has the ability to keep pay low. In this case, one must look at the percentages given out to distributors. In this case, in a perverse irony, what one is looking for as an investor is not the same thing one is looking for as a marketer.

Conclusion

For someone just starting in the world of investment, Warren Buffett’s book will be very educational. It has a lot of small chapters, each covering one aspect of investing, which makes the book very readable. It also gives examples of some companies that Buffett has invested in and avoided to show the reasons why he makes the decisions that he does regarding these companies. However, while I think that this approach is very good with explaining which companies to invest in, I think that there are other strategies to explain when to invest in them. I tend to agree with Buffett’s idea that if a company is not worth keeping for ten years, it is not worth keeping for ten minutes. This short book serves as a great guide to learn which companies are the ones to look into for the long haul.

Tags: financial statements, investment, strategies, Warren Buffett

This entry was posted on Thursday, July 1st, 2010 at 10:29 pm and is filed under Business, Steve's Book Club. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.