From the September 01, 2010 issue of Futures Magazine • Subscribe!

Buffett Beyond Value

Buffett Beyond Value:
Why Warren Buffett Looks to Growth
and Management When Investing
By Prem C. Jain
John Wiley & Sons, Inc.
$27.95; 304 pages

Anyone interested in using the investment principles espoused by Warren Buffett will benefit from this book. Prem C. Jain provides a laser-sharp view of Buffett’s investing philosophy, ideas, principles and approach that he gleaned from reading 50 years of Berkshire Hathaway annual reports, letters to shareholders written by Buffett, partnership letters and other writings. Providing a 44-year timeline from 1965-2009 of major events in Berkshire Hathaway’s growth, he describes each major event and the lesson learned from it.

Buffett espouses two main principles regarding buying bargain companies. First, the price paid for a company should not be high relative to its average earnings for a number of years, and second, each company should be large, prominent and financially conservative.

According to Buffett, there are three key factors when choosing an acquisition candidate. He insists on looking not only for value, but also for growth and high quality management. Jain then provides the details and the successes of Buffett’s ventures into buying various companies. Jain explains the concept of value investing, or purchasing a company at a reasonable price based on key criteria such as earnings, assets and dividends. He gives examples of the academic research regarding high vs. low P/E ratios, and high vs. low market-to-book ratio.

Before focusing on Buffett’s expertise in managing value and growth with a low downside risk, Jain covers the methodology of how to calculate a stock’s intrinsic value and guidelines for a buy or sell decision. He also discusses Berkshire Hathaway’s core business of insurance including Geico and General Re Corporation. Buffett believes that in evaluating an insurance company the determinants are the amount of float generated and its cost.

Jain provides additional investing insights into subjects such as risk and volatility, holding of cash equivalents, diversification, efficient markets, when to sell, arbitrage and hedge funds. He points out that based on the investing practices of Buffett, coupled with the teaching of Benjamin Graham and Philip Fisher, a prudent investing strategy is to select 10 to 30 stocks.

Not surprisingly, Berkshire Hathaway’s portfolio turnover was about 10% a year in 1994-1999, and more recently about 5% which equates to an average holding period of 20 years. This is in sharp contrast to mutual fund investors who hold their funds for an average of about two years. Buffett believes that stocks should only be sold for two reasons: when you know you’ve made a mistake and when the stock’s price is high relative to its intrinsic value. Selling should be considered when there are more favorable investments including short-term securities or cash.

According to Buffett, “Winning the game of investing does not require a high IQ or magical mantras.”

Jain describes Buffett as a renaissance investor because of his broad understanding and deep knowledge of investing. Jain has accomplished his goal of uncovering Buffett’s key investing tenets and providing investors with a look at the master investor’s keen insight and knowledge.

Leslie N. Masonson is the author of “Buy DON’T Hold” and “All About Market Timing.” Reach him at lesmasonson@yahoo.com.

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