Buffett Beyond Value by Prem C. Jain
A Warren Buffett biography that looks at investing like Warren Buffett
This Warren Buffett biography of his investing life titled Buffett Beyond Value
by Prem C. Jain provides the average investor with an analysis of Warren Buffett stock picks.
The focus of the book is encapsulated in the sub-title which is Why Warren Buffett Looks to Growth and Management When Investing
The Warren Buffett biography attempts to make the process of discovering Buffett-type businesses easier.
These are outstanding businesses with good growth prospects that are run by competent and honest managers and whose common stock is selling at a reasonable price.
I have highlighted 'reasonable price' since Buffett has not always bought companies below their calculated intrinsic value.
If he has a high degree of confidence in the management and can forecast good growth prospects, he has paid a 'fair' or 'reasonable' price.
One conclusion from Prem C. Jain's analysis of Buffett's stock picks is that investing implies both value and growth. This requires looking at purchasing stocks at sensible prices using benchmarks such as earnings, assets, dividends, as well as other financial ratios that you might find useful.
Jain argues on the basis of scientific studies that even the use of easy-to-follow basic financial ratios to determine value can be more rewarding than using fund managers whose fees do not often align with their performance.
Discovering Growth Stocks
Based on Buffett's requirement to be able to predict future growth in a company, Jain recommends that the investor start by examining earnings for several years. Companies with increasing earnings per share are good candidates to generate future growth.
Earnings stability is a metric that I look at as the greater the stability in earnings growth, the more confidence I can have in forecasting future earnings.
I look for companies whose stability is significantly greater than its sector and the market as a whole. My online broker's site provides a stability figure that uses historical and forecast earnings per share for each company.
Jain points out that 'growth' stocks may already be priced to reflect the growth potential. So it is well worth checking P/E ratios or calculating intrinsic value before you buy.
The Value Plus Growth Strategy
The methods that Buffett uses are described by Jain as 'Buffett-style investing' or simply 'Buffett investing'. This involves ensuring low downside risk.
Low downside risk may be implied by low or zero debt, a depressed share price, low ongoing capital requirements or a combination of them.
If a stock satisfies the requirement of low downside risk, then the next task is to consider its growth in earnings to implement a value-plus-growth strategy.
.. keeping in mind that value is about the past and growth is about the future.
The Importance of Management Quality
Jain's Warren Buffett biography also has highlighted management quality, as management quality is the source of growth in Buffett-style investing. He argues that investors should look for ... "extraordinary managers with the highest level of integrity".
Buffett practices tax deferment for Berkshire shareholders and Jain recommends that ordinary investors can practice tax deferment by not buying and selling frequently. This will cause a substantial percentages of taxes to be deferred. He suggests ... "buy good stocks and go to the beach".
He also notes that companies run by reputable managers rarely go out of business but continue to grow. "Find CEO's who have a good - and long - track record".
Other Warren Buffett Biography Conclusions
Other conclusions that Jain has arrived at through compiling the Warren Buffett biography of his investing life include ...
To Conclude ...
- a highly leveraged balance sheet is one indicator of high downside risk, so eliminate or severely limit investments in these companies
- be patient and do not rush to invest in stocks as soon as you have ready cash available, but be patient and wait for good opportunities
- a prudent investment strategy involves investing in 10 to 30 stocks
- the more you know about desirable stocks in your circle of competence, the more you should own.
- sell stocks infrequently if long-term value is evident
- generally avoid high capital-intensive companies as their downside risk can also be high
- pay special attention to accounting goodwill in well-managed companies as it can be a valuable asset
- the more you know about your psychological biases, the better you can function in volatile stock markets
- when you make mistakes, learn from them so that you can find ways to avoid making them again
- if a company buys its own shares then that is a good thing if the shares are undervalued - if they are not, then avoid the company
- look for companies in which the CEOs own a significant interest in the company's stock and do not receive excessive compensation, especially through stock options
The Warren Buffett biography of Pren C. Jain provides valuable insights into the investing approaches of the world's most successful investor - Warren E. Buffett.
Having read the book once, I was motivated to read it again because of the relevance the book has to value investing
As a Warren Buffett biography, I would judge it as one of the best I have come across.
- are commonly used by value investors. See which ones I like!
Intrinsic value - relates to what a stock is worth as distinct from what its current price is. Calculating intrinsic value is a worthwhile exercise. Check out how.
Accounting goodwill - is something that should not be ignored in company financial statements. Find out why!
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