Buffett Analysis of Financials

Sun, 08/29/2010 - 11:04

People on this page are asking for more information about how Warren analyzes financial statements in response to a comment I made there. So yes, I am writing the investing book. A biography can't contain the detailed examples that people want, and someone (by default, me) needs to put together a coherent framework of how Warren actually invests. Why write something that you already "know"? It goes without saying that there has been a clamor for this book. There is a lot to be learned from looking at the details. I've been asked probably a hundred times how Buffett does discounted cash flow analysis, and how he actually values stocks (in detail). Because all value investing works (essentially), there are people who are getting more than satisfactory results from what they already know, but even to them this book will probably be an eye-opener. That's all I can say now.

To answer the specific question:

> Warren does a lot of comparisons over time and within a set of financials, and notes inconsistencies.

> He is tough on companies that do not present information he wants to see, or who stop disclosing information that was once presented.

Berkshire's financials change a lot over time, and disclosures come and go and disappear. Warren is a fantastic storyteller, and Berkshire's financials, like all financials, tell a story. He's just so much more artful at telling it than most CEOs. You would expect this given how smart he is and how much he's studied about how other companies report their results. There's a good and bad side to this. The good side is that it's very clear. He doesn't clutter with a bunch of useless gibberish, and he states and shows very plainly what he wants you to understand. When he talks about writing a letter to his sisters as the model, it's a great analogy.

So, think about that from the other perspective (invert). If you're a halfway sophisticated investor, you probably want to know more than Doris and Bertie about how Berkshire is doing. And, you probably want to form your own version of the "story" of what happened in any particular quarter or year -- at least most analysts do. Generally speaking, though, that doesn't happen. Warren tells the story, and it's the story. If he said Berkshire had acquired a new high-margin, low-capital-intensive business called Hitmen Inc. and asked you to welcome aboard new "manager" Tony Baritone, there are people who would write breathlessly about Tony and speculate about whether he might go onto the "list of three" possible successors, without giving the situation a single substantive critical thought.

Should you trust Warren because he has earned it, because Berkshire is the most shareholder-friendly company in the world based on its compounding track record, and because if it flunks tests like these, Warren gets a special exemption to be secretive because that benefits Berkshire's shareholders? No! If someone told you the management of another company should be allowed to be secretive because it is so successful, you would begin to suspect the CEO should be in jail. Bernie Madoff would come to mind. Of course I'm not suggesting that there is fraud going on at Berkshire, only pointing out the logical fallacy in this argument. The better the results reported, the more you should be checking them out.

I have never seen Warren fail to do the homework no matter how much he liked or trusted the people involved.

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Mon, 01/02/2012 - 17:43 — Earnest

Buffettology

Does Warren Buffett really use what was written by Mary Buffett and David Clark in their book " The New Buffettology"?

Wed, 01/11/2012 - 19:03 — aliceschroeder

I can't speak for Warren

I can't speak for Warren about what he does or doesn't do with respect to other books. Also I make a practice of not commenting on other author's books, endorsing them, etc. when it comes to Buffett. It's just better that way.

Sat, 09/04/2010 - 18:37 — David Zuckerman

Why write something that is already Clear.

I dont get it. Alice. It seems to me that the approach warren uses is very clear and he has shared precisely what he does. Through His annual reports. And you wonderfull book snowball... gives any normally minded individual an advantage to invest successfully. Warren has opened himself and been giving away his investment style for as long ago as he first became a value investor. Another book is redundancey.
Your goin to write a book that will sell well. But the real problem is you cant teach someone something they dont understand how to do.
Either they understand it and can apply it or they cant.
It is easy to sit back and analyze a situation from the past and you know that.
Value investment is really about learning and investing in real time.
Your results determine if you research was correct.
Simple.

I have found you either get it or you dont. As far as value investment goes. Sometimes you can show someone precisely what your doing but in real time decision making and stock selection people freeze up and become unable to risk there money . Even if it appears a no brainer to you and me they still see tremdous risk because they dont understand the investment.

Li Lu said it best. Incredible research and understanding leads to supeior and outstanding results. This is not something you can teach it has to be done on an individual bases. Most people want something spoon feed and not work for it.
Warren Has worked hard . And shown alot of us small frys how to fish for life.

Tue, 08/31/2010 - 19:04 — love

Investing book ;-) and more analysis of Financial statement

It is a great news that you are writing an investing book. I definitely going to buy one in future(if good I buy more as gifts to my friends ;-)). Just highlight, please kindly consider include more financial statement analysis (or further business analysis)for banking and insurance company. I found it no many book really cover such area example, even the "Security Analysis" by Benjamin Graham not much example about bank but many utility/industry and railway area.

Further, I surprised that Benjamin Graham's work not much cover the "Cash flow statement" where nowadays attention a lot the cash flow analysis and free cash flow generated (to calculate the intrinsic value base of DFM (Discounted free cash flow model). But he and his students doing well in investment ;-). Further, you may consider include those trick like off balance sheet, earning reporting issue (like mark to market or fair value etc). Cheers.

Sun, 08/29/2010 - 21:35 — Ravi Nagarajan

One of the things that I have

One of the things that I have found frustrating over the years is that Berkshire often rolls subsidiaries that used to provide granular data into broader groups as the company grows over time. For example, if you look at the 1999 report, you see the following business groups under "Manufacturing, Service, and Retailing": Buffalo News, Flight Services, Home Furnishings, Dairy Queen, Jewelry, Scott Fetzer, See's Candies, Shoe Group.

For 2009, we have the following under Manufacturing, Service, and Retailing: Marmon, McLane, Shaw, Other Manufacturing, Other Service, and Retailing.

It is a gradual trend from year to year but when you go back a decade or more, the reduction of granularity really hits you.

Obviously, Berkshire in 2009 had many new business units that were acquired over the course of the decade and the business units reported separately in 1999 were consolidated into larger groups. As an analyst willing to spend a significant amount of time following Berkshire, I don't like this. I would love to have the details of all the business units from 1999. The more details the better.

Of course the problem is where to draw the line between analysts who want all this detail and the much larger group that would probably just not touch the resulting 300 or 400 page report.

I go back and forth on this - on one hand, I think the people who are unwilling to put in the time analyzing a complex business deserve the poor results they will eventually get. On the other hand, would Berkshire serve shareholders well with a data dump vs. a more careful reporting of the facts as management evaluates the business from a 5,000 or 10,000 foot level?

So again I think we come back to needing a basic level of trust to invest in Berkshire. Not mindless trust, but trust based on management's track record. Charlie Munger always talks about a "seamless web of deserved trust" at Berkshire and he obviously means to include shareholders in this ... I don't think he's asking shareholders to not think critically or evaluate the reporting, but to trust that management is furnishing the data with integrity and honesty rather than using less granularity to distort the results in some way (for example, rolling an underperforming unit into a larger grouping to make it "disappear", etc... )

Sun, 08/29/2010 - 13:58 — buysidemetrics

A new investment book from

A new investment book from you, with WeB examples, would be most welcomed, Alice (schedule?)

Funny to read WeB's expectation from others. I recently blogged (Hebrew, sorry) about him no longer supplying Iscar's rev/ops growth/decline, as he did in previous years (he gave specifics in very good years btw... up to the hitting of the 4Q08 wall). In addition, in his 2009 letter he unjustifiably compared Iscar's profit to its competitors (mainly the bigger Swede - Sandvik), without mentioning restructuring charges differences. I once found more reporting discrepancies with regard to MiTek discreptions over the annual letters.

I trust him :-) but wonder if that trust can be sustained after his 120 (reading Teledyne's history).

Sun, 08/29/2010 - 17:29 — aliceschroeder

bummer

I don't read Hebrew!

One thing I learned last time from other authors and it's very true - until it's gone to the compositor, never, ever, ever tell people when your book will be published. It's guaranteed heartache if you do. I would, though, just keep in mind that

> Good research takes awhile

> The publishing industry moves slowly

Your point about giving specifics until the wall is hit -- very true and you will see this over and over. Someone who does the analysis will have a lot of fun.

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