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Berkshire Hathaway Inc. Message Board

  • EliasFardo EliasFardo Jul 1, 1998 6:36 PM Flag

    Buffettology

    Is it just me, or is "Buffettology" simply a bad
    book? I just finished skimming it. I read word for word
    until they starting explaining the difference between a
    stock and a bond, starting skimming and couldn't stop.


    It is bad enough that it was written in what was to
    me anyway an irritating, condescending style. But
    who is this book written for? Evidentially the
    audience for this book needs to have an IPO explained. And
    the audience for this book needs to be instructed
    concerning inflation that "This hurts us as investors. If we
    hold on to dollars they will lose their value at the
    equivalent of the rate of inflation. So if inflation is
    running at 25%, your money will be losing its purchasing
    power at the rate of 25% a year. Thus, Warren believes
    that if you have an inflation rate of 25% you must get
    at least a 25% return on your investment in order
    for the real purchasing power of your wealth to stay
    even with inflation." Yet the audience for this book
    is also pretty sophisticated. They claim that "Now
    that you are equipped with some Buffettology, you
    should be able to bring in an average return of, say, 15
    to 25% compounded annually over the long term." and
    you should go set up your own investment partnership.
    25% a year! My have we come a long way in such a
    short time.

    They state with great confidence
    that Buffett, or as they say, Warren, "figures out
    approximately what the equity value of the company will be at
    the future date, say, in ten years, and then he
    multiplies the per share equity value by the projected
    future rate of return on equity ten years out, which
    gives him the projected future per share earnings of
    the company. Using the projected per share earnings
    of the company, he is then able to project a future
    trading value for the company's stock, Using the price he
    paid for the stock as the present value, he can then
    calculate his estimated annual compounding rate of return."
    Has anyone ever read or heard of Buffett himself
    claiming to do this? Munger has stated that he has never
    seen Buffett do anything like this.

    Does
    anyone else see this book as dangerous? Their
    "comparison of Coca-Cola per share earnings projections to
    actual results" on page 225 provides a result that could
    only be accomplished by backward determination or
    coincidence. I have never seen anything in the investment
    world work out so perfectly.

    And their
    dismissal of everything "Wall Street" is irritatingly smug.
    Do you remember 1987 like this? "To make a long
    story short, everything worked out, and you and I are
    still here, along with all the brilliant Gomer Pyles on
    Wall Street. 'Hey, Gomer! S&P 500 is down 10%. Time to
    sell 50% of our investment portfolio."

    I could
    go on, but why.

    I would be interested in the
    opinions of others who have read this book. If I am out of
    step with everyone else in the world, I will accept
    that and just keep myself away from polite society.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • Although my reaction to the book wasn't as
      strongly negative, I didn't feel the book brought anything
      new to the table. I also bought the book and have
      read it a few times. It is definately geared towards
      the beginner.
      It's not too bad a place to start if
      you're a beginner and you don't know the difference
      between the intrinsic value of cash and the intrisnic
      value of earnings.

      JimC
      The Toronto
      Investment Club
      http://torontoivnest.ndsn.com

    • Elias,

      I've read Buffettology several
      times as a matter of fact. I can't say I share your
      views on it.

      A few years back I got very
      interested in the stock market except I was pretty much
      exclusively interested in technical analysis. I bought many
      books, software, data services, studied like crazy,
      studied and then wrote systems, wrote a complex for me
      computer program to do all sorts of calculations. Then I
      did what I consider extensive system testing. I lost
      hunderds of dollars, tested some more and finnaly realized
      that for me, I did not like the statistical
      approach...72% chance of gain, 28% chance of loss.

      In the
      end, it was too much work to pick a stock, do all the
      analysis and then...it was out of my hands...a coin flip
      kind of situtation. After this I started to look at
      fundamental analysis.

      This lead me to Buffett books.

      • 2 Replies to stask
      • A poor book on fundamental analysis is better
        than an excellent book on technical anaylsis. I would
        recommend The Intelligent Investor to you.


        Buffettology seems to be a book for beginning investors that
        is combined with an attempt to explain Buffett's
        methods. Unfortunately for me anyway, it failed to
        accomplish either. I have read five other books about
        Buffett and read all of his shareholder letters for the
        last 20 or so years, so maybe there was just nothing
        new for me. I am glad that it worked for others.


        But besides the style of writing, what really annoyed
        me was that it seemed at odds with the impression I
        have received from every other source regarding his
        methods. I have never heard that he actully makes all of
        these projections that are discussed so much in the
        book. He doesn't even own a calculator. If all Buffett
        did was to compute the historical earnings growth
        rate and project that in order to make his investment
        decisions, he would not have had the success that he has
        enjoyed. Anyone can do that. My guess is that he uses
        those models in his head that Munger talks about to
        determine an appropriate share price.

        The
        difference that Buffett brings to the party is that he, for
        whatever reason, can very clearly see what is really going
        on today and then what will happen in the future. He
        does not just project the future based on the past. I
        know that no one, not even Buffett can explain how he
        is able to do that. Munger probably could give a
        better explanation than Buffett can. But, IMHO, it is
        that ability to see reality and patiently act on it
        that creates much of his success. This is where the
        book fails in its attempts at explanation.

        An
        example. On page 142-143 they discuss the Wells Fargo
        purchase. I remember that period of time. Buffett's
        purchase of shares in Wells Fargo was a very gutsy move
        because it was a big real estate lender in California and
        real estate in that state was in a free fall. Some
        were predicting that Wells would go under. What I am
        interested in is how Buffett determined that the loan
        provisions on Wells books were adequate. This was not
        addressed. They mention that the losses never reached the
        magnitude expected, but that is after the fact knowledge.
        The investment decision is made when the magnitude of
        the losses is unknown. Looking at past history of
        that bank or any other bank would not help answer
        that. To me, that is what Buffett is all
        about.

        I think that the best way to understand what he
        does is to read his own words. I received the
        Cunningham book in the mail today. It looks like there are
        about 200 pages of Buffett in it. I have not read it
        yet, but if someone wants to understand what he does,
        that looks like the place to start.

      • After reading many Buffett books as well as The
        Intelligent Investor, and I think one or two books on Graham,
        I became convinced that "intelligent" investing
        makes the most sense for me. It felt right. Then I came
        across the Hagstrom book. I read and re-read and made a
        spreadsheet to emulate his theories in the book.

        I
        became frustrated with the two time periods (growth
        periods) used in his discount model. I ordered from the
        library the Theory of Investment Value to try to look at
        some very early intrinsic value computation
        methods.

        While I have had great interest, I admit I do not
        understand a lot of the things I have come across. But if
        you do enough self learning, eventually you get a
        feel for whether you are on the right track or not. I
        was trying to balance out my various questions when I
        heard a new Buffett book was
        out...Buffettology.

        continued...

    • I have not read the book, but expected it to be
      that way.

      It is VERY hard to write good books
      when the author is torn apart by conflict of interests
      (ie, interest of truth vs. interest to make money by
      selling accompanying items, websites etc). Apparently,
      they were driven by money to a lot greater degree than
      by a desire to discover and describe something
      interesting.

      Just the name of the book itself makes me
      puke.

      The other problem is that fairly complex things (that
      are no rocket science, though) are now explained to
      general public who cannot tell a stock from a
      bond.

      That sometimes leads even smart people (eg, hagstrom)
      write stupid things that just are not true and/or
      useful. Whereas if they targeted their writings to people
      who know how accounting works, they would end up
      doing a lot better job.

 
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