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Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Book Description

A detailed look at how Warren Buffett really invests

In this engaging new book, author Prem Jain extracts Warren Buffett's wisdom from his writings, Berkshire Hathaway financial statements, and his letters to shareholders and partners in his partnership firms-thousands of pages written over the last fifty years. Jain uncovers the key elements of Buffett's approach that every investor should be aware of.

With Buffett Beyond Value, you'll learn that, contrary to popular belief, Warren Buffett is not a pure value investor, but a unique thinker who combines the principles of both value and growth investing strategies. You'll also discover why understanding CEOs is more important than studying financial metrics; and why you need an appropriate psychological temperament to be a successful investor.

  • Reveals Buffett's multifaceted investment principles

  • Discusses how Buffett thinks differently from others about portfolio diversification, market efficiency, and corporate governance

  • Highlights how you can build a diverse and profitable investment portfolio

With this book as your guide, you'll learn how to successfully invest like Warren Buffett.

Table of Contents

  1. Copyright
  2. Preface
    1. Buffett and Contemporary Teachings at Business Schools
    2. Focus on Important Questions
    3. How Much Background Do You Need to Understand Buffett's Principles?
    4. What Can You Learn from This Book?
  3. Acknowledgments
  4. I. INTRODUCTION AND BACKGROUND
    1. 1. The Thrill of Investing in Common Stocks
      1. 1.1. How a 1 Percent Advantage Becomes a 100 Percent Gain
      2. 1.2. How Much Would You Have Earned If You Had Invested with Buffett?
      3. 1.3. Conclusions
    2. 2. 1965–2009: Lessons from Significant Events in Berkshire History
      1. 2.1. 1965: Not Throwing Good Money after Bad
      2. 2.2. 1967: Invest in Your Circle of Competence
      3. 2.3. 1973: Cash Flow Is King
      4. 2.4. 1977: Successful Growth
      5. 2.5. 1980: Buying Shares after Prices Fall
      6. 2.6. 1984: Reported Versus True Financial Results
      7. 2.7. 1985: Capital Expenditures
      8. 2.8. 1986: Corporate Jets and Other Luxuries
      9. 2.9. 1988: Holding Period of an Investment
      10. 2.10. 1989: Looking Foolish Versus Acting Foolish
      11. 2.11. 1990: Pessimism Is Your Friend
      12. 2.12. 1991: Risk
      13. 2.13. 1992: Stock Splits
      14. 2.14. 1993: Identifying Excellent CEOs
      15. 2.15. 1994: Extraordinary Results in Ordinary Businesses
      16. 2.16. 1995: Corporate Acquisitions
      17. 2.17. 1996: Selling Too Early
      18. 2.18. 1996: Hiring Practices
      19. 2.19. 1997: Patience
      20. 2.20. 1999: Taking Responsibility
      21. 2.21. 2000: Selling in Euphoria
      22. 2.22. 2001: Not Losing Focus When Disaster Strikes
      23. 2.23. 2002: Financial Weapons of Mass Destruction
      24. 2.24. 2008–2009: Market Crashes
      25. 2.25. Conclusions
  5. II. BUFFETT INVESTING = VALUE + GROWTH
    1. 3. Value Investing—It's Like Buying Christmas Cards in January
      1. 3.1. Value Investing and Two Essential Principles
        1. 3.1.1. Principle 1: Price Should Not Be High Relative to a Company's Average Earnings over a Number of Years
        2. 3.1.2. Principle 2: Each Company Selected Should Be Large, Prominent, and Conservatively Financed
      2. 3.2. Other Helpful Guidelines for Value Investing
        1. 3.2.1. A Sharp Decline in the Stock Market
        2. 3.2.2. The Industry That Leads the Decline
        3. 3.2.3. Watch Out for Temptations
      3. 3.3. Does Value Investing Really Work?
        1. 3.3.1. Academic Research Evidence
        2. 3.3.2. Performance of High versus Low P/E Stocks
        3. 3.3.3. Performance of High versus Low Market-to-Book Stocks
        4. 3.3.4. The Power of Multiple Variables
      4. 3.4. Frequently Asked Questions
        1. 3.4.1. How Long Does It Take for Value Investing to Yield Superior Returns?
        2. 3.4.2. Are the P/E and Other Value Strategies Likely to Work in the Future?
        3. 3.4.3. Are Value Investment Strategies Riskier?
      5. 3.5. Conclusions
    2. 4. Growth Investing
      1. 4.1. Coca-Cola as a Growth Stock
      2. 4.2. How to Identify Growth Stocks
      3. 4.3. Importance of Track Record: Sales and Earnings
        1. 4.3.1. Is There Potential to Grow Sales and Earnings for Several Years?
        2. 4.3.2. How Are Relations with Employees?
        3. 4.3.3. Is Research and Development Important?
        4. 4.3.4. How Does the Company Respond to Challenges?
        5. 4.3.5. Is Management Quality Excellent?
        6. 4.3.6. How Important Are Profit Margins?
        7. 4.3.7. What Is the Company's Achilles' Heel?
      4. 4.4. One Example of a Non-Technology Growth Stock
      5. 4.5. Conclusions
    3. 5. Intrinsic Value
      1. 5.1. Computing Intrinsic Value
        1. 5.1.1. Wesco: Focus on the Balance Sheet
        2. 5.1.2. Coca-Cola: Focus on Earnings
        3. 5.1.3. Berkshire Hathaway: Intrinsic Value
      2. 5.2. When to Buy Any Stock: Consider Margin of Safety
      3. 5.3. Conclusions
    4. 6. Buffett Investing = Value + Growth
      1. 6.1. Berkshire Hathaway Is a Growth Stock
      2. 6.2. Value Plus Growth
        1. 6.2.1. Implementing Value Plus Growth
        2. 6.2.2. Where Does Growth Come From?
      3. 6.3. Examples from Berkshire Investments
        1. 6.3.1. Railroad: Burlington Northern Santa Fe
        2. 6.3.2. Training: FlightSafety International
        3. 6.3.3. Aviation: NetJets
        4. 6.3.4. High-Tech: BYD
      4. 6.4. Conclusions
  6. III. OTHER PEOPLE'S MONEY
    1. 7. Insurance: Other People's Money
      1. 7.1. Insurance Companies as Other People's Money
        1. 7.1.1. GEICO's Revenues and Operating Profits
        2. 7.1.2. Float: Other People's Money
        3. 7.1.3. GEICO's Valuation and Returns to Berkshire
        4. 7.1.4. Prior Berkshire Insurance Businesses and Blue Chip Stamps
      2. 7.2. Conclusions
    2. 8. Reinsurance: More of Other People's Money
      1. 8.1. Size Matters: Berkshire's Acquisition of General Re
        1. 8.1.1. General Re: 1998–2008
        2. 8.1.2. GEICO versus General Re Strategies on Capturing Market Share
        3. 8.1.3. Berkshire Hathaway Reinsurance Group
      2. 8.2. Failure of Reliance Insurance Company
        1. 8.2.1. The 2008–2009 Market Crash and AIG
      3. 8.3. Conclusions
    3. 9. Tax Deferment: Interest-Free Loans from the Government
      1. 9.1. Value of Berkshire's $10 Billion Interest-Free Loan from the Government
      2. 9.2. Returns on a $10,000 Investment in 25 Years with and without Tax Deferment
      3. 9.3. Conclusions
  7. IV. SUCCESS IN RETAILING, MANUFACTURING, AND UTILITIES
    1. 10. If You Don't Know Jewelry, Know Your Jeweler
      1. 10.1. Comparison with Wal-Mart: Cost Advantage
      2. 10.2. Helzberg Diamonds, Ben Bridge Jeweler, and Others
      3. 10.3. Profitability: Berkshire's Jewelry Businesses versus Tiffany & Co.
      4. 10.4. Conclusions
    2. 11. Compete Like Mrs. B
      1. 11.1. Know When Not to Compete: Nebraska Furniture Mart
      2. 11.2. R.C. Willey Home Furnishings
      3. 11.3. Star Furniture and Jordan's Furniture
      4. 11.4. CORT Business Services
      5. 11.5. Conclusions
    3. 12. Why Invest in Utility Companies?
      1. 12.1. Similarity between the MEC and Other Acquisitions
      2. 12.2. Four Nonprice Acquisition Criteria
        1. 12.2.1. Outstanding Management
        2. 12.2.2. Good Company
        3. 12.2.3. Good Growth Potential and Patience
      3. 12.3. Conclusions
    4. 13. High Profits in Honest-to-Goodness Manufacturing Companies
      1. 13.1. Scott Fetzer's Success
      2. 13.2. Shaw Industries, Marmon, and McLane
      3. 13.3. Conclusions
  8. V. RISK, DIVERSIFICATION, AND WHEN TO SELL
    1. 14. Risk and Volatility: How to Think Profitably about Them
      1. 14.1. Risk and Return: Holding Period
      2. 14.2. Volatility Offers Opportunities
      3. 14.3. Opportunities from the Sharp Decline of 1987
      4. 14.4. A Slow Decline in 1973–1974 and 2008–2009
      5. 14.5. More on Downside Risk
      6. 14.6. Conclusions
    2. 15. Why Hold Cash: Liquidity Brings Opportunities
      1. 15.1. Liquidity and Opportunities
      2. 15.2. Berkshire's Investments in Convertibles
      3. 15.3. Recent Berkshire Investments: Wrigley, Goldman Sachs, General Electric, Swiss Re, and Dow Chemical
      4. 15.4. Conclusions
    3. 16. Diversification: How Many Baskets Should You Hold?
      1. 16.1. Diversification
      2. 16.2. How Diversified Is Berkshire Hathaway?
      3. 16.3. How Many Stocks Should You Hold?
      4. 16.4. Philip Fisher Warns against Too Much Diversification
      5. 16.5. Diversification and "Diworsification"
      6. 16.6. Conclusions
    4. 17. When to Sell
      1. 17.1. Turnover of Berkshire's Equity Portfolio: Why Buffett Holds Almost Forever
      2. 17.2. Two Main Reasons to Sell
        1. 17.2.1. Why Were McDonald's and Disney Stocks Sold?
        2. 17.2.2. Why Was Freddie Mac Stock Sold?
      3. 17.3. Conclusions
  9. VI. MARKET EFFICIENCY
    1. 18. How Efficient Is the Stock Market?
      1. 18.1. Can I Make Money in the Stock Market?
      2. 18.2. Most Academics Favor Market Efficiency
      3. 18.3. Recent Evidence on Market Inefficiency
      4. 18.4. Conclusions
    2. 19. Arbitrage and Hedge Funds
      1. 19.1. Arbitrage in Merger Deals
      2. 19.2. An Example of a Successful Arbitrage Deal by Buffett
      3. 19.3. Long-Term Capital Management: The Story of a Hedge Fund and Berkshire Hathaway
      4. 19.4. Should You Invest in Hedge Funds or Private Equity Funds?
      5. 19.5. Conclusions
  10. VII. PROFITABILITY AND ACCOUNTING
    1. 20. M = Monopoly = Money
      1. 20.1. Widen the Moat
      2. 20.2. Profitability of Monopolies
        1. 20.2.1. Buffalo News: How Profitability Changed Dramatically
      3. 20.3. Dominance Does Not Mean High Profits
      4. 20.4. How to Look for Monopolies
      5. 20.5. Do Not Sell a Monopoly in a Hurry
      6. 20.6. Conclusions
    2. 21. Who Wins in Highly Competitive Industries?
      1. 21.1. Insurance Is a Commodity Business Like Retailing
      2. 21.2. Two Main Characteristics of a Leader: Low Cost and Customer Satisfaction
      3. 21.3. How Do Companies Keep Costs Low?
      4. 21.4. Conclusions
    3. 22. Property, Plant, and Equipment: Good or Bad?
      1. 22.1. Capital Intensity
      2. 22.2. Capital Intensity and Management Quality
      3. 22.3. Conclusions
    4. 23. Key to Success: ROE and Other Ratios
      1. 23.1. ROE: Underlying Performance of a Business
      2. 23.2. ROA: Return on Assets
      3. 23.3. Buffett and Accounting
      4. 23.4. Conclusions
    5. 24. Accounting Goodwill: Is It Any Good?
      1. 24.1. Accounting Goodwill and Its Economic Value
      2. 24.2. Goodwill and Earnings
      3. 24.3. Goodwill and Profitability of Acquired Businesses
      4. 24.4. Conclusions
  11. VIII. PSYCHOLOGY
    1. 25. How Much Psychology Should You Know?
      1. 25.1. Herding and You
      2. 25.2. Examine Your Buying and Selling Patterns
      3. 25.3. Can You Change Yourself?
      4. 25.4. How Psychology May Help You
      5. 25.5. How to Think about Psychological Biases
      6. 25.6. Some Important Questions for You to Consider
      7. 25.7. Conclusions
    2. 26. How to Learn from Mistakes
      1. 26.1. Mistakes versus Bad Luck
      2. 26.2. Learning from Mistakes
      3. 26.3. Mistakes of Commission and Mistakes of Omission
      4. 26.4. Conclusions
  12. IX. CORPORATE GOVERNANCE
    1. 27. Dividends: Do They Make Sense in This Day and Age?
      1. 27.1. Berkshire Does Not Pay Dividends
      2. 27.2. Microsoft and a Special Dividend
      3. 27.3. Conclusions
    2. 28. Should You Invest in Companies That Repurchase Their Own Shares?
      1. 28.1. Share Repurchasing Is Good News
      2. 28.2. Share Repurchases by Companies in Which Berkshire Has Invested
      3. 28.3. Why Doesn't Berkshire Repurchase Its Own Shares?
      4. 28.4. Conclusions
    3. 29. Corporate Governance: Employees, Directors, and CEOs
      1. 29.1. Employee Compensation at Berkshire
      2. 29.2. Compensation for Directors and Executive Officers
      3. 29.3. What Is Wrong with Compensation through Stock Options?
      4. 29.4. How to Identify Good CEOs or Other Senior Managers
      5. 29.5. Conclusions
    4. 30. Large Shareholders: They Are Your Friends
      1. 30.1. Founder Control Matters
      2. 30.2. Conclusions
  13. Conclusion: B = Baseball = Buffett
    1. 30.3. Don't Lose Money
    2. 30.4. Stay in Your Circle of Competence
    3. 30.5. Find Good People
  14. A. A Summary of the Book
  15. Notes
  16. About the Author