A Warren Buffett Screen, mark II: Mary Buffett & the New Buffettology

Wednesday, Feb 01 2012 by
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A Warren Buffett Screen mark II Mary Buffett amp the New Buffettology

As regular readers will know, we recently took a look at Warren Buffet's investment approach from a quantitative perspective. Although tthe best primary source of Buffett's thinking are his Berkshire Hathaway Shareholder letters, it is left to others to ascertain his precise investment criteria as he does not explicitly disclose them. As a result, our earlier discussion (and the resulting screen) was based largely on Robert Hagstrom's excellent book, "The Warren Buffett Way". 

More recently, though, we've come across Mary Buffett's very useful book, "The New Buffettology", so we'd thought we'd try setting up another screen based on this. In Chapter 13 of that book, Mary Buffett outlines a number of screening-type criteria entitled "Warren's Checklist for Potential Investments: His Ten Points of Light", which we summarise out below. Not all of these points are quantitative in nature, admittedly, but there's certainly the beginnings of a good Buffett screen, and one with a slightly different emphasis to that of Hagstrom. 

The New Buffettology

By way of background, Mary Buffett was married to one of Warren Buffett's sons in the 1980s. At Chistmas, Warren Buffett apparently used to play the "jolly billionaire version of St. Nicholas," tossing around envelopes filled with $10,000. He later switched to doling out $10,000 in stocks (what Mary Buffett calls "the gift that kept on giving") instead of cash after deciding family members needed to take a stronger interest in the family business.

This apparently led to her curiosity about his investment ideas and, along with David Clark, she sought to provide a methodical summary of his approach.  The original book, "Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor", was published in 1997  - a more recent edition, "The New Buffetology" was released in 2002. It is available on Amazon (there's also a good summary of the earlier edition here). 

Unsurprisingly, the overall message is that Buffet's approach is about investing in stocks based on their intrinsic value, where value is measured by the ability to generate earnings and dividends over the years. Buffett targets successful businesses with excellent economics, competent management and expanding intrinsic values, which he seeks to buy at a price that makes economic sense, defined as earning a long-term annual rate of return of at least 15%.

A New Buffettology-esque Screen 

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