Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor

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We keep a very wary eye on margin development because if you're growing you should be improving your margins. And just to give you the measure, I mean the average gross margin in Buffettology is 58%, and the average operating margin is 22%, so well above what the market averages are. There are dozens of books written on the topic of value investing, and many even claim to reveal the secrets that made superinvestor Warren Buffett billions of dollars. David Clark and Mary Buffett's bestselling book Buffettology , as the name suggests, belongs to the latter category, but the reason it stands out is that it actually delivers on its promise.

If you desire to have a real increase in your purchasing power, then it is necessary that the return on your wealth be at least equal to the effects of inflation and taxation." Buffettology The main author – Mary Buffett is the former spouse of one of Warren Buffett’s sons. Nothing like making a little bread off the ex-father-in-law’s name… Keith Ashworth-Lord: Yes, it's a very disciplined process. We start off looking for businesses with an economic moat, which effectively means they've got barriers to entry and they've got pricing power. And the way we go about it is we analyse the growth potential of the companies in their markets, the growth potential of the markets themselves. To figure this out, you'll need to estimate how much a company should realistically be worth five years from now, and such an estimate is only possible if a company has consistent earnings. But the book reveals even more tactics which hardly any other book about his strategy seems to cover: the importance of OPM, Other People's Money.In a Forbes article, which the book quotes, Charlie Munger summarized Berkshire Hathaway's strategy as follows: Where Graham, but also the famous Graham-and-Doddsvilleinvestor Walter Schloss, bought cheap companies and lots of them to spread the risk, Buffett prefers a focused portfolio with only a handful of excellent businesses with a competitive advantage and growing value. Owning only great businesses means less diversificationis necessary. Kyle Caldwell: And that rotation into value, which has benefited certain value sectors, such as oil and the miners in particular. If that were to persist for a long time, would you change your approach at all?

Keith Ashworth-Lord: Very much so. What you were seeing there was a contraction of price-to-earnings (P/E) multiples on the investee companies that we own. And just to prove that point, 23 of our 27 companies in 2022 reported earnings or trading statements that were in line with expectations or even better than expectations. But of those 27 companies, 22 of them finished the year with their share prices down and in some cases down quite a lot. So, I can't stress really too much that the operating performance of the companies is absolutely up to scratch. And it's been purely a market phenomenon. This rotation, so-called rotation into value, which has affected the multiples that the market accords our companies.

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