Mary
Buffett & David Clark
Author
The
New Buffettology:
The
Proven Techniques for Investing Successfully in a Changing Market
Editor's
Note: We have edited the interview in this transcription for clarity
and readability.
The original real audio interview
may be heard on Mary Buffett's Ask The
Expert page.
JIM
PUPLAVA: Joining me on the
program are Mary Buffett and David Clark. They are joint authors of the
new book called, The New
Buffettology: The Proven Techniques for Investing Successfully in a
Changing Market. David and Mary, welcome to the program.
MARY BUFFETT: Thank you, Jim.
DAVID CLARK: Thank you, good to be here.
JIM: In your first book, Buffettology, which was published in better times for the market at least in 1997, we were in a bull market at the time. Now we are in a bear market – the kind I believe Warren Buffett loves, because of the opportunities it presents for buying stocks. What are the differences between your first book and now the second book?
MARY: Well, Jim, I think in the first book, we definitely were in a bear market. We basically, explained the dogma of how Warren thinks in terms of, taking generic products and branding them, consumer monopolies. And in this book, we dove in a little more to the specific of those concepts. Durable competitive bandages, et cetera.
DAVID: Jim, the first book was, as Mary was talking about, was focusing on the basic concepts of business perspective of investing. This time around we aimed at a bear market. We discussed what we call selective contrarian investing, which is how Warren exploits a bear market. What companies to buy in a down market, how to identify them and how do you know it is not a company that is going to go under, rather a company that is going to return and give them the kind of profit that they want.
JIM: Maybe you can remember the quote. As I recall, Warren once said he is more aggressive when investors are fearful. Do you remember that quote?
MARY: There was a quote that was kind of like that. I think the closest one was, "How do you become a millionaire? You start out a billionaire and buy an airline."
DAVID: I think the quote you are thinking of is, "You should be fearful when others are greedy and greedy when others are fearful."
JIM: That is it. That is exactly it. When we look at today's market, with the threat of war and terrorist attacks, and when fear is rampant, this is the kind of market I would suspect from what you know of Warren, he is most interested in.
MARY: This is the kind of market that Warren prays for. When we were in a bull market in the tech bubble, there was really nothing for Warren to buy and it was really hard to sit on that kind of money. With Warren, there are two questions: what company and at what price. He is patient and can sit and wait for those kinds of companies that aren't really affected by things like the price of commodities going up, like sugar. Wrigley's Gum used to charge five cents a pack. Now they charge twenty-five and you are still chewing it. I think you are right; those are the companies that are sitting around and have been overpriced because of a bull market and now are coming down and being corrected, closer to their book value or under.
DAVID: In this market, he has identified companies that he thinks have a competitive advantage and have what he would say, own a piece of your mind. In these situations, you have a coming war, which is negative news. We discussed this in The New Buffettology. Negative news creates pessimism in the market and creates selling in the market. The selling means lower stock prices. He uses those lower stock prices as an opportunity to go and buy into these great companies, that 10, 20, 30 or even 5 years from now will correct themselves brilliantly and make him a lot of money.
JIM: Now, Warren's genius is that he has that ability to grasp the long-term economic growth potential of what I think is a key handful of companies. He is selective. He is patient, but explains also why he is focused. In other words, instead of your typical mutual fund that will go and buy 60 to 100 stocks, Warren buys very few companies. But when he does, he takes a larger interest.
MARY: I think that as David mentioned earlier, the selective contrarian investor can do that, because having a long-term point of view, you don't have to, like fund managers you have mentioned, have a return at the end of the year. If you don't have that return, you lose your job. That is the short-sightedness of the managers, the market, investors. Warren, I think is best described as, he doesn't play the market. He buys companies who have products or services that everyone needs, like H&R Block is a great one. That really has a long-term effect. If he had to put all of his money tomorrow in one stock, he probably would put it in Coca Cola and know that in twenty years from now, people will probably still be drinking Coca Cola.
DAVID: But, you must say Mary, he would have to get it at the right price.
MARY: ... at the right price. Coke at 40 times its earnings - he is not buying.
DAVID: But at 20 times its earnings he might consider buying. One other thing too, on what you said on focus, and Mary often discusses, he likes to invest in what he knows and understand and if he finds a good buy, he will buy heavily into it. His investment ideas, great ones, are few and far between. So he just keeps his eyes open. A good one he will swing hard at, but he will let most of them pass because they are not great ideas.
JIM: You know, Mary, I want to come back to a comment that you just made. Warren doesn't play the stock market. I wonder if you might elaborate on that. In today's swing trading and day trading environment, we have short-term thinking. Explain why that is important to his success.
MARY: Well, I think when he looks at a stock, he looks at it as a business, business perspective investing. Even if he was going to buy one share, he would take a look at the company as if he were buying the entire company. That is why he is so critical and interested in management. What happens to the profits? Is it a company that can take the profits and reinvest it in the company and buy more companies that are like it? Or re-purchase this stock when it comes to a correct price, rather than a company that has to retool an entire factory and has to use those profits for a new product? Wrigley's, all they have to do is change the flavors. The plant has probably been the same for 50 years. That basically is what I think he does. He looks at it as a company.
DAVID: A lot of people play the market. Is the market going up or is the market going down? He is playing people that play the market and the people who make pricing mistakes. When the market becomes pessimistic and people sell a great company, he is going in and buying it. He is not playing the market, he is looking at these individual companies and playing the short-term pricing mistakes that occur in the stock market all the time, because mutual funds are short-term motivated and he can be long-term motivated.
MARY: A great example of that, Jim, would be RJR. In the early 1980s when RJR was getting hammered in the press because of the affects of tobacco, etcetera, the market left. Everyone dropped the stock and ran from it. Warren knew that if he looked at that company, it was completely debt free. It had huge amounts of cash and profits and was really not just in the tobacco business and that is when he stepped in heavily.
DAVID: He said something to you at that time. He made a comment.
MARY: We were watching television and I said, "Gee Dad, this must be terrible for you." He looked at me and said, "Are you kidding! The price is just going to drop and I will step in and buy a bunch more."
JIM: Is this a play or something he learned from Ben Graham's, Mr. Market principle?
MARY: I think he learned a lot of things from Ben, but he has changed them.
DAVID: I would say that the Mr. Market principle is probably where he picked it up, but he has changed it from Ben's idea a great deal. The idea of buying something out of favor is very much a Ben Graham idea. Ben's favorite quote was in Latin, which I can't pronounce, but basically he said, "Many that have risen will fall, but many that have fallen will rise." It is the fallen that he is interested in.
JIM: I wonder if either one of you might want to cover a few examples of how Warren makes money out of bad news. Certainly we are in a bad news environment. I know there are a number of wonderful examples, but I wonder if we might cover a few of those, because I think it might illustrate the principle to our listeners. They see the evening headlines today. Why perhaps as an investor, may it be creating opportunities?
MARY: I think the bad news phenomenon is always one that a value investor waits for. If you know the underlying value of a company and you can buy it below that value, it is as simple as if to say, would you want to buy it at full price or at wholesale. I don't think Warren necessarily looks at the economic or financial indicators. But over a period of time in history, you know that the market will be down, pre-war and it will probably be back up in seven or eight months. There is a lot of his experience that goes into it and Ben Graham and Charlie Munger.
DAVID: Some of the classic ones were like in American Express, when early investment of American Express was during a period when they essentially had all the equity sucked out of them. He went in and he bought that. Geico, the insurance play, was on its deathbed when he made his investment in that. During the market crash in 1973-1974, the Washington Post Company was a classic one. It had been hammered at seven or eight dollars a share and he bought it. And it now trades at three or four hundred a share. Wells Fargo, during the banking episode, when it got hammered down to 50 dollars a share. Then we have Coca Cola in 1986 when the market crashed is when he started going in and buying more Coca Cola.
JIM: My wife and I love Coke, so I can understand why. Either one of you, explain how Warren got one of his best ideas on investing from baseball.
MARY: Oh, you don't have to swing at every pitch. He hears a lot of baseball analogies. Warren has an encyclopedic mind. There is no question about it. His baseball analogies are probably most well known. Don't swing at every pitch. If you make more than two investments a year, as a small investor, you are probably making wrong ones. You really have to take a long hard look, before you put your money down.
DAVID: You took the analogy. Ted Williams broke up the batting boxes into 80 squares and he would only swing a ball if it came through 12 of those squares, which is how he became such a good batter. Ted Williams wrote a book; Warren read the book and decided that he would only swing at companies that met the certain criteria, which we discussed in The New Buffettology. Things like Harvey Equities etcetera and a low asking price.
MARY: Earnings that are constant and going in the direction of up.
JIM: There are two important concepts I think that both of you talk about in your book, that investors should understand about the companies they invest in. David, I am going to refer this one to you on profit margins and inventory turn over. I wonder if you might explain how important those two are related to earnings.
DAVID: If you are selling lemonade for a million dollars a glass, it costs one dollar to make. So you have an incredible profit margin and would only have to sell one glass. However, if you are selling lemonade for $1.50 and it costs you a $1.00 to make, then you have to sell a lot of glasses. You have to turn over your inventory a lot to make any money. Warren realizes this. When he is looking at something, he will look and say that it doesn't have a high profit margin on a particular item, which means, if it does, more than likely it has some sort of protected position in the market place.
MARY: To add to that, Dave is exactly right. The lemonade doesn't stand as a great example, but one that is similar to it is a town that has one paper or the toll bridge theory is what we like to call it. If you want to buy the newspaper, if you are the only newspaper in town, then you have secured your profitability.
JIM: A key concept that you talk about in this new book and expound upon is something called a durable competitive advantage. I have two questions here. Explain a durable competitive advantage and why the key to investing, which is the second question, is to know between a competitive advantage and a company that is a commodity-type business.
MARY: A durable competitive advantage again, would be a company that is selling products or services that everyone needs, versus a company like the oil companies or the airlines. Those are companies that are bought by price motivation. If you are going down the street and there are four different gas stations on the corner, you are going to pick the cheapest gas station, not the brand. With a company like Wrigley's or Dairy Queen, as prices go up on the things that make them, people will pay more. That is the durability of a company. There are companies that own a piece of your mind. Take for instance; everyone buys tissue, however we refer to it as Kleenex. That would be a company that kind of owns a piece of your mind. If you think about renting a video or family evening, you are going to think about Disney. If you think about chocolate, you might say Hershey's. So those products, even though to some extent are generic, like McDonalds is just a hamburger, the branding of it makes it a consumer monopoly. That is a durable competitive advantage.
DAVID: Warren likes to ask himself, "How long has the product been around." He once said that there is nothing saying how long a Hershey bar has been around, it is durable. How long has Anheuser-Busch been making beer with the same machinery? Forever! Those things are competitive. When you compare it to Intel, Intel may be around, but they don't make the same chip year in and year out, they have to go in and re-tool and re-design and spend literally hundreds of millions doing it. Warren wants a company where they are not reinventing the wheel every year and that is what he means by durable.
MARY: Gillette is another example. You use a lot of razor blades. That is pretty durable. Every time one runs out, you buy another package of razors.
JIM: I guess it's similar to Coke. You drink one can; chances are you bought a six-pack.
DAVID: You keep drinking Coke. I drink Coke, my kids drink Coke, and my grandkids will probably drink Coke. That is pretty durable. The competitive advantages are they own a piece of our mind, as far as what we are going to drink.
JIM: We were talking about the commodity business. Explain Buffett's purchase of silver and even more recently, into the energy business.
MARY: I will say silver, because I had spoken about it. That was a simple supply and demand. There was more demand than there was supply. That was an easy one.
DAVID: What Warren thought is, gas pipelines in this country basically have a monopoly on shipping gas in and out of areas and they have been great businesses for a long time. They are quasi-monopolies. Northern Natural Gas is one of them and they have shipped gas from Texas to Minnesota for the last 60 years. It has been a good business, a great business. Williams Companies, which is in the gas business and got into trouble and needed money quick, and started selling off its gas pipeline businesses at really fair prices. Warren saw this and started buying them. They are going to be pumping gas in that pipeline for the next 20 to 50 years and they are not going to change. That pipeline has been in business for a long time. Besides doing upkeep on them, they have to go in and build a new one all the time. It is a good business. For a long time, those pipelines were owned by the gas companies and now that they are in trouble they are selling off their assets and he is buying. He is buying on the bad news.
JIM: Let's get into the kind of businesses that Warren loves and what are some of their features.
MARY: He loves simple businesses that he understands. Again I think that Dairy Queen is a great example. He probably wanted to buy Dairy Queen since he was eight years old, just the price wasn't right. Companies that he understands, Sees Candies. I remember my daughters sitting around and it was Mrs. Graham from the Washington Post, Warren and Charlie Munger--a quite wonderful group of people for Christmas--and my girls were about six years old and they said, "Mommy, is Grandpa and Mrs. Graham talking very seriously about cookies and candy?" It was true. They were talking about Sees Candies and Mrs. Fields, products that they understood. Coke's advantage over Pepsi is that McDonalds only sells coke. The worldwide market place that McDonalds has, gives them that advantage. Those are the kinds of businesses that he loves-services like American Express, H&R Block, and David's descriptions of the gas lines. Who knows what they are going to be used for? Just like Phillip Anchel bought the railroad lines. It wasn't the railroads. It was the fiber optics he was buying.
DAVID: ...just as William Companies crammed a lot of fiber optic cable into its pipeline. But from Warren's perspective, he wants that pipeline business that is pumping gas. From his perspective, it is good money. And at that price, it is a good investment. He is always price-motivated, but what he wants is a company that is going to be around in 20 years and doesn't take a rocket scientist to run it.
MARY: Hoover's Vacuum Cleaners he owns. If you look at some of the companies that he owns, they are very basic.
DAVID: He once said that he wanted a business that is so easy to run, that even an idiot could run it, because eventually an idiot probably would end up running it.
JIM: I want to talk about something that I think is very important for investors and I think it is too bad that they have not learned this earlier. In your book you talk about how investor's could use Warren's method to adopt and avoid the next high tech massacre. Certainly, when we had the euphoria of the tech bubble and when it passed, there would be another bubble to surface. The reason I want to talk about this is that you still have Wall Street playing this insane game, recommending investors buy techs. For example, Yahoo at 102 times earnings or even E-Bay at 84 times earnings. Why is it important to understand these valuations? In my opinion, it keeps you out of trouble.
MARY: That is true. There will be another bubble. There are two examples. One thing was when Warren used to say when he started Berkshire and he was knocking on neighbors' doors and the family relatives 10 thousand dollar investments, you could explain how brilliant you were at understanding the company, your valuations, the amount of profits and earnings the company would make, and the person would call their father and attorney and talk to people and probably not give you ten thousand dollars. In that bull market, a broker would call someone with a hot tip and they would put down $10,000 without a thought. That is the greed part of the equation. David, remind us of the Yahoo one, because we were talking about that at UCLA. Why would you pay eight million for a company that was earning one million?
DAVID: Getting into valuations, you ask yourself some questions. I think Yahoo at that price was valued at $80 some billion or even $130 billion. But you know that if you spend that $130 billion on Yahoo and weren't making any money, would you spend it? You would be out of your mind to. There is no way you would do it. You have people when they buy a share of stock that is what they are doing. These people aren't buying into a company; they are buying into a gamble. They are gambling that those stocks are going to continue to rise. That is called speculation. That is falling. If you ask yourself basic questions of durability, is Yahoo going to be around in 10 or 20 years? We don't know. Is it making any money now? It is not. Is it making 80 and 90 times earnings? Extremely doubtful.
MARY: Is it a monopoly? No. But the basic question is, what are you willing to pay and what is the return? Are you willing to pay $80 million for a company who is earning $100 million? That would be insane, but that is the business perspective point of view.
JIM: I think that business concept or that business perspective that he so diligently applies is very important. You just mentioned Yahoo, if a company is making a million dollars, or we can think of Amazon, and it has pro forma earnings. You look at the market cap of 12, 15 or at one time, Amazon was worth more than the major retailers. That is insane. If you were going out to buy a business, you would never pay that kind of price.
MARY: It is so simple, as you said, market cap. People are talking about mid, small, large. If they took the amount of outstanding shares and multiplied it by the price, there you would give you a really quick down and dirty valuation. Is it really worth that much a share?
DAVID: Was Yahoo worth $100 billion at the top of the market? There is no way if you had $100 billion in your pocket that you would have dumped it all on Yahoo. They would have dumped it in the bank and lived off the interest. Warren is the same way. You have to think the same way when you buy a single share of stock.
JIM: I want to move on to something that I think is very valuable on looking when to buy. Warren takes advantage of various opportunities, as you point out in your book, that create buying interest. I wonder if you might talk about those, for example, individual calamities or structural change in the war phenomenon, which we face today.
MARY: I think war is a great buying opportunity, unfortunately. They don't know what is going to happen. They take their money out of the market and put it in gold, which isn't ever going to give them a return that Berkshire-Hathaway would give them for instance or they keep it in cash. That creates one buying opportunity, the sell off. But look at now, the valuations, the P/E ratios are still really high. Those will eventually come down and then it is a real buying opportunity.
DAVID: Structurally you have individual calamities like Geico. When Warren had [bought] it, they just had bad business practices and they drove the stock into the gutter.
MARY: They were selling insurance to drivers that had bad records. That was a bad management mistake. Geico turned it around and so did the value of the stock.
DAVID: Those structural problems exist. Like in a recession; you can knock a company's stock price down as well. What is great is when you get a situation like we have now. We have a recession and we have a war. Those kinds of situations can really hammer company is stock prices. A company like Elan Pharmaceutical that is down in San Diego has had accounting problems and was carrying too much debt. They tore the stock prices down from $50 a share to $1.50 per share. That company will probably turn around and most people who got in at $1.50 per share are going to make a fortune.
JIM: Let's talk about where Warren gets his financial information. I think that sometimes investors think, the Wall Street guys have access to all the information and that we, the little investors, don't have access to. It is surprising how simple and easy it is to get this information.
MARY: I am glad you said that. It is truer now than ever. In the old days, the financial guys had an edge on information. In our first book we talked about calling a company and asking them to send a prospectus. Warren used to get the scuttlebutt off the company. He would look at who the competitor was and talk to their competitor. He knocked on the door and tried to meet management. We have Internet access, magazines, Value Line. He uses all of those.
DAVID: In this day and age, the ability to access information from the FCC online is phenomenal. The ability to access news stories online for free is amazing. None of this was available ten years ago. Now it is. For the individual investor, it puts them in the same league as a Wall Street analyst in regards to being able to acquire information about a company.
JIM: Even if the individual doesn't have a computer, most libraries today carry a copy of Value Line; which is a very valuable source.
MARY: Or Moody's. Warren used to study Moody's every night. As David said, now you don't. You can go to the library. You can find things that were almost impossible before.
DAVID: Warren once said what helped him greatly is that he knows pretty much what is going on with all the businesses through Moody's. Somebody said, "How do you do that?" He said, "You work at A and you go all the way through to Z."
JIM: I thought it was somewhat entertaining. You mentioned in your book that due to his friendship will Bill Gates, Bill got him computerized.
MARY: Yes he did. He didn't get him buying index stocks, but they play a lot of bridge.
DAVID: Bill's dad is a big Bridge player and Warren is a big Bridge player and they play on the Internet together.
JIM: Let's talk briefly about some of the 10 points of light that Warren has. We don't have time to go into all of them, but I was wondering, Dave, if you might address the three that I think are very important. First, the return on equity, a return on total capital and consistent earnings and why that is important. And perhaps, Mary, a qualitative question-when debt makes Warren nervous.
DAVID: The return on equity determines whether the business is making any money. The same with return on capital. Equity is basically how much money the company has retained in investors and investors have invested in it. Return on capital is how much money they have spent on capital equipment, assets and what they can return on that. Both of these are benchmarks for profitability. Consistency of earnings is a good way to tell whether the company has a competitive advantage going. If the earnings gyrate a lot, for example, every other year they loose money, or ever three years they lose money, some years they boom and then they lose. That is not what you are looking for. You are looking for a company that consistently earns money and has a good return on equity and a good return on capital.
MARY: Over a good ten-year period of time, I might add. Now, in terms of debt, debt makes Warren nervous because it doesn't allow the company to have the profit and cash to go out and repurchase their shares or buy other companies that are undervalued. He doesn't believe in debt. There are certain circumstances that a company will generate debt, but he isn't interested in a company that is debt-laden.
DAVID: Debt is a big killer in a bad situation. If your company is in a situation where it is losing money because of something in the market the one thing that will kill you is too much debt. I think you see that with Tyco right now. They are just loaded with debt and turning that around would be almost impossible.
JIM: One issue that is important--and I would like both of you to address--is the issue of corporate governance. Last year we certainly saw a lot of the earnings of the 1990s were somewhat fictional. How does an investor protect themselves from a company that looks like it has rising earnings and the return on capital looks good, but maybe the numbers aren't what they are supposed to be?
MARY: Corporate governance is something that Warren is very keen on. If you look at almost every company that he owns, he is very well aware of management, what their interests are, and if it is with the shareholders' interest in mind or not theirs. Are they flying around in corporate jets or taking that money and utilizing it with the shareholders' interests in mind? Warren had to step into some companies, like Solomon several years ago and kind of have that governance put back into place. How did an investor find due diligence like that in a company? Again, it is reading business journals. I think Barron's is a great magazine. I think looking at where the management came from and what their philosophies are -- it is all of that. I think a lot of the big corporations, no one was looking and David you can put your two words to that, because you know very well that Chuck Ogden Sees Candies, Eden, and Nebraska Furniture Mart was run by a family. Warren bought it and they still run it. Boreshimes Jewelry store, he bought it, a family owned company. They still run it. That is his consistency.
DAVID: He likes to buy management when he buys a company completely. He says, when I buy a company it has to come with management, because there is no way he can supply it. The way that you protect yourself from a great deal of fraud is you start by saying, does the company have a competitive advantage? Has their product been around for a while? Does the management have history of being careful? If you do your homework, you can see that. If the head of the company has a reputation for being flamboyant and a cowboy, it is probably not the kind of business you are interested in being in. Those are the kinds of things you have to read and look at. It is hard.
MARY: But, you can see annual reports. You can see that at one time, the head of Geico, or Warren himself, takes a salary of $100,000 a year, or bought a corporate jet. It was really for the sake of the shareholders and his time management and it wasn't because he was being flamboyant. Up until then, he took airlines like everyone else.
DAVID: When KKR took over RJR, the first thing they did was get rid of all the airplanes.
JIM: Let's talk about Warren's secret for getting out at the top, because he does sell stocks.
DAVID: Warren's secret for selling out, because he does sell. He asks himself one question. Given how much money this company is earning, if I got out right now and put that money in something like T-bonds, and earned the equivalent amount of money that that company would earn me in a 10-year period, that is sort of a way he is thinking if the company is selling at a very high price or not. Coca Cola at 50 times earnings, he wants to get out of, because he can take his returns and get more money elsewhere given the underlying economics of Coca Cola, if he was taking the money directly out of Coke. But the stock market comes along and says, "We think it is worth a fabulous amount of money" and certain times when it says that, it is time to leave. During the bull market in 1999, Warren decided it was time to leave and left a lot of companies.
JIM: I guess a final question, given all the opportunities, the prospects of war, given the bear market, what is Warren buying now?
DAVID: Coca Cola is at 24 times earnings, when it goes down to 20 times earnings, he will be buying Coke.
MARY: When Berkshire-Hathaway was free-falling with everything else, Warren put a floor on that. He wasn't going to let it go for under $40,000. He was going to buy back shares right then. I don't know what in particular he is buying right now, but I know he is getting poised more likely than not, to make a buy that has a chance to give him a great opportunity.
DAVID: I think gambling he is looking closely at General Electric. It is at a good price range right now, given the kind of company it is. It meets the criteria he is looking for and it is selling at a fabulous price right now.
JIM: Looking at your two books, Buffettology and The New Buffettology, I want to talk, just for a moment, about a book that both of you wrote. I thought it was fabulous. That was The Buffetology Workbook. Those listening on the air or reading this in transcript and for those of us in the financial business, we are used to doing financial calculations and speaking in financial terms. What I thought was great in both books and both workbooks, is you take the investor through the process and the steps on how to analyze a company, how to use those calculations to value whether you are buying a company at a high price or determine whether it is a good price. I wonder if you might speak for a quick moment on that. I thought it a fabulous job and I want to compliment both of you on it.
MARY: Thank you very much. That was a fun book to write. The chapters are short. We did chapter reviews at the end. With the Texas Instruments financial calculator for $15, you can just step through the process. David really, I have to credit for the formatting of that process, because he is more quantitative than I am. We have just had nothing but great rewards with UCLA students, college students that have really utilized that book.
DAVID: The workbook was Mary's idea. She keeps everything clear, which makes the Buffettology book so fantastic and why it has been a privilege to work with her over the years is that they are clear books. They are written for lay people. If I were writing alone, I would have written for some financial analyst on Wall Street. Mary has got a gift of explaining these things in simple terms, that everyday people can understand, which makes them fantastic tools for lay investors.
MARY: I wouldn't have been able to do it without David.
JIM: A final question. In your book, you talk about how Warren Buffett has compounded the book value of Berkshire-Hathaway at an average annual rate at 23% a year. Why do you think, as successful as this man has become and very few people with this wealth have made it through this stock market, why do you think more people do not emulate his approach?
MARY: I think that there are few people who can have the patience and the focus that Warren has. Really, to control yourself until you absolutely know. He knows what price he has to buy that company, for how long he is going to hold it to get the kind of return that he wants. Compounding is so simple, but a lot of people don't get. It is that old if you had a penny and you saved and doubled it the next year, and in twenty years, you have millions of dollars. That is watching money compound at 100%. Warren is quite happy with 23.
JIM: Given the success that Warren has had over such a long period of time. I can think of very few money managers that have compounded at 23% a year, why more on Wall Street don't emulate his approach.
DAVID: The problem with Wall Street is it is short-term motivated. Every year they have to bring in the big number in order to get more people to invest in them. They can't take a long-term perspective on them. Some years you are going to find Wall Street guys bring in a 60-70% return on money and other years you are going to see them losing money. It becomes a roller coaster ride. They have to have a short term perspective and that will not change. They are catering to a lay public and a lay public is looking at that yearly number. Where the individual investor can profit on it like Warren did, they don't have to have that perspective. Wall Street can never give birth to a Warren Buffett. An individual investor can match Warren's returns though, and that is what Buffettology is all about.
JIM: I want to highly recommend your book The New Buffettology and more so given the times we are in right now. A lot of investors are more fearful. You have shown in this book is that fear is nothing to be afraid of, especially in environments we are into today where you do have this negative news, but how you can use this news to your advantage. I want to thank you both for joining us on Financial Sense Newshour. The name of the book is called, The New Buffettology, but if you pick up this book, I highly recommend you pick up the first book, Buffettology, and the workbook that goes with it. Thank you both for being so gracious with your time and joining us on Financial Sense Newshour.
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