The Ignorant Investor

A couple of months ago I read a book on investing that laid out the principles of investing according to Warren Buffet. According to the book, Mr. Buffet isn’t just some guy playing half-assed Caribbean music to a bunch of drunken thirty-somethings in Hawaiian shirts, he’s also known as one of the world’s most successful investors.

What? . . . I’m confusing Warren Buffet with Jimmy Buffet? Hmm, okay. So Warren Buffet is the old guy with glasses from Omaha, Nebraska. Jimmy Buffet is the old guy with the guitar and baseball cap and the talent for relentless self-promotion. Glad we got the sorted out.

In any case, Warren Buffet has certain things he’s looking for in a company. In the interests of avoiding copyright infringement, I’ll summarize what the book says in as summary a fashion as possible. Warren says to:

1) Look for a company with a business model that’s simple and understandable, which has been shown to produce real profits in the past and which is likely to do so in the future.

2) The managers of the business must be sound, must be candid with their shareholders, and must resist something Warren calls the “institutional imperative”, a term which I can’t define since I returned the book to the library without noting down what it meant.

3) Ignore the earnings per share and instead focus on the company’s return on equity; you want to see big profit margins. Warren also says to calculate “owner earnings,” which sounds like an important measure of profitability, but, again, I don’t know what it means (Hmm, I may have to go back to the library to find out). Also, for every dollar retained by the company, make sure the company has created a dollar’s worth of market value. Which I assume means that if the company goes out and spends a million dollars to buy another company, the purchase should increase the company’s market value by at least a million dollars.

4) Accurately calculate the value of the business, and only buy the company if the company is trading at discount to its true worth.

5) Focus on buying fewer stocks rather than a big, highly diversified portfolio. Owning 10-15 great companies, Warren says, is better if you’ve picked companies with great prospects.

6) Examine the probabilities involved: what is the probability that you’ve miscalculated the profitability of the business? What are the chances you’re making a mistake trusting management? How certain can you be that management will return profits to investors?

7) Think long-term. Be patient. The market is not always efficient or rational over the short term, but eventually it recognizes value.

So there you have it. That's all very simple, isn’t it? Everything you need to know to invest the Warren Buffet way, straight from Warren Buffet himself.

Don’t be bothered by the fact that literally thousands of professional investors are familiar with Warren’s methods and we not able to do what he has done. Or that Warren often invests in companies by buying them outright after teams of very sharp people have gone over every available item of relevant information like starving peasants looking for grains of rice in the dirt (sorry about that analogy- was watching CNN International this morning). Basically, all you must do is assume that the financial acumen that Warren Buffet possesses his latent in all of us.

Frankly, I wish that I had Warren’s genius for investing, but I don’t. When he's evaluating a company, he brings to the table a wealth of business experience that I lack. He probably understands people better than I do. And he knows people who know stuff about the company that isn't generally known by the rest of us. Forget following Warren Buffet. Even following Jimmy Buffet is beyond me. I can't play a guitar. I don't have the self-possession to write mediocre songs about partying the Island way. So I am truly screwed.

So we come to the true point of this piece: Do not expect to replicate Warren Buffet’s success just by following the advice in his book. And don't annoy people by telling them how great Jimmy Buffet is in concert, or how people who aren’t parrotheads just don’t “know how to have fun.” Yes, I’m talking about you, Camilla. You work in an office, not the fry shack down at the beach in Saint Thomas. I’m tired of the sound of Jimmy Buffet coming over the cubicle wall. Knock it off, already. Would it kill you to listen to the Sex Pistols or the Ramones or Nirvana or, well, just anybody else once in a while? Try something bleak for a change.