Book Summary: How to Pick Stocks Like Warren Buffet by Timothy Vick
Warren Buffett has amassed a fortune of more than 60,000 million dollars. This book is a bit older, so it only lists Mr. Buffett’s worth at $30 billion. The creation of wealth and employment from his work is truly revolutionary. Berkshire Hathaway, which is the entity he works for, is a conglomerate of companies that employs more than 250,000 people through companies such as GEICO, Burlington Northern Railroad, See’s Candy and Helzberg Diamonds. When Warren Buffett evaluates a business, it’s a straightforward decision: YES, NO, and Too hard. The too difficult category keeps you focused on his circle of trust, which we’ll talk about in the book.
Why is this important to me?
I start all book summaries with this question because if we can’t answer it, then there’s no point in wasting time watching the video. The simple answer here is knowledge. One of the best ways to learn is by what I call PEO. OPE represents the experience of other people. Since Mr. Buffett probably won’t take my phone call or guide me personally, it doesn’t mean I can’t learn from him. Timothy Vick describes in the book several things Warren does to build wealth. The real power in all of his strategies comes down to the power of compounding. Understand this concept and you, too, can benefit financially from this book.
OPT: Other people’s time is really where Mr. Buffett has been able to accumulate true wealth. Berkshire Hathaway’s 2009 tax return was over 15,000 pages long. The corporate headquarters does not look like Enron. They have 20 people in the company. The true value of OPT comes from betting on the correct “Jockey”. All of the CEOs who run Berkshire Hathaway’s various businesses are world class. This is a key component to investing in the RIGHT business. OPT is a critical component of how Mr. Buffett invests. He does NOT want to run the business. He simply wants to allocate capital.
If you know anything about Warren Buffett, you know that he loves investing in insurance companies. This provides great tax advantages, as well as access to free money known as “Float”. Float invested wisely can make big profits. This is the classic example of using other people’s money for profit. Another thing that is relevant under OPM is the “Velocity of Money” concept. Understanding this concept can make you rich. Have you ever wondered how a grocery store can make a profit if their average profit margin is 2%? The answer is inventory turns, which are a classic example of “Velocity of Money.”
Timothy Vick divides the book into 5 sections. I will cover parts of each section for time reasons. Developing a Mathematical Mind: Before you hit the pause button or skip out of this video, let me put a disclaimer on this one. You don’t have to be a math geek to apply these principles. With the Internet, all of this is done for you. What I am going to highlight are the differences that small movements make that can determine losses and gains.
1. Understand opportunity costs – This concept is important for any part of your life. The concept is simple. If you decide to cook dinner tonight, you can’t go out to dinner at the same time. You have chosen one over the other. If you buy $50,000 because then you can NOT use that $50,000 to invest. Also, that car doesn’t cost you $50,000 but it does cost you $1,000,000.
2. Price and Value Compounded Together. Price and value are not the same in investment terms. Some people would say that a $5 per share share is cheaper than a $50 per share share. Understanding the value will let you know if that is true or not. The $50 share may be “cheaper.” Buying at the right price and value together magnifies your results through compounding.
3. Batting for a high average: Ted Williams was a great baseball player with a batting average of over .344 in his career. He broke down the strike zone into areas that he could probably hit successfully. Basically what this means is that he controlled his swing to ensure he had the highest success rate. Mr. Buffet does the same to guarantee a .900 batting average on his investment. Therefore, he only focuses on companies that he understands, big businesses that can be run by average people and who buy at a cheap price.
One thing value investors do is analyze companies to determine if they are overvalued or undervalued. I have invested in the stock market BEFORE learning these tools and I can tell you from experience that I have received everything except the kiss in terms of losses. These principles are an absolute must if you want to secure your financial future. Simply giving your money to a dating “financial person” is not the way to secure your future.
1. Greedy Moats – This basically means that the company must have a lasting competitive advantage. If you look at See’s Candy, this company has been in business for 100 years and has a coveted moat. They make high margins in a relatively “Easy” business. They do NOT have to invest all of their capital gains for the next model year. This means that this business is NOT capital intensive when a car manufacturer is capital intensive. Another company owned by Buffet is Dairy Queen. I’m sure you’ve heard of him. They sell ice cream and have a lasting competitive advantage through their brand. The good news is that you can measure the power of the moat through numbers.
2. Rule Number One: There are two investment rules that MUST be understood. Rule one is don’t lose money and rule number two is don’t forget rule number one. This simple rule has power. Let’s say you invest $1,000 and make a 50% profit. You now have $1,500. Let’s say you have a 50% loss instead. You now have $500. To get back to par, you need a 100% profit on the $500. This is the hidden power of Rule One.
3. Valuing a Business – This book, along with a few others we’ll introduce in future videos, describe in simple terms how to value businesses. Once you know how to do this, investing in stocks is much more rewarding and easy. The goal here is to find a value of $2 and pay a price of $1. If you buy stocks like you buy groceries, this becomes easy to do and takes the mystery out of all the tech investing terms. Understanding return on equity, free cash flow, sales growth, and other metrics is key to valuation.
Today we have two main competitive advantages over Mr. Buffet. When he started investing, he had to do all the calculations manually. He read the financial statements 12 hours a day. Today we can use the Internet for all of our research and he can just plug in numbers and do simple multiplication, division, and addition to calculate the future value of the companies he cares about. In addition, we have the BENEFIT of size. The average size of a purchase in the stock market is 400 shares. When companies trade a million shares a day, our orders do NOT affect the price. When Mr. Buffet has billions of dollars to allocate, this action can move markets. The analogy here is that Mr. Buffet is a freighter and we are jet skis. This means that we can buy and sell before the market changes. An excellent follow-up book that I will describe is called Rule One Investing by Phil Town. He really goes into detail on these points.