Book review: Gone Fishing with Buffett

This book is totally to my style and I finished reading the book in just a few days. Sean did a good job of putting Buffett's (dry) investing principles into layman terms by mean of a story. This makes it easy to read and is pretty entertaining. The story talks about a young man befriending a mysterious old man at a jetty and getting to learn about value investing from this folk (whom you guessed, is the imaginary Mr Buffett). 

If you have the slightest inkling about what is value-investing, this book serves as a refresher of all the concepts or reinforced them for your better memory. There are key notes in a grey section at the back of each chapter, which are the author's notes about each concept.

The book is published in year 2012. With that in mind, we can compare how those businesses that he penned in the book have changed over the years and see if the 'prediction' of their future values still holds true.

The coca cola case study was good to illustrate the point but the values did not seem accurate. When I compared it to real life EPS and current price versus 10 years ago, it showed that coca cola has kind of lost its shine (did not live up to the expectations of projected earning growth). Its liability grew but earnings were not growing.

Let's do a summary on what's covered in the book:

The Rules of Thumb in choosing a business for investment

• Consistent historical earnings per share
• Average ROE (=net income/ shareholder's equity) of more than 15%
• ROA (net income / total asset) of more than 7%
• Has long-term debt not more than 5 times its net income
• Interest coverage ratio > 3 (Interest coverage ratio = EBIT/ Interest Expenses
• Positive earning does not equate to positive cash flow (we have to look at Free Cashflow per share too)
• Has pricing power

[Calculate CAGR using a finance calculator, value keyed is EPS present and EPS future.]

Avoid IPOs

IPOs are seldom sold at bargain. So be patient and wait for the market to mis-price it against its value before buying the business.

Buy the business that stays competitive due to its business model

"Buy businesses that even a fool can run, because someday one will."

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My take:

Value investing forms the basis of all long term equity investment strategies. 

However, we cannot just buy and forget. Periodic evaluation of the above Rules of Thumb for the businesses we are vested in will prevent us from unwanted surprises like holding shares that are due for perpetual downward price slide.

We would also want to check that the future earnings of the companies we are vested in coincide with or exceed our "prediction". That is also how we decide on whether to continue holding a stock.

Update about a portfolio's face value and bench marking it against Mr Market means nothing in the long run (unless you are a mutual fund manager showing clients your results). Being updated with how the portfolio correlates with the value of its underlying businesses may be much more important.

A related blog post earlier - High value is not the same as low price.

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