Reviewed by Chris Crispy Garrah
What Is Mary Buffett and David Clark's Book About?
I am going to give you a brief insight into the book. Even though you may know how to read financial statements you may not have discovered key discovery's Warren Buffett discovered by reading and analyzing many financial statements, I am thinking that as perhaps as a small investor you too could grow your fortune over many years just like Warren Buffett did. By picking great stocks you could make money over many years if you had the patience to continue buying small quantities of the types of stocks that Warren Buffett (a very rich man) favors.What Is the Background Of Mary Buffett?
Well, she is the former daughter-in-law of Warren Buffett. So, she was privy to inside information on how Warren Buffett discovered differences on the income statement between great companies and not so great companies In the process Warren Buffett was able to grow his many billions of dollars over many years .
Key Discoveries Warren Buffett made About The Size of Expenses Affecting Net Income in Relation to Revenue -
Warren Buffett's analysis of financial statements differed from an accountant's view because he noticed some companies could generate sizable net margins and some could not. Line by line he found expenses were much smaller for Companies with distinct competitive advantages.A key element in comparing two different companies' ability to grow their earnings over many years was the size of the net profit is in proportion to the revenues. . The book emphasizes that Warren Buffett discovered early on in investing that a bigger net profit margin is crucial in selecting stocks to buy when buying for the long term - perhaps holding your whole life unless the fundamentals change. To me I am assuming a change would be a drop in the net profit margin.
Wikpedia is defining net profit margin as net profit divided by revenues. Multiply by 100 to get a number between 0 and 100.. The net profit margin could also be negative if their is a net loss. I think the book is indicating 15 to 20 percent or more is very good. .... and I think Warren Buffett uses "net income before income tax" divided by revenue as his indicator = net profit margin
In contrast to these companies with high net margins (and thus a distinct competitive advantage ) are companies like car manufacturers ( look in the book for this) that have a very small net profit margin. These small net profit margin companies is have to really compete with the other companies and they must sacrifice a healthier profit by spending more on the expenses just as many companies also do.
And that is where the subtitle of the book comes in ..."durable competitive advantage". Why can some companies earn so much money from revenues. Well, the book is indicating that various expenses like 'research and development' and 'depreciation' ..caused by needing to retool (like car companies and phone companies that need to invest in new technology) are smaller in these exceptional companies.. Another thing about these companies with a durable competitive advantage are they have well known names. The same issues apply to your family finances .. you could grow the family's wealth faster if you cut down on your need expenses and kept more money in your pocket - a higher net profit margin for your family's finances.
The growth in earning from one year to the next is indicated by the high net margin.
This growth in earnings will drive up a company's stock price.
Peter Lynch, one of the most successful mutual fund managers also stresses this point in his investing books. For Warren Buffett, according to Mary Buffett's book he could see clearly the potential to grow earnings over the years with the cash being generated in the company - high net margin and using it to buy more earning power or to buy back stock - with fewer shares the earnings per share will rise .
Where can I filter the stocks by net profit margin?
One place that I go to is Google Finance. They have a stock screener and you can add this as a criteria to screen stocks.Or you can locate a company's net profit margin on Google Finance on the right side of the screen . For each stock they have key stats listed and the stat you are looking for , "net profit margin" is here also.
In the past Warren Buffett has invested in such companies as American Express, Moody's , Wells Fargo. Coca Cola and others. As an exercise you can follow these stocks on Google Finance and find much more about a company than just its net profit margin.
What else could I screen in my stock selection?
Well, the valuation of a company is very important. The Price per earning measures how pricey a stock. Usually, the lower the better as a guideline. I recall Peter Lynch in one of his books say that he would rather buy a company that had a p/e of 30 and growing earnings at 30 percent a year than own a company with a price/earnings of 20 and growing at 20 percent a year.Are there other ways to learn about investing without risking my money?
My bank offers a practice account so you can practice buying and selling stocks. You could view the stocks you buy daily, or weekly over months or years if you were cautious. It is only pretend money in the practice account. Although the money is only pretend money as the stocks that you have bought in this account change in value you can get a measure of how well your stock picks may have done by looking at the percentage changes which change over the day or month or year.ANOTHER WAY TO PROTECT YOURSELF
The magic of mathematics - I think having five to seven stocks that are dissimilar helps reduce major losses. This could be something to investigate to give you more confidence. The more confidence you have in the quality of the stock the more you would be able to weather a temporary downturn in the market and keep your stock long term to generate long term gains.The Law of 72
I do not recall if this covered in the book but the rule of 72 tells you how long it will take to double your money. - because the value of the stock is compounding. Refer to Wikipedia. If your stock rises at 18 percent a year then 72/8 equals 4 years to double. Also refer to solution on Wikipedia for the rule for how long to triple your money. Because Warren Buffett has been investing for many years and has selected stocks that he believes will grow year after year his fortune has grown to an astronomical number.I also recommend reading Dr. Alexander Elder's book "Trading For a Living" especially if you enjoy charts and numbers. or visit Dr. Alexander Elder, author of Trading for a Living I have a book review on this site. I recall an exhaustive treatment of indicators of the markets direction.
SUMMARY
Do you ever find yourself watching a stock investing show and the commentator is saying how good a stock is? Well, now you may find yourself shouting at the screen "what is the net profit margin ...is it a measly 2 percent or a juicy 20 percent? and how is it valued ? Does it have a 100 price per earning? How is the stock going to rise fast enough in value to justify that valuation (of 100 price/earning). Enjoy learning about investing and seek expertise but also do your own research and for what the authors actually said - read the book! Happy learning. I think you really have to have confidence to keep a stock that is falling - I am not saying to keep it but if the fundamentals of the company are the same - high earnings - maybe the company will rebound. From the book it appears Warren Buffett seldom sells - because he does not want to pay capital gains - an income tax - upon selling his stocks. the magic of compounding!.Note: I always welcome feedback, especially if I make faulty analysis, grammar errors and typos.
The last time I looked on Amazon the book was selling for just a few dollars. A real gem of a book at a discounted price - what I like to call a door stop book - the perfect place to hide a book so no one "steals" it.
