192 THE WARREN BUFFETT WAY
Buffett believes it is foolish to use short-term prices to judge a com-
pany’s success. Instead, he lets his companies report their value to him
by their economic progress. Once a year, he checks several variables:
- Return on beginning shareholder’s equity
- Change in operating margins, debt levels, and capital expendi-
ture needs - The company’s cash-generating ability
If these economic measurements are improving, he knows the share
price, over the long term, should ref lect this. What happens to the stock
price in the short run is inconsequential.
INVESTING THE WARREN BUFFETT WAY
The major goal of this book is to help investors understand and employ
the investment strategies that have made Buffett successful. It is my
hope that, having learned from his past experiences, you will be able to
go forward and apply his methods. Perhaps in the future you may see
examples of “Buffett-like” purchases and will be in a position to prof it
from his teachings.
For instance...
- When the stock market forces the price of a good business
downward, as it did to the Washington Post,or - When a specif ic risk temporarily punishes a business, as it did
Wells Fargo, or - When investor indifference allows a superior business such as
Coca-Cola to be priced at half of its intrinsic value
... investors who know how to think and act like Buffett will be
rewarded.
The Warren Buffett Way is deceptively simple. There are no com-
puter programs to learn, no cumbersome investment banking manuals
to decipher. There is nothing scientif ic about valuing a business and
then paying a price that is below this business value. “What we do is not
beyond anybody else’s competence,” says Buffett. “It is just not neces-
sary to do extraordinary things to get extraordinary results.”^5