Buffettology Workbook

BUFFETOLOGY Workbook Steps

1) Find a consumer monopoly. Don't worry how long it takes to find the perfect pitch, just be patient.
2) Understand the business product - respecting product obsolescence is a huge factor in avoiding losing your money.
3) 20 year test: if people are unlikely to be using this product in 20 years then move on.
4) Conglomerate test: is this a monopoly or collection of weaker commodities? Identify which direction management is heading in buying more consumer monopolies or fixated on the commodity side of things?
5) EPS strong or weak? erratic only once or often?
calculate past 10 years EPS growth rate - TI BA-35 Solar Calculator, Present Value PV = year 1 earnings; year 10 earnings = FV Future Value, 10 for years, hit the CPT compute key
then the %i key (or interest key) then annual compounding growth rate per share will appear

6) are managers earning a high return on shareholders equity?
15% minimal or walk away. If its there, get out your Value Line and gather together the return on shareholders equity figures for the last 10 years and calculate the average.

7). Is the company conservatively financed? the earning power of a business is the only real judge of a company's ability to retire its debt. Calculate how many years of the past 10 years nets earnings would be required to pay off this years long term debt? calculate Years of earnings to pay off debt. (1 is okay, 2 is marginal, 3 not good)

8). Is the company buying back its own shares? (increases ownership tax free) Value Line is one of few companies that offers this information. Take the number of shares 10 years ago and subtract todays number of shares to see if there are less (a positive number are shares bought back, a negative number are shares added, consider stock splits as well).

9). Is the company free to rise prices with inflation? Consumer monopolies can raise their prices, commodity businesses cannot compete with rising prices. A good barometer is 4% price increase per year is ballpark for a consumer monopoly business. Use the TI BA-35 calculator, PV = price 20 years ago, current price = FV, 20 = years, hit CPT and %i keys and annual compounding in price growth is calculated.

PRICE ANALYSIS

10.) Is the companys stock price suffering from market panic, business recession, or individual calamity that is curable? If you can't buy during these events then chances are you are paying full price for the stock. Getting rich means learning to exploit bad news situations and the markets short sightedness.

11.) What is the initial rate of the investment and its expected annual rate of growth? How does it compare to rate of return on US Treasury bonds? Divide EPS by share price, this is your initial return. Couple that with EPS growth rate you calculated and you get the initial rate of return and expected annual growth rate. (e.g. Coke's initial rate of return was 6.8% in 1988 but grew as EPS grew at 17% annually). If Treasuries are better, stock is overpriced.
Initial Rate of return _______
Growth Rate ________
Rate of Return on US treasury bonds _______

12.) The company's stock as an equity/bond calculation:
Take the company's annual per share return on shareholders equity value for last 10 years (number 6.). __________
Subtract the average annual percentage paid out as a dividend. ________
Use the resulting difference as the growth rate that the company's shareholders equity will grow at ______

Use the company's per share shareholders equity value in this year ________ as the PV,
Use the calculated rate of growth for shareholders equity as the rate of interest (&i).
Punch in 10 for the number of years out you want to make your projection (N), hit CPT key and FV key
This will calculate the future per share value of the shareholders equity __________

To calculate future selling price of the company's stock, take the per share value of shareholder's equity ________
multiply it by the average return on shareholders equity ________
This will give you the company's projected per share earnings: ________.
Then multiply the projected future earnings ______ by the company's average annual price to earnings ratio (P:E) for the last 10 years ________
This will give you the company's per share projected future trading price _______

Using the current market price as your PV ______ and the future trading price as FV ________ and the number of years between the two (N key),
then hit the CPT key and %i key to calculate the projected annual compounding rate of return the investment will produce.


Average Annual growth rate: ____
Average % paid out as dividend: _______
Company's shareholders equity per share in current year: _______
Company's average annual P:E ratio for 10 years: _______
Projected growth rate of shareholders equity over next 10 years: ______
Projected future trading price of company's stock: ______
Current trading price of company's stock: ______


13. Projecting an annual compounding rate of return (EPS growth rate over past 10 yeras) using the historical annual per share earnings growth figure:
To calculate ACRoR on investment from 2009 to 2019, first calculate the annual compounding per share growth rate form 1999 to 2009:
Per share earnings in 1999 ______
Per share earnings in 2009 ______
Use the 1999 per share earnings as the PV, 2009 per share earnings as the FV, and 10 for N years. hit CPT and %i to compute EPS growth rate.

Now use the company's per share earnigns for 2009 for PV, the EPS growth rate as the interest rate (%i) and 10 for years.
Hit CPT and theen FV key which will project the EPS for the company in 2019.

Take the projected EPS for 2019 and multiply it by the average annual P:E ratio for the time period 1999-2009
This will give you the projected trading price for the company's stock in 2010.

Do You Make the Buy?

To buy or not to buy is always the question. If its a consumer monopoly you can buy it at a price that makes business sense, then you should jump on to it. If it's too high, wait for a market correction, industry recession, or business calamity. If its not a consumer monopoly then put it out of your mind (unlike Coke, Pepsi, Kraft, Kellogg's, See's Candy, Wells Fargo Bank, railroads, etc.)