Where to begin...

[ItalianFX]

In light of all of the fundamental threads that have been going on, I have been thinking about it and I'm still lost.

Can a business be fundamentally analyzed on the business model/strategy alone, or is it mainly about the numbers? Obviously, the numbers are like the scorecard of the business.

I'm not really one to look at financial statements because I have a hard time breaking them down. I know how to analyze them based on the different ratios, but it's so time consuming (yeah I know), and they really have to be compared to the industy averages and other companies in the same industry.

Another thing is, how do you find a company to start reading about? Where did Warren Buffett get the ideas to look into the Washington Post, See's Candy, etc.? Where does anybody get an idea to pick a random company and find a hidden gem? How do you look forward into the future?

I'm interested in personal stories of anybody on here who wants to share their input. I like to hear stories of other people because it gives me inspiration to work harder for myself.

I just feel like I'm on a random path going nowhere because I don't know where to start.

So what I want to know is, how does you break it down and begin on a new company that you have never heard of, or don't know that much about?

[DesertCat]

Read all of Buffett's shareholder letters for the last 30 years.

[ItalianFX]

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Read all of Buffett's shareholder letters for the last 30 years.

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Thanks.

I read most of the most recent, but I'll go back to the first one that I can find and see what it says.

I found a page on Fundamental Analysis on Investopedia, which helped alot.

DesertCat (and anyone else) - care to share some of your stock picks in the past based on fundamental analysis that has done well for you?

[dp13368]

Link to Buffets 'letter to shareholders' ?

[ItalianFX]

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Link to Buffets 'letter to shareholders' ?

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http://www.berkshirehathaway.com/letters/letters.html

[yellowbastard]

Hoovers.com premuim service has an outside option built in for a lot of US companies called ValuEngine analysis. You can subscribe to the site and get reports and stuff. This is what it said about H&R block around the time Buffett bought it...

[yellowbastard]

You can go to their site and read about their valuation models. I've been meaning to do it but I'm lazy [img]/images/graemlins/smirk.gif[/img]

[dazraf69]

[ QUOTE ]
Read all of Buffett's shareholder letters for the last 30 years.

[/ QUOTE ]

Can you indicate the key points one would be looking for or method of analysis when reading these letters. In other words what am looking to find?

[ItalianFX]

[ QUOTE ]
[ QUOTE ]
Read all of Buffett's shareholder letters for the last 30 years.

[/ QUOTE ]

Can you indicate the key points one would be looking for or method of analysis when reading these letters. In other words what am looking to find?

[/ QUOTE ]

As you read these reports, you'll see that he is very straight forward. He tells you what he looks for and he doesn't try to cut corners. If he is doing bad, or a part of the company is doing bad, he will tell you.

You'll see though that he gives his reasons for some of his investments.

Especially with the most recent Letter, he actually states the criteria for what businesses he is looking for.

[DesertCat]

[ QUOTE ]
[ QUOTE ]
Read all of Buffett's shareholder letters for the last 30 years.

[/ QUOTE ]

Can you indicate the key points one would be looking for or method of analysis when reading these letters. In other words what am looking to find?

[/ QUOTE ]

From 1977.

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Most companies define “record” earnings as a new high in
earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.

Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital. In 1977 our operating earnings on beginning equity capital amounted to 19%, slightly better than last year and above both our own long-term average and that of American industry in aggregate. But, while our operating earnings per share were up 37% from the year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance.

...

In aggregate, the insurance business has worked out very well. But it hasn’t been a one-way street. Some major mistakes have been made during the decade, both in products and personnel. We experienced significant problems from (1) a surety operation initiated in 1969, (2) the 1973 expansion of Home and Automobile’s urban auto marketing into the Miami, Florida area,
(3) a still unresolved aviation “fronting” arrangement, and (4) our Worker’s Compensation operation in California, which we believe retains an interesting potential upon completion of a
reorganization now in progress. It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.

In 1977 the winds in insurance underwriting were squarely behind us. Very large rate increases were effected throughout the industry in 1976 to offset the disastrous underwriting results of 1974 and 1975. But, because insurance policies typically are written for one-year periods, with pricing mistakes capable of correction only upon renewal, it was 1977 before the
full impact was felt upon earnings of those earlier rate increases.

The pendulum now is beginning to swing the other way. We estimate that costs involved in the insurance areas in which we operate rise at close to 1% per month. This is due to continuous monetary inflation affecting the cost of repairing humans and property, as well as “social inflation”, a broadening definition by society and juries of what is covered by insurance policies.
Unless rates rise at a comparable 1% per month, underwriting profits must shrink.

...

Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of
the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us.

...

A little digression illustrating this point may be
interesting. Berkshire Fine Spinning Associates and Hathaway Manufacturing were merged in 1955 to form Berkshire Hathaway Inc. In 1948, on a pro forma combined basis, they had earnings after tax of almost $18 million and employed 10,000 people at a dozen large mills throughout New England. In the business world of
that period they were an economic powerhouse. For example, in that same year earnings of IBM were $28 million (now $2.7 billion), Safeway Stores, $10 million, Minnesota Mining, $13 million, and Time, Inc., $9 million. But, in the decade following the 1955 merger aggregate sales of $595 million produced an aggregate loss for Berkshire Hathaway of $10 million. By 1964 the operation had been reduced to two mills and net worth had shrunk to $22 million, from $53 million at the time of the merger. So much for single year snapshots as adequate portrayals
of a business.

...

We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be
(1) one that we can understand,
(2) with favorable long-term prospects,
(3) operated by honest and competent people, and
(4) available at a very attractive price.
We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.

Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and
not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.

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