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What Buffett would buy

Mary Buffett tells Moira O'Neill how to buy shares the Warren Buffett way - as explained in her new book - and analyses 17 of his holdings
What Buffett would buy

I speak to Mary Buffett (pictured, below) at 8am Los Angeles time, but she says she has been up watching the market much earlier than this. "I'm watching and waiting for it to go down," she says. "That's classic Warrenism."

Warrenism refers to her ex-father-in-law Warren Buffett, the sage of Omaha and chairman of Berkshire Hathaway. Mary has made a career out of being his daughter-in-law - for 12 years she was married to his son Peter. That career has seen her writing (in partnership with co-writer David Clark) eight books about Warren Buffett and his investment methodology, of which the latest in the series, The Warren Buffett Stock Portfolio, was published at the end of 2011.

But how close is Mary really to Warren Buffett. "We're two peas in a pod - are you kidding?" she says. "I'm very much an ex-daughter-in-law. It's been years since I talked to Warren," she says. However, she was much closer to Warren's first wife Susan (until she died in 2004). Susan lived nearer to Mary and was close to Mary's children - her grandchildren.

The fact that Warren has never given any ringing endorsements to Mary and David's Buffettology series is fuel for their detractors.

But Mary explains: "Warren always made it a practice to never say anything about anyone's books because it creates controversy. Before the first book, Buffettology, came out we sent a manuscript, thinking that if there was a problem he would say something." Mary says Warren did say something in the end, at the Berkshire Hathaway annual general meeting, along the lines of 'I have no quarrel with that book'. That's not exactly an endorsement but as close as it gets.

Mary says her real credentials are in studying Warren for 30 years. Plus, she has the "unusual experience of seeing him up close" for the 12 years that she was married to his son, Peter. During this time she had access to Warren's personal library and the original Berkshire Hathaway partnership agreement. In addition, Warren was constantly teaching and talking about business. "I happened to be interested and was like a sponge," she says.

So how is the latest book different from the rest? "It is about how and why Warren Buffett invests. I tried to distil Warren's investment and analysis into simple form. It's a practical handbook with the least amount of math. The other books were simple but technical. This is an analysis of 17 current and key investment companies. It does the work that is time consuming and what a lot of investors don't want to do."

I ask about who writes the books. Is it mainly her, or does her writing companion David Clark do most of the ground work? "David and I work closely together," she says. "David was studying Warren when he was eight years old. We kind of send material back and forth. I am a qualitative person and David does the quantitative.

"I tend to write in a story-telling way. We both contribute a fair amount. But David would be the one to explain an arbitrage algorithm. I can boil complex issues down to something simple."


How to invest like Warren Buffett

In The Warren Buffett Stock Portfolio, Mary Buffett and David Clark examine Warren Buffett's investments in 17 companies that have brought him extraordinary wealth, to reveal the types of companies he finds attractive. The book emphasises Warren's quest for a company that has "durable competitive advantage", which will signal if it has significant, long-term economics working in its favour. This can be summed up in one memorable quote from Warren Buffet: "I look for businesses in which I think I can predict what they're going to look like in 10 to 15 years' time. Take Wrigley's chewing gum. I don't think the internet is going to change how people chew gum."

The book cites four basic questions that Warren uses to identify a company with a durable consumer monopoly. These are:

1) Will the product or service the company is selling today be the same product or service that it will be selling 10 years from now? Mary says: "The company has to have been around for a long time. Warren knows these companies will be around 10 years from now so their earnings are predictable. Examples are Coca-Cola and Kraft."

2) Does Warren understand how the product works? Mary says: "The company won't have to change dramatically in order to survive. Railroads (Union Pacific Corporation) and discount shopping (Wal-Mart) are not difficult to understand."

3) Does it take large amounts of research and development to keep the service or product competitive?

4) Does the company in question have a monopoly or is it the leading low-cost producer of the product or service it sells? Mary says: "Band Aid is probably the name you use even if it is a different product. It's the same with Kleenex. You may have bought discount tissue but you would still say 'Pass the Kleenex'."

"Predictable products equals predictable earnings," says Mary.

The book illustrates how Warren Buffett likes to view stocks like these as bonds, because their earnings are so predictable that the ordinary shares (called common stock in the US) are really a kind of bond with a variable coupon. He calls them "equity bonds".

Once a company's durable competitive advantage and predictability of earnings has been established, the 'Oracle of Omaha' gauges a stock's value by how attractively it is priced and the consistent long-term profit he believes it will bear.

"Our 17 companies are all great companies. That is why we chose them specifically," says Mary. "However, we are, as value investors, price motivated. The lower the price the higher the motivation."

"It's like in high school and you like a guy but he is going out with another girl. You wait and then make your move when they break up," she explains. "This is the key thing that investors don't do - know what you want to buy and then wait for it to be sold at a discount."

She advises investors to use the tools that are out there on the internet to evaluate companies. "Don't think of it as stock. Buying a stock is buying a fractional piece of business."

On Warren Buffett's outstanding performance she says: "He made $60bn (£38bn) by only investing in the stock market. Everyone can with much less capital still get outstanding returns. Anyone can invest like Warren if you stick to the principles and discipline. It's not rocket science but not many people do it."

She gives the example of the 'Nifty Fifty' - an informal term used to refer to 50 popular large-cap stocks on the New York Stock Exchange in the 1960s that were widely regarded as solid buy and hold growth stocks. The 50 are credited with propelling the bull market of the early 1970s. "People thought at that time they could hold onto stocks forever. But Warren saw a bubble - he thought stocks were overpriced. So in 1969 he sold completely out of the market and sat on cash for four years. That is the patience you need. He spent those four years evaluating companies."

But hasn't he just had incredible luck? "I don't think 'luck' is in his vernacular," she says. "He used to say to me: Mary, purge yourself of all emotion. You can't get excited about a company. He does hard-core analysis and he doesn't live in New York. He is insulated and has always been that way."

So which of the 17 companies analysed in the book is her favourite? "For me this is very personal. I love railroads." Therefore she chooses Warren's holding in Union Pacific Corporation, which operates North America's premier railroad franchise. "I think his investment in railroads is really genius. Right now it is the lowest-cost provider for moving goods from here to there. I love fast transportation systems. Japan and Europe have wonderful highly efficient trains."

Since the book's publication, he has sold his UPC shares in favour of the outright ownership of Burlington Northern Sante Fe, a rival railway.

GlaxoSmithKline is the only London-listed stock among the 17 companies in the book, although Mr Buffett has since acquired shares in Tesco. "It shows great consistency in earnings and rising per share book value," she says. "Plus, it has really made its mark with Aids antivirals. For Warren and the foundations he has supported, it is a natural."


17 Warren Buffett investments: Mary Buffett evaluates their durable competitive advantage

American Express Company: worldwide financial services company headquartered in New York City.

Years of Berkshire purchase: 1994, 1995, 1998, 2000.

Durable competitive advantage: "Makes more money per transaction than does MasterCard or Visa."

The Bank of New York Mellon: global financial services company formed in 2007 by the merger of the Bank of New York with Mellon Financial Corporation.

Year of Berkshire purchase: 2010.

Durable competitive advantage: "No one is bigger or cheaper or does it better."

Coca-Cola Company: drinks manufacturer.

Years of Berkshire purchase: 1988, 1999, 1994.

Durable competitive advantage: "The one product that took over the world."

ConocoPhillips: oil and petrochemical company with operations all over the world.

Date of Berkshire purchase: 2006 to 2007.

Durable competitive advantage: "Approximately 10.3bn barrels in proven oil reserves."

Costco Wholesale Corporation: world's largest merchant of fine wine.

Year of Berkshire purchase: 2002.

Durable competitive advantage: "Money-making retail machine that can run with the best brands in the world."

GlaxoSmithKline: Global pharmaceuticals giant.

Year of Berkshire purchase: 2007.

Durable competitive advantage: "Four pharmaceutical giants control most of the vaccine production in the world and GSK is one of them."

Johnson & Johnson: Global pharmaceuticals and consumer products manufacturer.

Years of Berkshire purchase: 2006, 2007, 2010.

Durable competitive advantage: "Brand name products: Listerine, Band-Aid, Motrin and Tylenol will be around for a long time."


Kraft Foods: Largest food and beverage company in the US.

Years of Berkshire purchase: 2007, 2008.

Durable competitive advantage: "40 of its brands are more than a hundred years old."

Moody's Corporation: Financial Ratings Agency.

Year of Berkshire purchase: 2010.

Durable competitive advantage: "Controls approximately 40 per cent of the world credit rating market."

Procter & Gamble Company: Worldwide consumer products manufacturer.

Year of Berkshire purchase: 2005 via P&G’s acquisition of Gillette.

Durable competitive advantage: "Stunning array of brand-name products it has in its product portfolio."

Sanofi SA: Pharmaceuticals and healthcare manufacturer.

Years of Berkshire purchase: 2007, 2008, 2009.

Durable competitive advantage: "Out of the top four makers of vaccines, it has the largest product range."

Torchmark Corporation: Life and property insurance.

Years of Berkshire purchase: 2000, 2006.

Durable competitive advantage: "Has a very profitable insurance company. Is a big buyer of its own shares."

Union Pacific Corporation: Operates North America's premier railroad franchise.

Year of Berkshire purchase: 2007

Durable competitive advantage: "Arguably, both a monopoly and a low-cost producer of the services it provides."

US Bancorp: Fifth largest commercial bank in the US.

Years of Berkshire purchase: 2006, 2007, 2009.

Durable competitive advantage: "Super good at growing its business by merging or acquiring other banks."

Wal-Mart Stores: World's largest retailer.

Years of Berkshire purchase: 2005, 2009.

Durable competitive advantage: "Competitors don't have the purchasing power to force suppliers to give them their rock-bottom price."

Washington Post Company: Owner of leading US newspaper.

Years of Berkshire purchase: 1973, 1974.

Durable competitive advantage: "Has been buying back the number of shares it has outstanding."

Wells Fargo & Company: Second-largest bank in the US by assets.

Years of Berkshire purchase: 1989, 19990, 1998, 2005, 2008, 2009, 2010.

DCA: "Warren considers it to be the best-run large bank in America."

*Not all holdings are current. Warren's annual shareholder letters disclose only positions with a book value greater than $1bn.



"I invest my money pretty much closely to the principles with which Warren invests. When Warren was buying Berkshire shares you knew it was time to buy Berkshire.

"Personally I buy stocks directly. But I would say to the average investor use the tools, get some understanding of accountancy and know your risk tolerance. Warren is always loaded for bear.

"In the case of money managers and mutual funds it is difficult for them to take a long term perspective because at the end of the year they want to be number one. That's stunning to me but it is true. Investors have to do their own research."

On a more personal level she would tell her children: "You can't buy your health or happiness. Money gives you the luxury of choice. If you're smart you start saving from the very first pay check that you get. The longer the time frame the better. If my girls want to buy cashmere sweaters or my son wants to buy an Xbox, I say take $200 and think about what it is worth in 5 years' times in the sweater or the Xbox. Then compare what it would be if invested during that time.

"Warren drives an old VW Beetle. He is famous for it. Cars are worth nothing in 30 years but if you take $20,000 in 30 years it could be worth $1m and that is too much to pay for a car."