It is not any secret that the “Oracle of Omaha” keeps his lips rather tight when it comes to revealing, which company he is about to invest in. And with the exposure he is getting, who can really blame him? With his exposure, showing the potential triumphs to the investing public would attract thousands, if not millions, of “hangers on”, who would drive the stock price into levels, he could no longer accept for his stellar portfolio.

So all that a savvy student of Buffett’s strategies is left with, are tons of written materials describing Buffett’s not so recent purchases, and his supposed reasons behind them, as put together by various authors.

One of such books I got recently my hands on is “The New Buffettology” by Mary Buffett and David Clark (not too certain about my celebrity gossip, I think Mary Buffett was, at some time, Warren’s daughter in law) published in 2002.

I must say, that, even though I have read quite a number of similar publications, I found this book both very informative and educational. In one of the key chapters, this book describes the types of companies Buffett keeps his eye on, waiting for Mr.Market to present him with a right price so he can “strike for the fences�?. According to the book his favorite plays are divided into four categories:

1. Businesses that fulfill a repetitive need with a consumer product with brand name appeal.
2. The advertising business providing a service that manufacturers must continuously use to persuade public to buy their products.
3. Businesses that provide repetitive consumer services that people and businesses are consistently in need of.
4. Low cost producers and sellers of common products that most people have to buy at some time in their life.

In the first category you would include businesses, whose products became almost synonymes for their respective industries. From brand name fast food outlets (’nothing gets used up faster than fast food”) where hungry customers associate the taste of particular food with the company brand name (burger – McDonald’s, fried chicken – KFC, pizza – Pizza Hut), through brand name beverages (beer – Anheuser-Bush, cola – Coca-Cola) and brand name foods (chocolate – Hershey’s, soup – Campbell’s, chewing gum – Wrigley’s) to brand name clothing businesses (jeans – Levi’s, shoes – Nike).

To the second category belong businesses, who make their profits from promoting and advertising products of others. Here you would find all the media companies, such as TV stations ABC, NBC and CBS (”buy a transmitter, build an antenna, plug it into the wall, and you’re in the business”), newspapers (Washington Post) and advertising agencies (Omnicon Group, Ogilvy Group). It is fairly obvious, that if any of the companies in this group manages to secure virtual monopoly in it’s field or area, it will be able to price its services however necessary in order to draw excellent profits year in and year out.

Third category includes companies providing services one will need repeatedly over and over again. Often, but not exclusively, the founding stones of these businesses are “not so sexy” operations such as cleaning, pest control, maid services or lawn care (eg. Service Master, Orkin). Other examples of repetitive, constantly needed services in this group come from tax (H&R Block), credit card (American Express) data processing (Fist Data Corp.) industries. The main idea behind investing
your money here is that “…these companies provide necessary services, but require very little in the way of capital expenditures or a highly paid, educated workforce [and] there is no such a thing as product obsolescence”.

And last, fourth group of Buffett’s potential favorites are businesses, which are not enjoying the brand recognition of category one, however their tightly run operations reduced their production costs (and subsequently their product prices) into such depths, that no other competitor dares to challenge their dominant market positions. These investments are present in many industries, the well know examples are Wal-Mart or Berkshire’s own Nebraska Furniture Mart and GEICO (”as long as people need beds to sleep in and couches to sit on and insurance for their car, these companies will make money. Lots of money, for a very, very, very long time to come”).

As you can see from this brief sample, The New Buffettology does provide you with rather descriptive road map to investing success. Because this book does not only cleverly describe how to identify potentially successful investments the Warren Buffett way but also peppers the slow theory parts with lots of real life examples, it is quickly becoming one of my favorite books on the topic.

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This entry was posted on Wednesday, May 16th, 2007 at 8:03 pm and is filed under Warren Buffett. You can follow any responses to this entry through the RSS feed. You can leave a response, or trackback from your own site.