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Warren Buffett and the Interpretation of Financial Statements

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Warren Buffett and the Interpretation of Financial Statements

Scribner,

15 min read
10 take-aways
Text available

What's inside?

Learn how Warren Buffett identifies the best stocks by seeking clues from financial statements.

Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

Financial statements hold clues about the future performance of a company, and Warren Buffett’s quest to find such clues has put him among the ranks of the wealthiest people in the world, according to Buffett experts Mary Buffett (his former daughter-in-law) and David Clark. Seeing the interpretation of financial statements through Warren Buffett’s eyes is both instructive and insightful. He routinely calculates meaningful financial ratios from line items in financial statements to distinguish the most promising companies from the rest. Although financial novices may have the most to learn from this book, the authors include savvy bits of “Buffettology” for more seasoned investors’ benefit. getAbstract recommends this book to readers who want a basic introduction to financial statement analysis and, perhaps more importantly, who want to learn how “the Oracle of Omaha” picks his winning investments.

Summary

The Divergent Styles of Warren Buffett and His Mentor

In the 1950s, an economist and professional investor named Benjamin Graham served as a mentor to Warren Buffett, who went on to become one of the world’s wealthiest people. Graham pioneered the practice of value investing – that is, buying into companies with low stock prices. Buffett, Graham’s student at New York’s Columbia University, later worked as an analyst at Graham’s Wall Street investment firm.

When he started his own investment business, Buffett altered the Graham method of value investing in several ways. For one, Buffett ignores the Graham rule of selling stocks after they appreciate by 50%, because sometimes their prices will rise much more. Graham would buy a stock based primarily on its cost – the lower, the better. Buffett favors high-quality companies with predictable cash flows, so he is inclined to pay a “fair price” for their shares, not necessarily the lowest amount possible. Graham espoused the importance of holding a diversified portfolio of stocks, increasing the odds that moneymaking stocks would offset losers. Buffett prefers a portfolio concentrated on a few stocks that he regards as excellent...

About the Authors

Mary Buffett and David Clark have written four other books on how Warren Buffett makes investment decisions. An author and speaker, she was Warren Buffett’s daughter-in-law from 1981 to 1993. Clark is the managing partner of a private investment group.

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    J. M. 11 months ago
    Good
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    V. B. 3 years ago
    Great book. Every Investor in Stocks must read this book, understands the principles and the concepts which Warren Buffett followed, and then try to apply the same in his/her investing in stocks. The rewards shall be very high.
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    L. W. 10 years ago
    Good summary. Reveals the importance of financial literacy.