Chapter 2 - The New Buffetology

Chapter 2- How Warren Makes Good Profits Out of Bad News About a Company

Key Points from Chapter:

• Warren practices a selective contrarian investment strategy.
  
• Warren recognizes that everyone from mutual fund managers to Internet day traders are stuck playing the short term game. It is the nature of the stock market.
• The bad-news phenomenon goes on constantly - people sell on bad news.
  
• Companies that have a durable competitive advantage have the economic power to pull themselves out of most bad news situations.
  
• Warren made all his big money investing in companies that possess a durable competitive advantage.

Now in simpler terms........this chapter basically says that Warren Buffet likes to buy stocks that are out of favor or dropping in price but not long term value. Because hes buying stocks on the way down or when they are not popular his strategy is called "contrarian" or going against what the crowd is doing.

The most important part of the chapter is it adopts a qualifier for the contrarian strategy. In addition to just buying stocks that are down in price and that have bad news and are disliked by the crowd, Buffet applies the additional screen of looking for companies that have some long term competitive advantage. The chapter gives the examples of The Washington Post and HR Block.

Ironically enough the long term competitive advantage of both of these companies is currently being called into question. HR Block has come under much scrutiny over the past few years due to the mortgage business which they started and then sold (Option 1) and Washington Post is considered an oldline media company stuck in the print newspaper business and without a clear way to adapt to the new internet world. As we go deeper into the book I think the authors will highlight what THEY think Warren Buffet THOUGHT about these two companies when he bought them - in other words - the hypothetical competitive advantage that the two had over the long term.

It will be interesting to see how these compare to the curren state of affairs and whether the competitive advantage still exists despite the "short term" pessimism.

Couple charts of the two - you can see that given preferred holding period of "forever" - WB is still killin it with these two...

HR Block









Washington Post