Today I took a stroll over to Powell's Books in downtown Portland, Oregon. From what I understand, it has the widest selection of books of any brick & mortar bookstore in the United States. Because of this - and the coffee shop inside - Powell's makes for a great place to get through the dog days of August. Powell's also gained somewhat of a cult following nationally, after Steven Colbert promoted Powell's in June in an effort to divert sales from Amazon to smaller competitors. The gripe is that Amazon is trying to control the book market, and put the squeeze on writers (like Mr. Colbert) and publishers by using (allegedly) coercive tactics.

We can save the Amazon business model for another day, but they have certainly created a marketplace with undeniable power due to the scale it has created from capturing significant market share.

The point of this blog post, though, is something that was reinforced in a book called "Buffettology" I scanned for a few minutes. And that point is while we should assess the merits of individual companies, we should certainly ignore broad market commentary from supposed experts.

Ignore Prognosticators

Take a watch of this CNBC video posted yesterday.

What basis do these guests have in determining their economic forecasts? Answer: very little. Most of it sounds like guesswork to me. More likely, these prognostications will be well off the mark like usual. It isn't the expert's fault, though. No one can predict the future with certainty, especially something as intricate as the macroeconomic environment. While expert analysis should be taken with a grain of salt, it is usually well-heeded by conventional thinkers who take comfort in the expert status anointed on these guests.

Instead, successful investors should try to assess things that can be reasonably forecasted. This idea was reinforced by "Buffettology." In it, the authors discuss Mr. Buffett's method for assessing intrinsic value. The key point I gleaned today is that Mr. Buffett only buys companies that he can reasonable assess their earnings power 5 or 10 years down the road. Anything else is speculation. And, of course, Mr. Buffett only buys when the purchase price dictates that he can compound his money at acceptable rates, usually defined at 15%+ per year. That is, Mr. Buffett doesn't assess what he thinks a business is worth today, like normal present value calculations, he envisions what it could be worth in 5 years, then backs into the internal rate of return. That is a pretty savvy way to value a business, in my opinion.

Focus on Earnings Power

How does Mr. Buffett assess future earnings power? He looks for businesses he calls "consumer monopolies." Coca-Cola is a prime example. Mr. Buffett understood the company, why it has certain competitive advantages and a reasonably certain earnings stream over the longer-term. Once future value is determined, the key is to wait for the market to get upset about the company for some transitory reason, and to offer Mr. Buffett the opportunity to buy at a wide discount to his estimate of the future earnings stream.

The stock market is made up of folly and discipline. By staying disciplined, investors can take advantage of folly - in this case, price dislocation.


I am so impressed with this book, that I may update the blog with some insightful commentary gleaned from it. Stay tuned for more nuggets of wisdom from The Oracle.