Buffett: Read The Footnotes
You have to do the work, which means a lot of reading. An example from Kraft's "dumb" pizza deal.
Like many things in life, the secret is that there is no secret, just a lot of hard work.
Investing is no different.
In response to a question at the 1996 Berkshire annual meeting, Buffett discussed the work required:
“Nobody will do it for you…You have to do it yourself. — WB
“What I find is that it takes a long time to read the annual report, even if it’s a comparatively simple business, because if you’re really trying to understand it, it’s not a bit easy.” - Charlie Munger
“I would say that, on average, in a business we’re really interested in, even though we know what to skip, to some extent, and what to read, I mean, it’s going to be 45 minutes or an hour on a report. And if there are six or eight companies in the industry, that’s going to be six or eight hours, perhaps, and then their quarterlies and a lot of other… I mean, the way you learn about businesses is by absorbing information about them, thinking, deciding what counts and what doesn’t count, relating one thing to another. And, you know, that’s the job.” - WB
Kraft’s “Dumb” Pizza Deal
“The pizza deal was particularly dumb.” - WB
As a real-world example of Buffett’s reading in action, take his 2010 annual meeting comments on Kraft’s sale of its pizza business to Nestle (links below).
I find the entire discussion fascinating, including Buffett’s recall of specifics from the 10K. The point is that he could only get such information from deep inside the report, reading he undoubtedly did himself.
Buffett’s comments on the deal from the 2010 AGM #16.
Deal Details
As Buffett noted in his comments, Kraft agreed to sell the business for $3.7 billion. So much was clear on page 22, as was the fact that there was a gain on sale.
It’s only on page 66 that we learn that the gain on sale was net of $1.2 billion of tax.
So Kraft received $2.5 billion in cash for a business earning $341 million pre-tax (and as Buffett noted, a growing business). Kraft sold it for just 7x pre-tax earnings or 11.5x after-tax.
Today’s fast-paced world can make you feel unproductive. But it pays to slow down and think. There’s no substitute for hard work.
Stay Rational!
Adam
I've been hearing about people trying to use AI to make this process easier but I honestly can't see how any AI would catch such important details. Maybe other things? But not the stuff you find in the footnotes.
7x Pre-tax earning which is growing and also deal can be done more tax-efficient way. How precise and clear thought process of Mr. Buffett.