More Praise for The Warren Buffett Way, First Edition

Inc.
magazine’s 500 fastest-growing privately held companies in
the United States, and Christopher has been recognized by 
Working
Woman
magazine as one of the top 500 women business owners.
Doris Christopher started her business with a passionate belief that
sitting down together at mealtime brings families together in a way that
few other experiences can match. That philosophy has shaped and
guided the Pampered Chef from the beginning, and it is at the core of
the sales approach: a friendly, hands-on pitch to housewives that links
the quality of family life to the quality of kitchen products.
Many of the company’s “kitchen consultants,” as they are called, are
stay-at-home moms, and most of the sales are conducted in their homes
at “kitchen shows.” These are cooking demonstrations where guests see
products and recipes in action, learn quick and easy food preparation
techniques, and receive tips on how to entertain with style and ease. The

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4 9
products are professional-quality kitchen tools and pantry food items;
some 80 percent of the products are exclusive to the company or can
only be bought from TPC representatives.
Today, the Pampered Chef has 950 employees in the United States,
Germany, the United Kingdom, and Canada, and its products are sold
by over 71,000 independent consultants during in-home demonstra-
tions. Over one million kitchen shows were held throughout the United
States in 2002, producing sales of $730 million. And the only debt the
company has ever incurred is the original $3,000 seed money.
In 2002, Doris Christopher realized that in case she either keeled
over or decided to slow down, the Pampered Chef needed a backup
plan. So, on the advice of her bankers at Goldman Sachs, she approached
Warren Buffett. That August, Christopher and her then CEO, Sheila
O’Connell Cooper, met with Buffett at his headquarters in Omaha. A
month later, Berkshire announced it had bought the company, for a price
thought to be approximately $900 million.
Recalling that August meeting, Buffett wrote to Berkshire share-
holders, “It took me about ten seconds to decide that these were two
managers with whom I wished to partner, and we promptly made a
deal. I’ve been to a TPC party and it’s easy to see why this business is a
success. The company’s products, in large part proprietary, are well-
styled and highly useful, and the consultants are knowledgeable and en-
thusiastic. Everyone has a good time.”
10
Buffett is often asked what types of companies he will purchase in the
future. First, he says, I will avoid commodity businesses and managers
that I have little conf idence in. He has three touchstones: It must be the
type of company that he understands, possessing good economics, and
run by trustworthy managers. That’s also what he looks for in stocks—
and for the same reasons.
I N V E S T I N G I N S T O C K S
It is patently obvious that few of us are in a position to buy whole com-
panies, as Buffett does. Their stories are included in this chapter because
they give us such crisp insight into Buffett’s way of thinking.

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T H E W A R R E N B U F F E T T W AY
That same chain of thinking also applies to his decisions about buy-
ing stocks, and that does present some examples that ordinary mortals
might follow. We may not be able to buy shares on the same scale as
Warren Buffett, but we can prof it from watching what he does.
At the end of 2003, Berkshire Hathaway’s common stock portfolio
had a total market value of more than $35 billion (see Table A.27 in the
Appendix)—an increase of almost $27 billion from the original pur-
chase prices. In that portfolio, Berkshire Hathaway owns, among oth-
ers, 200 million shares of Coca-Cola, 96 million shares of the Gillette
Company, and 56-plus million shares of Wells Fargo & Company. Soft
drinks, razor blades, neighborhood banks—products and services that
are familiar to us all. Nothing esoteric, nothing high-tech, nothing
hard to understand. It is one of Buffett’s most strongly held beliefs: It
makes no sense to invest in a company or an industry you don’t under-
stand, because you won’t be able to f igure out what it’s worth or to
track what it’s doing.
The Coca-Cola Company
Coca-Cola is the world’s largest manufacturer, marketer, and distribu-
tor of carbonated soft drink concentrates and syrups. The company’s
soft drink product, f irst sold in the United States in 1886, is now sold in
more than 195 countries worldwide.
Buffett’s relationship with Coca-Cola dates back to his childhood.
He had his first Coca-Cola when he was f ive years old. Soon afterward,
he started buying six Cokes for 25 cents from his grandfather’s grocery
store and reselling them in his neighborhood for 5 cents each. For the
next fifty years, Buffett admits, he observed the phenomenal growth of
Coca-Cola, but he purchased textile mills, department stores, and wind-
mill and farming equipment manufacturers. Even in 1986, when he for-
mally announced that Cherry Coke would become the official soft
drink of Berkshire Hathaway’s annual meetings, Buffett had still not
purchased a share of Coca-Cola. It was not until two years later, in the
summer of 1988, that Buffett purchased his f irst shares of Coca-Cola.
The strength of Coca-Cola is not only its brand-name products, but
also its unmatched worldwide distribution system. Today, international
sales of Coca-Cola products account for 69 percent of the company’s
total sales and 80 percent of its profits. In addition to Coca-Cola Amatil,

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the company has equity interests in bottlers located in Mexico, South
America, Southeast Asia, Taiwan, Hong Kong, and China. In 2003, the
company sold more than 19 billion cases of beverage products.
The best business to own, says Buffett, is one that over time can
employ large amounts of capital at very high rates of return. This de-
scription f its Coca-Cola perfectly. It is easy to understand why Buffett
considers Coca-Cola, the most widely recognized brand name around
the world, to be the world’s most valuable franchise.
Because of this f inancial strength, and also because the product is so
well known, I use Coca-Cola as the primary example in Chapters 5
through 8, which detail the tenets of the Warren Buffett Way.
The Gillette Company
Gillette is an international consumer products company that manufac-
tures and distributes blades and razors, toiletries and cosmetics, stationery
products, electric shavers, small household appliances, and oral care appli-
ances and products. It has manufacturing operations in 14 countries and
distributes its products in over 200 countries and territories. Foreign op-
erations account for over 63 percent of Gillette’s sales and earnings.
King C. Gillette founded the company at the turn of the twentieth
century. As a young man, Gillette spent time strategizing how he would
make his fortune. A friend suggested that he should invent a product
that consumers would use once, throw away, and replace with another.
While working as a salesperson for Crown Cork & Seal, Gillette hit on
the idea of a disposable razor blade. In 1903, his f ledgling company
began selling the Gillette safety razor with 25 disposable blades for $5.
Today, Gillette is the world’s leading manufacturer and distributor
of blades and razors. Razor blades account for approximately one-third
of the company’s sales but two-thirds of its prof its. Its global share of
I buy businesses, not stocks, businesses I would be willing to
own forever.
11
W
ARREN
B
UFFETT
, 1998

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market is 72.5 percent, almost six times greater than the nearest com-
petitor. The company has a 70 percent market share in Europe, 80 per-
cent in Latin America. Sales are just beginning to grow in Eastern
Europe, India, and China. For every one blade that Gillette sells in the
United States, it sells f ive overseas. In fact, Gillette is so dominant
worldwide that in many languages its name has become the word for
“razor blade.”
Buffett became interested in Gillette in the 1980s. Wall Street ob-
servers had begun to see the company as a mature, slow-growing con-
sumer company ripe for a takeover. Prof it margins hovered between
9 percent and 11 percent, return on equity f lattened out with no sign of
improvement, and income growth and market value were anemic (see
Figures 4.1 and 4.2). In short, the company appeared stagnant.
CEO Colman Mockler fought off four takeover attempts during
this time, culminating in a hotly contested battle against Coniston Part-
ners in 1988. Gillette won—barely—but in so doing obligated itself to
buy back 19 million shares of Gillette stock at $45 per share. Between
1986 and 1988, the company replaced $1.5 billion in equity with debt,
and for a short period Gillette had a negative net worth.
At this point Buffett called his friend Joseph Sisco, a member of
Gillette’s board, and proposed that Berkshire invest in the company.
“Gillette’s business is very much the kind we like,” Buffett said.
Figure 4.1
The Gillette Company return on equity.

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“Charlie and I think we understand the company’s economics and
therefore believe we can make a reasonably intelligent guess about its
future.”
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Gillette issued $600 million in convertible preferred stock to
Berkshire in July 1989 and used the funds to pay down debt. Buffett re-
ceived a 8.75 percent convertible preferred security with a mandatory
redemption in ten years and the option to convert into Gillette com-
mon at $50 per share, 20 percent higher than the then-current price.
In 1989, Buffett joined Gillette’s board of directors. That same year,
the company introduced a highly successful new product, the Sensor. It
was the beginning of a turnaround. With Sensor sales, Gillette’s pros-
perity magnified. Earnings per share began growing at a 20 percent an-
nual rate. Pretax margins increased from 12 to 15 percent and return on
equity reached 40 percent, twice its return in the early 1980s.
In February 1991, the company announced a 2-for-1 stock split.
Berkshire converted its preferred stock and received 12 million com-
mon shares or 11 percent of Gillette’s shares outstanding. In less than
two years, Berkshire’s $600 million investment in Gillette had grown
to $875 million. Buffett’s next step was to calculate the value of those
12 million shares; in Chapter 8, we’ll see how he went about it.
Gillette’s razor blade business is a prime beneficiary of globaliza-
tion. Typically, Gillette begins with low-end blades that have lower
margins and over time introduces improved shaving systems with higher
Figure 4.2
The Gillette Company market value.

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margins. The company stands to benefit not only from increasing unit
sales but from steadily improving profit margins as well. Gillette’s fu-
ture appears bright. “It’s pleasant to go to bed every night,” says Buffett,
“knowing there are 2.5 billion males in the world who will have to
shave in the morning.”
13
The Washington Post Company
The Washington Post Company today is a media conglomerate with
operations in newspaper publishing, television broadcasting, cable tele-
vision systems, magazine publishing, and the provision of educational
services. The newspaper division publishes the