On Enhancing the Research Process Behind Berkshire's Acquisition of Lubrizol Corp.

Buffett issued a statement regarding the resignation of the previous heir apparent David Sokol.  The resignation and circumstances under which he is departing does not interest us.

What is interesting is the additional information illustrating how Berkshire went about purchasing Lubrizol Corp (LZ). Apparently the investment bankers at Citigroup pitched 18 chemical stock ideas to Sokol in December.  By January 14 or 15, Sokol had presented the idea to Buffett who on January 25 interviewed the CEO.  Lubrizol had been in our model portfolios from the time of our first monthly report on 8/31/2010.  The position was closed on 10/31/2010 due to a slightly better score by two other chemical companies at the time.  LZ was added back to the models on 11/30/2010 only to be taken out again on 12/31/2010 after scoring slightly relatively worse on our rankings again.

The Berkshire process as it relates to researching and purchasing Lubrizol illustrates a few interesting things:

• Our research is as prescient if not more so than the investment banking team's at Citigroup.

• Our research is as prescient if not more so than the managers and analysts at Berkshire Hathaway Inc.

• It can take more than ten weeks from initial introduction to purchase of a stock idea at a management firm; our screens are successful because they are “good enough” at capturing great stock ideas and require no bureaucracy or internal campaigning to be distributed.

• A systematic approach to relative valuation can probably find value more quickly and efficiently than even the most sophisticated investment research teams.

• A systematic approach to relative valuation may be able to drastically enhance a research team's efforts.

• Mild volatility in rankings can probably be ignored week-to-week and month-to-month or longer, lending support to our 1-month and 12-month strategies.