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Warren Buffett’s Magic Formula In 1965?

I recently read through Buffett’s Partnership Letters again. This time I paid particular attention to one of the strategies he used to perform better than the market in down years. Buffett employed three such techniques from 1956-1965:

Generals – Private Owner – Large margin of safety was a cushion when markets fell.

Workouts – Special situations were not correlated to the market.
Controls – Accounting of “controls” typically outperformed the market in down years.
In his January 15, 1965 letter to partners, Buffett introduced a fourth category called:

4. Generals -Relatively Undervalued

“We have recently begun to implement a technique which gives promise of very substantially reducing the risk from an overall change in valuation standards; e.g., we buy something at 12 times earnings when comparable or poorer quality companies sell at 20 times earnings, but then a major revaluation takes place so the latter only sells at 10 times earnings. The risk has always bothered us enormously because of the helplessness position in which we be left compared to the “Generals -Private Owner” or “Workout” types. With this risk diminished, we think this category has a promising future.”

BP, Inc (NYSE:BP) will attempt to develop its deep portfolio of oil and gas projects to deliver 1-2% production growth beyond 2015. These and other plans and goals were outlined at the company’s annual strategy session in early March.

Exploration and Production
The company’s 1-2% growth in production through 2015 is predicated on $60 oil, and does not include any potential upside from its Iraq ventures. BP will make decisions on 24 major projects over the next two years to achieve this growth. If these are all approved the company will have 41 major projects start up before 2015, delivering 1 million barrels of production.

The company also plans to extend this growth beyond 2015 at this same rate. BP is powering this growth through investing extensively in deepwater exploration and development, and through an aggressive entry into onshore natural gas. For the second half of this decade passed 2015, BP is focused offshore in the Gulf of Mexico, Angola, Egypt and Libya.

One giant discovery for BP was the Tiber prospect in the Gulf of Mexico, which was drilled to the Lower Tertiary trend. This was BP’s second discovery here, after it hit a successful well at Kaskida. BP has a 62% working interest in the Tiber prospect, along with Petrobras (NYSE: PBR) with 20% and ConocoPhillips (NYSE: COP) with 18%.

Complementing the balance sheet and income statement, the cash flow statement (CFS), a mandatory part of a company’s financial reports since 1987, records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how it is being spent. Here you will learn how the CFS is structured and how to use it as part of your analysis of a company.

The Structure of the CFS

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. (To learn more about the credit crisis, read Liquidity And Toxicity: Will TARP Fix The Financial System?)

Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing,

Operations