Who in the investing world does not know Warren Buffett? So, I would definitely want to know more about his investing strategy. The Warren Buffett Way attracts me with its title. The author wants us to use this book to learn, but not to be like the legendary investor himself as each person is different. This book is fundamentally about investment principles.
Robert G. Hagstrom is a Chartered Financial Analyst. He is currently a senior portfolio manager in Equity Compass and chair of Investment Management Committee for Stifel Asset Management. Prior to that, he was working in Legg Mason Investment Counsel and Legg Mason Capital Management. He possesses over 30 years of investment experience. He also authors nine investment books.
The Warren Bufett Way has 3 forewords, an introduction, a preface and 8 chapters.
It is unusual for a book to have 3 forewords. The forewords are from 3 different people for different editions of the book. Howard Marks is the writer of the foreword for this third edition. Bill Miller and Peter S. Lynch wrote the foreword for second and first edition respectively. The introduction is written by Kenneth L. Fisher. These are all eminent investors.
Chapter 1 is A Five-Sigma Event: The World’s Greatest Investor, dealing with Buffett’s early life and his investment career.
Chapter 2 is The Education of Warren Buffett. It talks about the development of his investing philosophy and his influencers.
Chapter 3 is Buying a Business: The Twelve Immutable Tenets. It lists down the 12 investment tenets practised by the greatest investor.
Chapter 4 is Common Stock Purchases: Nine Case Studies. Here we examine the stocks that were bought by Buffett.
Chapter 5 is Portfolio Management: The Mathematics of Investing. The author discusses history of probability theory and introduces focus investing in this chapter.
Chapter 6 is The Psychology of Investing. It discusses the role psychology plays in investment and also the psychological obstacles in investing.
Chapter 7 is The Value of Patience. The author discusses the importance of rationality and patience in achieving investment success.
The last chapter is The World’s Greatest Investor. It talks about Buffett’s personal life and gives the author’s last advice.
There is an appendix which contains the common stock portfolio of Berkshire Hathaway from 1977 till 2012.
The author did not give a outrageous claim regarding the book. He claims that his book is a success if we learn some lessons that help improve our investment results.
This book advocates long time horizon in investing. For Buffett, risk is not defined by price volatility but the certainty that the individual stocks will, over time, produce a profit. The way to reduce risk is buying stocks when the margin of safety (favourable discrepancy between the intrinsic value of the company and today’s market price) is high. Concentrating the portfolios around a limited number of high-probability events reduces risk and helps to generate returns far above the market rate of return. This way of investment is known as focus investing.
What about diversification? Is it not a must in investing? Wide diversification is required only when investors do not understand what they are doing. Both active and index funds provide diversification but neither give exceptional returns. So, diversification is for those who do not have the time or resource to do their own research.
But what if we do not have the skill or brain to do the research? According to the author and Buffett himself, IQ is not that important by itself. If we are willing to do the hard work, anyone can get it right. Furthermore, there is a need to detach the brain from emotions as emotions are the principal reason for investment failures.
To be successful in investing, we have to be rational. The cornerstone of rationality is the ability to see past the present and analyse several possible scenarios, eventually making a deliberate choice. If the new stock you are considering purchasing is not better than what you already know is available, do not buy it. Resist temptation to buy a marginal company just because you have cash reserves. Be patient and wait for the right business.
Human emotion has a more pronounced impact on short term stock prices than the fundamentals. Acquiring new habits and thought patterns does not happen overnight, but gradually teaching yourself not to panic or act rashly in response to the vagaries of the market is certainly doable. We should drop our insistence on prices as the only measuring stick, and we have to break ourselves of the counterproductive habit of making short-term judgments.
All of us are vulnerable to individual errors of judgment, which can affect our personal success. Sell mistakes so that we don’t give up a gain that could be earned by reinvesting smartly.
The twelve tenets are divided into 4 categories: business, management, financial and market. I will only share the business tenets here. You will need to find out about the rest in the book. The business tenets are 1. Is the business simple and understandable? 2. Does the business have a consistent operating history? and 3. Does the business have favorable long-term prospects?
After reading The Warren Buffett Way, I found out one of my weak points. I am always looking for activity which is not the right way for focus investing. Thus, I have to tone down and wait for the opportunities to come instead. One drawback of focus investing is that the portfolios will underperform in some years, which is inevitable. Nonetheless, as long as we do it right, the result should be okay in the end as the share price will match the company’s value in the long run. Some lessons are not applicable in Malaysia such as the capital gain tax as we do not have it in Malaysia. The author references Against the Gods which I reviewed not too long ago.
I think this is the book for value investors. I have learned a lot from this book and you should read The Warren Buffett Way if you are a serious value investor.
- It is never easy to make unconventional decisions or to shift direction.
- It appears to me that the most sensible way to approach horse racing, or the stock market, is to wait until the good horse comes to the post with inviting odds.
- Given enough time, the price of a business will align with the company’s economics.
- If anything, a dip in price actually reduces risk.
- But investment success is not synonymous with infallibility. Rather, it comes from doing more things right than wrong.
Interested in The Warren Buffett Way?
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