The Warren Buffett Way, Second Edition

Rating:
Summary: The Classic Book About Warren Buffett's Investment Way
Review: "The Warren Buffett Way" by Robert G. Hagstrom provides insight into the investment principles used by America's greatest investor, Warren Buffett.

In 1956, Buffett started his first investment partnership with $100. He cashed out after 13 years with $25 million, achieving a compounded rate of investment return of 29.5% for his investors. Today, Buffett's net worth is about $43 billion.

We learn two different schools of investment thought influenced Buffett. Ben Graham taught Buffett to seek value. Philip Fisher and Buffett's investment partner Charlie Munger taught Buffett to seek quality companies with the potential to grow their earnings.

To determine a stock's value, Buffett examines the business behind the stock and evaluates the company's worth by making an estimate of the future cash flows of the company and then discounting these cash flows back to their present value. Buffett only purchases the company if the purchase price is below its discounted value. This provides Buffett a margin of safety.

Hagstrom explains that Buffett uses a focused approach to investing and often only holds a handful of stocks. And, Buffett invests within his "circle of competence" which usually involves traditional companies Buffett understands. Buffett avoids high-tech investments in companies he doesn't understand. Buffett prefers companies he could hold forever. He avoids businesses without a solid track record or businesses lacking honest and competent management.

Quoting Buffett, Hagstrom writes: "In evaluating people, you look for three qualities: integrity, intelligence, and energy. If you don't have the first, the other two will kill you."

"The Warren Buffett Way" shows how Buffett's investment criteria came into play for several major companies he purchased, including GEICO (Berkshire Hathaway, Buffett's company, owns 100% of GEICO), Clayton Homes (mobile homes), The Pampered Chef (kitchenware sold direct at in-house parties), Gillette, and Coca-Cola. The book's appendix lists Berkshire's major stock holdings each year from 1977 to 2003.

Buffett is most likely to purchase entire companies today. Smaller successful investments do little to grow Berkshire Hathaway.

So, can investors today benefit from Buffett's investment approach? Yes and no, argues Hagstrom. For example, Buffett spends a great deal of time reading annual reports to learn about a company.

Hagstrom writes: "It must be said here, with sadness, that it is possible that the documents you study are filled with inflated numbers, half-truths, and deliberate obfuscations. We all know the names of the companies charged with doing this; they are a rogue's gallery of American businesses, and some of their leaders are finding themselves with lots of time in prison to rethink their actions. Sometimes the manipulations are so skillful that even forensic accountants are fooled; how then can you, an investor without any special knowledge, fully understand what you are seeing? The regrettable answer is, you cannot."

Hagstrom shares a few of Buffett's tips for spotting accounting problems and irregularities in financial documents, such as looking for "unintelligible footnotes."

Also, today, the stock market is composed of many more companies. Hagstrom relates the story of Buffett's interview on the show Money World:

"Appearing on the PBS show Money World in 1993, Buffett was asked what investment advice he would give a money manager just starting out. 'I'd tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities.'

Moderator Adam Smith protested, 'But there's 27,000 public companies.'

'Well,' said Buffett, 'start with the A's.'"

Further, Hagstrom argues too many desirable investments are in the field of high technology. To those investors wishing to follow Buffett's approach to investing, Hagstrom suggests: "...expand your circle of competence by studying intently the business models of the companies participating in the New Economy landscape..." Investors who are less willing to spend time understanding business might want to consider indexing their money in a low-cost mutual fund instead.

If you want to understand the investment principles of Warren Buffett, I highly recommend "The Warren Buffett Way."

Peter Hupalo, Author of "Becoming An Investor"


Rating:
Summary: Value Investing the Proletariat Way
Review: After reading this book, I have seen the errors in my ways.
I have discovered that the only way to real power is becoming a day trader.

At any rate, me and buddy Trotsky have founded a new investors club which meets at my crypt each Saturday.

Best of luck to my friends the Deaniacs.

Rating:
Summary: Revised Viewpoint is More Interesting
Review: First published in 1994, ten years ago the Warren Buffett Way introduced us to the way he evaluated and chose stocks. Since that time, his magic has continued --he is number two on the Fortune list of the richest Americans, and the only one in the top five who made his fortune in the stock market.

His basic rule is very simple: invest in businesses that are simple and understandable, have a consistent operating history and have favorable long term prospects. Now, keep that in mind while the world is changing about you, while people are crashing airplanes into buildings, going to war in Iraq, through inflation, deflation, stock booms and busts, and all the personal troubles that we fall into.

This second edition is completely revised and brought up to date and includes two new chapters that help to update and revise his strategy. This is one of those books that you simply must be aware.

Rating:
Summary: One of the best...
Review: For starters, you can read this book and understand investing even if you're not a businessperson. Beginners should read the biography written by Roger Lowenstein first although this book is much more interesting.

The book talks about the billionaire investor Warren Buffett, how he got started, his achievements, the type of guy he is, how he calculates what a company's worth. Much like a biography... but the best part in my opinion, are the details on Buffett's past purchases. Hagstrom (the author) actually gives charts to show these which to me is invaluable. You'll know what I mean if you've ever tried to put money in stocks as a value investor.

To the experts (and I don't mean the people with advanced degrees or MBAs but the experienced VALUE investor), this book is a must have. I use it to study the specific purchases he made and by looking at the graphs, I think it's not hard to tell what Buffett was thinking, given what he already knows about the companies. And plus, you'll get some idea on calculating intrinsic value which I honestly think came from Hagstrom, not Buffett. But it's a start.

As it relates to price, I'd say this book is undervalued, it's a screaming buy pitch (under US$6)... You'll learn a great deal about stocks and about people (from managers to stockbrokers).

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Rating:
Summary: Worth the read
Review: Forget B-school, read this book. Seriously, a great introduction to value investing and the Buffett mentality of risk.

Hagstrom's analysis is very easy to read and understand... a book everyone should read.

Rating:
Summary: Once Again, Take It With A Grain of Salt
Review: I am not Warren Edward Buffett. Unlike Mr. Buffett, who has the delightful headache of trying to figure out where to put his steadily growing billions, I am a non-investor, sitting on the sidelines, wondering what all the fuss is about. Like most readers of this book, I have been told incessantly to invest for retirement, and not knowing exactly how I should do so, I figured it might be a good idea to glean a few secrets from a proven successful investor. Hence, I read The Warren Buffett Way from cover to cover, hoping to learn a few things.

And what did I learn? I learned that I am not Warren Edward Buffett. Unlike Mr. Buffett, whose circle of associates includes all of the Beautiful People of Corporate America, I am surrounded by ordinary people, more than a few of whom are looking for a way to get rich quick. Whereas Mr. Buffett is patient and thoughtful with his investments, most of the people I encounter are thoughtless and reckless with their gambles. These two things, which I increasingly began to ponder as I read this book, distinguish me from the Oracle of Omaha, and quite possibly from most readers of this book.

The book consists of nine chapters, and is mostly historical in nature. It details many of Buffett's past exploits in the stock market, mostly the good moves but also some bad ones, and offers some of the principles guiding Mr. Buffett's stock investing strategy, grouped into three classes called Management, Financial and Market Tenets. The first four chapters of the book delve into the early history of Berkshire Hathaway, the key influences on Mr. Buffett which helped to shape his investment philosophy, Mr. Buffett's perspective on the financial markets, and the principles by which he goes about purchasing a business. The last five chapters of the book give example after example of some of Mr. Buffett's past stock moves, and tries to show his Tenets in action.

The style of the book is mostly active until the fifth chapter, whereupon it becomes plodding. The book is extremely repetitive at points, and as other reviewers have pointed out, key concepts are not fully explained up front, suggesting that the possible target audience for this book are those having a strong background in the general principles of economics and business.

In all honesty, I have previously encountered most of the content of this book in coursework or self-study. I previously read Mr. Hagstrom's The Warren Buffett Portfolio, and found the two books to be similar in some respects. That said, I still found this book to be very interesting and useful, primarily because it exposed me to an investment approach which utilizes these concepts in ways I had not previously considered. I also found it highly interesting on an anecdotal level, given that Mr. Buffett's investment career spans The Go-Go Years, The Nifty Fifty Stocks and the 80s and 90s Tech Stock Boom, and yet he never once participated in these tech-stock manias but handily outperformed tech stock investors nonetheless.

Like I said, I am not Warren Edward Buffett and I can not expect or even hope to do what he does, but that does not mean that I can not think like him. Even Mr. Buffett cautions the small investor in this regard, as there are things that he can do that none of little guys can do. Yet, he also has said that there are things the little guy can do that he can not do. That said, the book deserves to be read by any one lacking the ability to reason through the process of investing. However, readers at all levels should not stop with this book. Others have pointed out that one could get even more information straight from the horse's mouth- the Berkshire Hathaway website.

On the other hand, as this information details past moves for which the conditions surrounding them are most unlikely to come around again, I believe that the more astute reader looking to learn more should consult The Money Game by Adam Smith for a brief historical look at financial foolishness (albeit the late sixties but the resemblance to Right Now is striking), The Theory of Investment Value by John Burr Williams for Buffett's original basis for valuation, and The Intelligent Investor by Benjamin Graham for a more detailed explanation of the concepts of margin of safety, intrinsic value, and the benefits associated with ignoring the market noise. These three books will help one learn how to reason through the investment problem, as this is the most important step, aside from finding smart people (as Mr. Smith admonishes forcefully in The Money Game and Buffett has consistently done) and thinking more but acting less (as Buffett has said- do a few things right and screw everything else).

Rating:
Summary: Worth the read
Review: If you are reading this book just to be better informed, I think you will get your money's worth. I feel I got a five-star education. But if you are going to read it to make a decision to buy or not to buy Berkshire Hathaway, you should keep these two points in mind: First, almost everyone considers Warren Buffet to be the world's greatest investor. This special attribute of Mr. Buffet might be reflected in the price of Berkshire Hathaway stock. If Warren Buffet were no longer around, what would that do to Berkshire Hathaway? Hasn't Mr. Buffet's greatness built in a premium in Berkshire Hathaway stock?

Second, this book proves that Mr. Buffet beat Mr. Market most of the time under normal circumstances. In abnormal circumstances, Mr. Market could beat Mr. Buffet. Abnormal circumstances would exist if Mr. Market went into a long, deep depression (like he did in the 1930's and dropped in value by 90%). And could a second terrorist attack similar to 9/11 cause Mr. Market to panic and create abnormal circumstances in the economy?

No matter how good the company, Mr. Market can and will hurt the value of its stock. If there is another terrorist attack like 9/11, Mr. Market will panic and Coca Cola, Washington Post, GEICO, etc., would all suffer terribly.

Rating:
Summary: Belongs on the list of all time investment classics.
Review: Other reviewers have written that this book is undervalued and they are right. Right from the start Hagstrom gives us advice on the nature of the market. He then gives management tenants, how to value a business and all kinds of investment tenants. These tenents are so fundamental that its very difficult to see how investing can be done without them in one form or the other. This makes the book timeless. Numerous examples are given from real world cases of how these tenants are used. There is also an excellent appendix that gives examples of how a business is valued. This is very helpful. Some reviewers have criticized Hagstrom, saying that if the book is true, why isnt he rich? But this is not how information is to be judged. There are many books that contain solid gold advice, but there are few who master them. Buffett is among them. If one wants additional information on Buffets methods, I suggest reading "How to pick stocks like Warren Buffett" by Tim Vick. But The Warren Buffett Way is a classic and at the top of the heap.

Rating:
Summary: The Theory of Investing finally has a title
Review: Reading this book gives one the essential knowledge of a successful investment strategy. The book is not meant to make you rich, but establish a wealth of knowledge through a voyage into the mind of one oof the greatest investors of our time. The essential message of the book is buying value within your circle of experiance. The author outlines the people who influnced Buffet's way of thinking, and thier theories on investing. Great read

Rating:
Summary: Great Philosophy, Good Read, Average Practical Use
Review: The "Warren Buffet Way" never ventures too far from common sense but whether that makes it ingeniously sound or blandly uninspired will be left for the reader to decide. The techniques Warren Buffet employed to attain success (and wealth) are well documented here with summaries of his investments from early life to recent times (1994). Each investment in analyzed through the lense of Warren Buffets economic principles, a blend of widely recognized economic minds and Warren Buffets own basic philosophy, and the result is an appreciation for his business sense and stock selecting ability.

This hindsight review of his choices is partially intended to teach you, the reader, how to make equally good investments and turn a profit without extensive risk. The problem lies in the fact that Buffet's confident simplicity is hard to obtain. The crux of his theory is calculating the intrinsic value of a company through research that is probably second nature to long-time professional investors like Buffet but is vague or downplayed in the book. Technological methods and industry readings are turned down in favor of a physical appraisal of the company and its management and an unexplained calculation of its potential.

But who has the time or money to visit and interview every possible investment they are considering? And to do so when they are only just starting out with little idea of where to start or what is an important indicator of value and while being told to expect only long-term gains? The book tells you to look past the popular and fickle market at the company itself but it is unclear what to focus on. The idea is good, I'll try to put it to good use in my own investing, but its too general to nail down or check off on a list.

Overall though, it will provide an insightful look at one of the richest men in the world. You'll learn some basic investment strategies and a little history. Its not an economic Bible but it may help beat the crowd without going too far over your head.