reviewed by Ian Bullock
Robert Hagstrom is a principal with a Philadelphia brokerage firm and has been studying and writing about Warren Buffett since the early 80s. He did not interview Warren Buffett for this book; however, he did send copies of the manuscript to him and got his approval for the use of copyrighted material used in the book. The author tells us that the book will assist those investors who are willing to help themselves by doing their own thinking; using relatively simple methods, and having the courage of their convictions. This is the Warren Buffett way.
Peter Lynch writes a foreword to this book in which he quotes Buffett as saying that one does not have to be correct very many times in a lifetime and that twelve investment decisions in his forty year career have made all the difference.
Hagstrom gives us some of the early history and investment beginnings of Warren Buffett that reveal an achiever family background; inate entrepreneurial talent, and the disciplined training behind the popularized folksy Omaha image. After graduating from the University of Nebraska, Buffett studied under Ben Graham at Columbia where he obtained a Master's degree in economics, and eventually joined the Graham-Newman Corporation. When Graham retired, Buffett began a limited investment partnership in Omaha - at the age of 25. From the financial success of the limited investment partnership Buffett acquired control of Berkshire Hathaway in 1969 and, during the next two decades, both his and Berkshire's wealth soared.
The author describes Buffett as an intellectual genius who retains a down-to-earth relationship with people that is truly uncomplicated. He displays an engaging combination of sophisticated dry wit and cornball humour; has a profound reverence for those things logical and a foul distaste for imbecility; he embraces the simple and avoids the complicated.
At Berkshire, Buffett uses a compensation system that rewards managers for performance based on their success at meeting performance goals keyed to their area of responsibility, regardless of Berkshire's overall profits. He writes cheques - some of them quite large. Berkshire Hathaway Inc is complex, but not complicated. It owns several businesses; a number of minor subsidiaries, and has a portfolio of investments in publicly traded companies. Charlie Munger, a Harvard Law School graduate, and friend for more than thirty years, is vice-chairman and, in Buffett's eyes, Berkshire's co-managing partner. Like Buffett, Charlie Munger managed an investment partnership with stellar success until his Diversified Retailing merged with Berkshire in 1978 and Munger joined the board of Berkshire Hathaway.
Ben Graham taught Buffett that the basic difference between investors and speculators lies in their attitudes towards stock pricing. The speculator, noted Graham, tries to anticipate and profit from price changes. On the contrary, the investor seeks only to acquire companies at reasonable prices.
The author observes certain basic principles, or tenets, that guide Buffett's decisions to buy businesses or make a major investment, and he groups them as follows:
Business tenets -
Is the business simple and understandable?
Does the business have a consistent operating history?
Does the business have favourable long term prospects?
Management tenets -
Is management rational?
Is management candid with the shareholders?
Does management resist the institutional imperative?
Financial tenets -
Focus on return on equity, not earnings per share.
Calculate "owner earnings" to get a true reflection of value.
Look for companies with high profit margins.
For every dollar retained, make sure the company has created at least one dollar of market value.
Market tenets -
What is the value of the business?
Can the business be purchased at a significant discount to its value?
The author takes us through the major holdings of Berkshire and shows how the tenets were applied in each case, and the timing of the investments in each. Given that the investment satisfies the tenets, the Warren Buffett Way then comes into play, namely:
Turn off the stock market.
Don't worry about the economy.
Buy a business, not a stock.
Manage a portfolio of businesses.
In essence, Buffett focuses on two simple variables: the price of the business
and its value. Not having to concern himself with the stock market allows
him more time to understand his businesses; and occasionally to check the
market to see who has done something foolish that presents a buying opportunity.
Ian Bullock is an author, reviewer, eagle eye co-editor of The CEO Refresher, investor & shareholder champion, former CFO and consultant, residing in Toronto, Canada. Contact Ian by e-mail: firstname.lastname@example.org .