Tenets of "The Warren Buffett way"

 

 

Warren Buffett, in an investment world, needs no introduction. How did Mr. Buffett reach such an epitome of success? What is his investment style and what are his investment principles? Who were his early teachers? All such questions which intrigued me looking at the cover page were answered aptly in this book.

Robert G. Hagstrom's name stands out amongst the sea from the books written on Warren Buffett. He has written three books on the stock market tycoon named: The Warren Buffett way, The Warren Buffett Portfolio, The essential Buffett.

In this book, the author discusses Warren Buffett's secrets and offers investors their first in-depth look at the innovative investment and business strategies behind the spectacular success of the living legend.

"Every year, Forbes magazine publishes a list of the 400 richest Americans, the elite Forbes 400. Individuals on the list come and go from year to year, as their personal circumstances change and their industries rise and fall, but some names are constant. Among those leading the list year in and year out are certain mega billionaires who trace their wealth to a product (computer software or hardware), a service (retailing), or lucky parentage (inheritance). Of those perennially in the top five, only one made his fortune through investment savvy."

That one person is Warren Buffett.!

The key to Warren Buffett's success is that he had solid principles developed to make sound investment decisions. The author has described these principles briefly in this book as:

• 1. Stop worrying about the economy: Economic cycles come and go. An intelligent investor focuses on buying outstanding companies with a margin of safety and never panic over short-term price swings

 

• 2. Don’t buy a stock, buy a business: One of my favorite Buffett quotes comes from a 1993 interview with Supermoney author Adam Smith. Appearing on the PBS show Money World, 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 are 27,000 public companies.” “Well,” said Buffett, "start with the A’s".
  Every single time, Warren Buffet analyzed the business carefully and not the performance of the stock.

 

• 3. Switch off the share market: Markets are not preceptors but a simple mechanism to buy and sell shares of stock. An investor is neither right or wrong because of the crowd disagreeing with him.

 

• 4. Maintain a business portfolio: Buffett restricts his investments to businesses he can easily analyze. After all, if a company's operational philosophy is ambiguous, it's difficult to reliably project its performance.

 

The main essence of this book lies in the 12 tenets that Mr.Buffett uses to examine a stock or a business.
In short, these describes his investing style.
Also, this intellectual blend is the base of what the author calls “The Twelve Immutable Tenets” of buying a business.

• A. BUSINESS TENETS:

  i. Is the business simple and understandable?
  ii. Does the business have a consistent operating history?
  iii. Does the business have favorable long-term prospects?

• B. MANAGEMENT TENETS:

  i. Is management rational?
  ii. Is management candid with its shareholders?
  iii. Does management resist the institutional imperative?

• C. FINANCIAL TENETS:

  i. What is the return on equity?
  ii. What are the company’s “owner earnings?"
  iii. What are the profit margins?
  iv. One Dollar Principle: Has the company created at least one dollar of market value for every dollar retained?

• D. MARKET TENETS:

  i. What is the value of the business:
  ii. Can it be purchased at an attractive price: This is also known as Margin of Safety.

 

 

One of my favorite quotes from this book:

You are neither right nor wrong because the crowd disagrees with you: You are right because your data and reasoning are right.

 

If you are an investor or someone who is new to this investment world, then this is the right book for you to get more insights about Warren Buffett's investment career and philosophy or in value investment in general.