Since I planning to realize my dream of seeing Warren Buffett live in person, I thought it would be a good idea to read about his investment strategies and to learn
more as much as I can about him. The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor by Robert G. Hagstrom, Jr. is a bit dated (it was published in 1994) but it was a great read nonetheless and there is a 3rd edition published in 2013 that is obviously not dated but I didn’t have a chance to read that one. The second edition was published in 2004, so I guess there’s a new edition very ten years.
The Buffett Background
The book starts off by talking about Warren Buffett’s youth, and the people that influenced his investing style, namely Phillip Fisher and Benjamin Graham.
In The Warren Buffett Way, you also learn about how Berkshire Hathway came to fruition. The book also went through all the businesses that Buffett bought and why he bought them. I had no idea that Gillette was more profitable outside of North America than it is within North America (Foreign operations make up more than 60% of Gillette’s sales and earnings). I also had no idea that Guinness owned so many different brands of alcohol (like Johnnie Walker and Gordon’s Gin). It was certainly interesting to learn about the background and roots and business outline of these huge international brands.
The Four Tenets
Then, The Warren Buffett way gives you the true Warren Buffett way and goes into the nitty gritty on how Warren Buffett invests:
- Business Tenets– Warren Buffett is not a stock picker, he buys businesses. The business has to have good long term prospects, it has to be understandable, and it has to consistency in its operation.
- Management Tenets– Warren Buffett values effective management and has demonstrated that this is very important to him. Management has to be rational, has to display integrity with their shareholders (which is less and less common these days), and has to resist institutional pressure.
- Financial Tenets– The company should have higher profit margins, the investor should focus on return on equity, not simply earnings per share. The company should create at least one dollar of market value for every dollar retained.
- Value Tenets– Finally Warren Buffett evaluates the value of the business. He considers whether the business can be purchased at a big discount in relation to the business’ value. Perhaps this is the hallmark of “Buffettism Investing” buying at a deep discount to a company’s business value.
The Buffett Buys
Perhaps the most interesting (well for me anyway) part of this book is going through all the purchases that Warren Buffett has had to date (to the 1994 date of the edition I read, that is), and reviewing each buy according to the tenets above. Some of the holdings included The Washington Post Company, Geico Corporation, Coca-Cola, American Express, The Gillette Company, Guinness PLC, Wells Fargo & Company (by the way they have great free museums to check out, the one in Phoenix Arizona was great),
When I finished the book I was in even more awe of Warren Buffett and his amazing talent and skill. The book serves as a good reminder for the important principles to remember when investing. That getting swept up hoopla and the musings of the market can be tempting, but when you think about yourself as a shareholder second and a business owner first, you want to buy a portion of a business that is managed well, instead of plunging head first into the ocean like a lemming controlled by Mr. Market and his mood swings.
Basically Warren Buffett researches researches and researches before he plunks his hard earned money on a stock. He then goes big or goes home. He puts a big chunk in because he knows he is investing in a good business. He is without a doubt the Oracle of Omaha.
I plan to continue with my Warren Buffett obsession by reading The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder.
Readers, have you read The Warren Buffett Way by Robert G. Hagstrom Jr? Have you read all three editions? What did you think of it?