StocBox Book Rec: The Warren Buffet Way
By Robert Hagstrom
Click Here to Check it Out on Amazon
Recommended for investors of all experience levels
Review by Chandler Lutz
The Short Story:
The Warren Buffett Way is an excellent introduction to Buffett’s story and investment philosophy. This book clearly outlines the principals that Buffett uses to determine the quality of a business and what Buffett looks for in any investment. With the book in its second edition and now published in paperback, the Warren Buffett way is a practical investment (about 10 dollars) for all those looking to learn the man and his ways. However, for those thrifty shoppers out there, you can get the material in its raw form from the Berkshire annual reports.
In Depth Analysis:
Whenever I read a book or article concerning Buffett (like The Winning Investment Habits of Warren Buffett and George Soros which I reviewed earlier) I always find myself fascinated and intrigued. Usually, I can’t put the book down. In these cases, one might give the credit to the author, but when the subject matter is Buffett it makes any writer’s job much easier. Even though this may be true with the Warren Buffett Way, I still found the author’s work to be insightful and useful. The premise of his work is simple: to invest like Buffett you need to look for certain factors in the underlying business, the financials, management and finally valuation. Hagstrom calls these the four tenets of investment. Before we dive into these tenets you must understand that these are not simple formulas; as Buffett’s criteria are not something that can be reduced to easy to read numbers and calculations. You cannot write a computer program to invest as Buffett since much of his criteria is qualitative and not quantitative. However, that does not mean that these tenets are difficult to decipher or beyond anyone’s capabilities. As Buffett says, “What we do is not beyond anyone’s comprehension.”
Overall the tenets are quite simple and easy to follow (they are found on p. 59 of the book):
Business Tenets:
- Is The Business Straightforward and easy to comprehend?
- Does the firm have a consistent history?
- Does the firm have Favorable long term prospects?
Management Tenets:
- Is management Rational?
- Is management candid with its shareholders?
- Does management resist the institutional imperative?
Financial Tenets:
- What is the return on equity?
- What are the company’s “owner earnings”?
- What are the profit margins?
- Has the company created at least one dollar of market value for every dollar retained?
Value Tenets:
- What is the value of the company?
- Can it be purchased at a significant discount to its value?
It is important to recall that these criteria are based on Hagstrom’s analysis of Buffett’s writings and that they are not actually from the master himself
The book’s structure is based on these tenets and elaborates on them while providing examples from Buffett’s portfolio. In my mind, it is these examples that hold the real value of the book. By analyzing what Buffett was thinking as he made these investments, readers can gain a unique perspective on Buffett’s ideas and practices.
The first edition of the book was published and the second edition was published in 2004. The two editions are very similar, but the newer edition includes more current examples that occurred after the first edition was published and a chapter titled “The psychology of Money.” The newer examples basically stuck in random places in the book in what Hagstrom calls “Case in Point” sections. Don’t get me wrong, these case studies are very informative, but the author did not take the time to integrate them with the rest of the work. Also, he used a gray background to highlight these sections (so, if you own the first edition and do not want to buy the second, you can go to Barnes & Noble and read these gray sections along with the extra chapter and save yourself the extra ten bucks). I also found the chapter on the psychology of money very interesting. In this part, Hagstrom outlines basic behavioral finance and various different ways human psychology affects monetary decisions. Behavioral finance and its relation to psychology is becoming an increasingly important topic in both the academic and professional world and this chapter provides a nice introduction to those who are interested.
Overall, The Warren Buffett Way is an excellent read for Buffett fans, but I consider this work to be just the start of a journey that is learning about Buffett. The next step is check out Berkshire’s annual reports (which you can download free), the Intelligent Investor, Securities Analysis and Common Stocks and Uncommon Profits.