Buffett’s investment style and thought process is brought to life by Hagstrom by walking the reader through Berkshire’s investments and why they were made
- To be successful you must be willing to study and learn about your companies and have the emotional fortitude to disregard short-term changes in the market. If you are in need of constant affirmation, the probability of sticking with and benefiting from the Buffett Way is diminished. Must be able to think for yourself, apply relatively simply methods and have the courage of your convictions
- Buffett embraces the simple and avoids the complicated
- Must be a stable company, with good owner earnings, grow in the future without a lot of equity financing, simple to understand, in your circle of competence, have pricing power (moat, close to monopoly), low price producer, honest and competent management, good long-term prospects, attractively priced
- Don’t need to over stress about diversification if picking good companies with the above characteristics
- Must master emotions and be able to think independently
- Conventionality is synonymous with conservatism
- Average does not equate with safe
- Business tenets
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favorable long-term prospects?
- Management tenets
- Is management rational?
- Is management candid with the shareholders?
- Does management resist the institutional imperative (lemming-like tendency of mediocre managers)?
- Financial tenets
- Focus on ROE, not EPS
- Calculate “owner earnings” to get a true reflection of value
- NI + depreciation, depletion and amortization – CapEx and any additional working capital that might be needed
- 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 Warren Buffett Way
- Turn off the stock market
- Don’t worry about the economy
- Buy a business, not a stock
- Manage a portfolio of businesses
What I got out of it
Having already read the Berkshire letters, this book didn’t offer too much new information but definitely a good reminder of Buffett’s investing principles