This is the first investment book that I have read in my life. It was both refreshing and daunting to read this book. Warren Buffett (WB) invests by owning companies and own substantial shares in companies. I invest by owning very limited retail bonds and funds based on stocks and bonds. Thus, a direct comparison is absent, but the investment lessons are great.
The Main Theme and Structure of the Book
The Third Edition has three powerful forewords as follows:
- Third Edition– Howard Marks (Jul 2013)
- Second Edition– Bill Miller (Oct 2004)
- First Edition– Peter S. Lynch (Oct 1994)
The main thesis of the book is to argue why WB is the world’s greatest investor. It starts off by tracing the education of WB, and how he is very much influenced by investors like Benjamin Graham, Philip Fisher and Charlie Munger. It next discusses the twelve immutable tenets of buying a business/investing. Then, he outline nine cases for common stock purchases/investing. The book then dives deeper into both the mathematics and psychology/behavioral finance of investing, before ending with the value of patience in investing. The final Chapter 8 concludes with the thesis that WB is indeed the world’s greatest investor–in terms of his behavioral, analytical and organizational advantages.
Why is WB the World’s Greatest Investor
According to Howard Marks, the reasons are as follows:
- He’s super-smart.
- He’s guided by an overarching philosophy.
- He’s mentally flexible.
- He’s unemotional.
- He’s contrarian and iconoclastic.
- He’s counter-cyclical.
- He has a long-term focus and is unconcerned with volatility.
- He’s unafraid to beg big on his best ideas.
- He’s willing to be inactive.
- Finally, he’s not worried about losing his job.
WB’s Investment Principles
According to Bill Miller, WB’s investment principles are as follows:
- Think of buying stocks as buying fractional interests in whole businesses.
- Construct a focused, low-turnover portfolio.
- Invest in only what you can understand and analyse.
- Demand a margin of safety between the purchase price and the company’s long-term value.
Tenets of WB Way
- Business Tenets
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have a favourable long-term prospect?
- Management Tenets
- Is management rational?
- Is management candid with its shareholders?
- Does management resist the institutional imperative?
- Financial Tenets
- Focus on return on equity, not earnings per share.
- Calculate “owner earnings”.
- Look for companies with high profit margins.
- For every dollar retained, make sure the company had 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?
Key Takeaway
- This book is a must read for any students or practitioners of investing. The mode and scale of investing may be different, but the key principles and tenets of investing are still relevant.
- I like WB’s way of investing–pick the stocks that you would like to invest based on some objective criteria, bet big stay long, and watch the stock value grow in the long term. But then, how many of us have the longevity, richness and patience of WB. Maybe this is why the WB way, though easy to understand is very difficult to prosecute.
#Warren Buffett #Robert G. Hagstrom #Howard Marks #Bill Miller #Peter S. Lynch
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