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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Investment Classic Series
- Sprache: Englisch
- Veröffentlichungsjahr: 2024
An insightful new take on the life and work of one of the world's most remarkable investors: Warren Buffett In the 30th Anniversary Edition of The Warren Buffett Way, celebrated author and investor Robert Hagstrom delivers the definitive version of his bestselling compendium of the investment strategies made famous by Warren Buffett. The Warren Buffett Way describes the twelve investment tenets of Warren Buffett's strategy called business-driven investing and his distinct approach to managing a portfolio of businesses. You'll learn how you can apply these same principles to building your own portfolio and find discussions on the psychology of long-term investing, its optimal benefits, and how to avoid the most common pitfalls and mistakes encountered by investors. This latest edition includes: * A new author preface to complement the existing forewords from Peter Lynch, Bill Miller, and Howard Marks. * Insights on how to achieve worldly wisdom advanced by Warren Buffett's longtime business partner Charlie Munger. * Footnotes and references to academic work that supports and expands on Warren Buffett's investment approach and portfolio management. * The complete Berkshire Hathaway common stocks portfolios from 1977-2021. An indispensable guide to the remarkable work and accomplishments of Warren Buffett, The Warren Buffett Way is a can't-miss resource for professional and individual investors who want to learn from the world's greatest investor.
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Foreword to the First Edition
Foreword to the Second Edition
Foreword to the Third Edition
Preface
CHAPTER 1: World's Greatest Investor
Understanding Patterns
The Making of an Entrepreneur
Buffett Limited Partnership
Berkshire Hathaway: Compounding Conglomerate
Notes
CHAPTER 2: The Education of Warren Buffett
Howard Homan Buffett: Earliest Influence
Benjamin Graham: Developing an Investment Methodology
Philip Fisher: Discerning a Good Business
Charlie Munger: An Intellectual Perspective
Notes
CHAPTER 3: Business-Driven Investing
Business Tenets
Management Tenets
Financial Tenets
Value Tenets
An Intelligent Investor
Notes
CHAPTER 4: Common Stock Purchases
The Washington Post Company
GEICO Corporation
Capital Cities/ABC
The Coca-Cola Company
Apple, Inc.
The Value of Retained Earnings
Notes
CHAPTER 5: Managing a Portfolio of Businesses
Portfolio Management Today: A Choice of Two
A Third Choice: Focus Investing
The Superinvestors of Buffettville
Three Thousand Focus Investors
A Better Way to Measure Performance
High Active-Share Investing
Notes
CHAPTER 6: It's Not That Active Management Doesn't Work
High Priests of Modern Finance
Efficient Market Hypothesis
Investment and Speculation: Understanding the Difference
Investing in a Parallel Universe
Notes
CHAPTER 7: Money Mind
Sportsman, Teacher, Artist
Berkshire Hathaway: An American Institution
Notes
Appendix A: Berkshire's Performance Versus S&P 500 Index (1965–2022)
Appendix B: Berkshire's Common Stock Portfolios (1977–2021)
Acknowledgments
About the Author
Index
End User License Agreement
List of Tables
Chapter 5
Table 5.1 John Maynard Keynes: Annual Investment Performance History
Table 5.2 Buffett Partnership, Ltd.: Annual Investment Performance History
Table 5.3 Charlie Munger Partnership: Annual Investment Performance History...
Table 5.4 Sequoia Fund, Inc.: Annual Investment Performance History
Table 5.5 Lou Simson, GEICO: Annual Investment Performance History
Table 5.6 Superinvestors of Buffettville: Performance Percentage over Time
Table 5.7 Superinvestors of Buffettville: Underperformance Over Time
Table 5.8 Superinvestors of Buffettville: Worst Relative Performance
Table 5.9 Focus (15-Stock) Portfolios—10-Year Data (1987–1996)
Appendix A
Table A.1 Berkshire's Performance Versus S&P 500 Index (1965–2022)
Appendix B
Table B.1 Berkshire Hathaway 1977 Common Stock Portfolio
Table B.2 Berkshire Hathaway 1978 Common Stock Portfolio
Table B.3 Berkshire Hathaway 1979 Common Stock Portfolio
Table B.4 Berkshire Hathaway 1980 Common Stock Portfolio
Table B.5 Berkshire Hathaway 1981 Common Stock Portfolio
Table B.6 Berkshire Hathaway 1982 Common Stock Portfolio
Table B.7 Berkshire Hathaway 1983 Common Stock Portfolio
Table B.8 Berkshire Hathaway 1984 Common Stock Portfolio
Table B.9 Berkshire Hathaway 1985 Common Stock Portfolio
Table B.10 Berkshire Hathaway 1986 Common Stock Portfolio
Table B.11 Berkshire Hathaway 1987 Common Stock Portfolio
Table B.12 Berkshire Hathaway 1988 Common Stock Portfolio
Table B.13 Berkshire Hathaway 1989 Common Stock Portfolio
Table B.14 Berkshire Hathaway 1990 Common Stock Portfolio
Table B.15 Berkshire Hathaway 1991 Common Stock Portfolio
Table B.16 Berkshire Hathaway 1992 Common Stock Portfolio
Table B.17 Berkshire Hathaway 1993 Common Stock Portfolio
Table B.18 Berkshire Hathaway 1994 Common Stock Portfolio
Table B.19 Berkshire Hathaway 1995 Common Stock Portfolio
Table B.20 Berkshire Hathaway 1996 Common Stock Portfolio
Table B.21 Berkshire Hathaway 1997 Common Stock Portfolio
Table B.22 Berkshire Hathaway 1998 Common Stock Portfolio
Table B.23 Berkshire Hathaway 1999 Common Stock Portfolio
Table B.24 Berkshire Hathaway 2000 Common Stock Portfolio
Table B.25 Berkshire Hathaway 2001 Common Stock Portfolio
Table B.26 Berkshire Hathaway 2002 Common Stock Portfolio
Table B.27 Berkshire Hathaway 2003 Common Stock Portfolio
Table B.28 Berkshire Hathaway 2004 Common Stock Portfolio
Table B.29 Berkshire Hathaway 2005 Common Stock Portfolio
Table B.30 Berkshire Hathaway 2006 Common Stock Portfolio
Table B.31 Berkshire Hathaway 2007 Common Stock Portfolio
Table B.32 Berkshire Hathaway 2008 Common Stock Portfolio
Table B.33 Berkshire Hathaway 2009 Common Stock Portfolio
Table B.34 Berkshire Hathaway 2010 Common Stock Portfolio
Table B.35 Berkshire Hathaway 2011 Common Stock Portfolio
Table B.36 Berkshire Hathaway 2012 Common Stock Portfolio
Table B.37 Berkshire Hathaway 2013 Common Stock Portfolio
Table B.38 Berkshire Hathaway 2014 Common Stock Portfolio
Table B.39 Berkshire Hathaway 2015 Common Stock Portfolio
Table B.40 Berkshire Hathaway 2016 Common Stock Portfolio
Table B.41 Berkshire Hathaway 2017 Common Stock Portfolio
Table B.42 Berkshire Hathaway 2018 Common Stock Portfolio
Table B.43 Berkshire Hathaway 2019 Common Stock Portfolio
Table B.44 Berkshire Hathaway 2020 Common Stock Portfolio
Table B.45 Berkshire Hathaway 2021 Common Stock Portfolio
List of Illustrations
Chapter 5
Figure 5.1 10-Year Period (1987–1996) Annual Average Return
Figure 5.2 18-Year Period (1979–1996) Annual Average Return
Guide
Cover
Title Page
Copyright
Foreword to the First Edition
Foreword to the Second Edition
Foreword to the Third Edition
Preface
Table of Contents
Begin Reading
Appendix A: Berkshire's Performance Versus S&P 500 Index (1965–2022)
Appendix B: Berkshire's Common Stock Portfolios (1977–2021)
Acknowledgments
About the Author
Index
End User License Agreement
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Additional Praise for The Warren Buffett Way
“The Warren Buffett Way outlines his career and presents examples of how his investment techniques and methods evolved and the important individuals in that process. It also details the key investment decisions that produced his unmatched record of performance. Finally the book contains the thinking and the philosophy of an investor that consistently made money using the tools available to every citizen no matter their level of wealth.”
from the foreword by Peter Lynch
“The book's popularity is a testimony to the accuracy of its analysis and the value of its advice. The enduring value of Hagstrom's work is due to this clear focus – although the book talks about investment techniques, it is fundamentally about principles. And principles do not change.”
from the foreword by Bill Miller
“Warren Buffett is focused, disciplined, and purposeful; he's hard working; highly numerate and logical; he's a voracious collector of information. The attributes listed are rare, but not unique. It's just that few people are able to demonstrate all of them in action. It's the combination of all of them that has enabled Warren to succeed so exceptionally by applying The Warren Buffett Way.”
from the foreword by Howard Marks
“In simple language, this book tells the rules by which the most successful stock investor of modern times got that way. It could be a godsend to the legion of unhappy investors who keep floundering because they ignore the basics of major investment success.”
Phil Fisher, Author, Common Stocks and Uncommon Profits
“Robert Hagstrom presents an in-depth examination of Warren Buffett's strategies, and the ‘how and why’ behind his selection of each of the major securities that have contributed to his remarkable record of success. His ‘homespun’ wisdom and philosophy are also part of this comprehensive, interesting, and readable book.”
John C. Bogle, Chairman, The Vanguard Group
“Warren Buffett is surely the Greatest Investor of this century – not so much because he built a great fortune with a free market as because he shared his important thinking with us and openly demonstrated the sagacity and courage so vital to success. Berkshire Hathaway has been my largest, longest investment. Warren has been my best teacher.”
Charles D. Ellis, Managing Partner, Greenwich Associates
“By placing Buffett's approach into a broader context, Robert Hagstrom captures not just the key ideas of this century's investing giants, from Ben Graham to Phil Fisher, but also lucidly explains the theoretical foundation of their insights. This is not an investing book, it's an investing library.”
Chris Davis, Davis Advisors
“Warren Buffett is often characterized simply as a ‘value investor” or a Ben Graham disciple. Hagstrom fills in the rest of the story with some immensely practical pointers on prospering in the market.”
Martin S. Fridson, Author, Financial theory, reporting, and history
“Thank you, Robert Hagstrom, for the finely honed thinking, the clear writing, and the simple strategies that help all of us be more successful at one of the life's most intriguing and intimidating tasks; investing our money.”
Janet Lowe, Bestselling author, Warren Buffett Speaks
INTRODUCING WILEY INVESTMENT CLASSICS
There are certain books that have redefined the way we see the worlds of finance and investing—books that deserve a place on every investor's shelf. Wiley Investment Classics will introduce you to these memorable books, which are just as relevant and vital today as when they were first published. Open a Wiley Investment Classic and rediscover the proven strategies, market philosophies, and definitive techniques that continue to stand the test of time.
Books in the series include:
Only Yesterday: An Informal History of the 1920's
by Frederick Lewis Allen
Lombard Street: A Description of the Money Market
by Walter Bagehot
The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s
by John Brooks
Fifty Years in Wall Street by Henry ClewsValue Averaging: The Safe and Easy Strategy for Higher Investment Returns
by Michael E. Edleson
Common Stocks and Uncommon Profits and Other Writings
by Philip A. Fisher
Paths to Wealth through Common Stocks
by Philip A. Fisher
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Confusion de Confusiones by Joseph de la Vega ´
by Martin S. Fridson, Ed.
Where the Money Grows and Anatomy of the Bubble
by Garet Garrett
The Stock Market Barometer
by William Peter Hamilton
Manias, Panics, and Crashes: A History of Financial Crises
by Charles P. Kindleberger and Robert Aliber
Reminiscences of a Stock Operator
by Edwin Lefevre
The Battle for Investment Survival
by Gerald M. Loeb
A Fool and His Money: The Odyssey of an Average Investor
by John Rothchild
The Common Sense of Money and Investments
by Merryle Stanley Rukeyser
Where Are the Customers' Yachts? Or A Good Hard Look at Wall Street
by Fred Schwed, Jr.
The Alchemy of Finance
by George Soros
The Aggressive Conservative Investor
by Martin J. Whitman and Martin Shubik
Supermoney
by Adam Smith
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
by John C. Bogle
John Bogle on Investing: The First 50 Years
by John C. Bogle
THE WARREN BUFFETT WAY
30TH ANNIVERSARY EDITION
ROBERT G. HAGSTROM
Copyright © 2024 by Robert G. Hagstrom. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
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Library of Congress Cataloging-in-Publication Data Is Available:
ISBN 9781394239849 (Cloth)ISBN 9781394239863 (ePDF)ISBN 9781394239856 (ePub)
Cover Design: WileyCover Image: © Michael Prince/The Forbes Collection/Contributor/Corbis via Getty Image
Foreword to the First Edition
One weekday evening early in 1989, I was home when the telephone rang. Our middle daughter, Annie, then 11, was first to the phone. She told me that Warren Buffett was calling. I was convinced this had to be a prank. The caller started by saying, “This is Warren Buffett from Omaha [as if I might confuse him with some other Warren Buffett]. I just finished your book, I loved it, and I would like to quote one of your sentences in the Berkshire annual report. I have always wanted to do a book, but I never have gotten around to it.” He spoke very rapidly with lots of enthusiasm and must have said 40 words in 15 or 20 seconds, including a couple of laughs and chuckles. I instantly agreed to his request and I think we talked for 5 or 10 minutes. I remember he closed by saying, “If you ever visit Omaha and don't come by and see me, your name will be mud in Nebraska.”
Clearly not wanting my name to be mud in Nebraska, I took him up on his offer about six months later. Warren Buffett gave me a personal tour of every square foot of the office (which did not take long, as the whole operation could fit inside less than half of a tennis court), and I said hello to all 11 employees. There was not a computer or a stock quotation machine to be found.
After about an hour we went to a local restaurant where I followed his lead and had a terrific steak and my first Cherry Coke in 30 years. We talked about jobs we had as children, baseball, and bridge, and exchanged stories about companies in which we had held investments in the past. Warren discussed or answered questions about each stock and operation that Berkshire (he never called his company Berkshire Hathaway) owned.
Why has Warren Buffett been the best investor in history? What is he like as an individual, a shareholder, a manager, and an owner of entire companies? What is so unique about the Berkshire Hathaway annual report, why does he donate so much effort to it, and what can someone learn from it? To attempt to answer those questions, I talked with him directly, and reread the last five annual reports and his earliest reports as chairman (the 1971 and 1972 reports each had only two pages of text). In addition, I had discussions with nine individuals who have been actively involved with Warren Buffett in varied relationships and from different viewpoints during the past four to over 30 years: Jack Byrne, Robert Denham, Don Keough, Carol Loomis, Charlie Munger, Tom Murphy, Carl Reichardt, Frank Rooney, and Seth Schofield.
In terms of his personal qualities, the responses were quite consistent. Warren Buffett is, first of all, very content. He loves everything he does, dealing with people and reading mass quantities of annual and quarterly reports and numerous newspapers and periodicals. As an investor he has discipline, patience, flexibility, courage, confidence, and decisiveness. He is always searching for investments where risk is eliminated or minimized. In addition, he is very adept at probability and as an oddsmaker. I believe this ability comes from an inherent love of simple math computations, his devotion and active participation in the game of bridge, and his long experience in underwriting and accepting high levels of risk in insurance and in reinsurance. He is willing to take risks where the odds of total loss are low and upside rewards are substantial. He lists his failures and mistakes and does not apologize. He enjoys kidding himself and compliments his associates in objective terms.
Warren Buffett is a great student of business and a wonderful listener, and he is able to determine the key elements of a company or a complex issue with high speed and precision. He can make a decision not to invest in something in as little as two minutes and conclude that it is time to make a major purchase in just a few days of research. He is always prepared, for as he has said in an annual report, “Noah did not start building the ark when it was raining.”
As a manager he almost never calls a division head or the chief executive of a company but is delighted at any time of the day or night for them to call him to report something or to seek counsel. After investing in a stock or purchasing an entire operation, he becomes a cheerleader and sounding board: “At Berkshire we don't tell .400 hitters how to swing,” using an analogy to baseball management.
Two examples of Warren Buffett's willingness to learn and adapt himself are public speaking and computer usage. In the 1950s Warren invested $100 in a Dale Carnegie course “not to prevent my knees from knocking when public speaking but to do public speaking while my knees are knocking.” At the Berkshire annual meeting in front of more than 2,000 people, Warren Buffett sits on a stage with Charlie Munger, and, without notes, lectures and responds to questions in a fashion that would please Will Rogers, Ben Graham, King Solomon, Phil Fisher, David Letterman, and Billy Crystal. To be able to play more bridge, early in 1994 Warren learned how to use a computer so he could join a network where you can play with other individuals from their locations all over the country. Perhaps in the near future he will begin to use some of the hundreds of data retrieval and information services on companies that are available on computers today for investment research.
Warren Buffett stresses that the critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. He doesn't care what the general stock market has done recently or will do in the future. He purchased over $1 billion of Coca-Cola in 1988 and 1989 after the stock had risen over fivefold the prior six years and over five-hundredfold the previous 60 years. He made four times his money in three years and plans to make a lot more the next 5, 10, and 20 years with Coke. In 1976 he purchased a very major position in GEICO when the stock had declined from $61 to $2 and the general perception was that the stock was definitely going to zero.
How can the average investor employ Warren Buffett's methods? Warren Buffett never invests in businesses he cannot understand or that are outside his “circle of competence.” All investors can, over time, obtain and intensify their circle of competence in an industry where they are professionally involved or in some sector of business they enjoy researching. One does not have to be correct very many times in a lifetime, as Warren states that 12 investment decisions in his 40-year career have made all the difference.
Risk can be reduced greatly by concentrating on only a few holdings if it forces investors to be more careful and thorough in their research. Normally more than 75 percent of Berkshire's common stock holdings are represented by only five different securities. One of the principles demonstrated clearly several times in this book is to buy great businesses when they are having a temporary problem or when the stock market declines and creates bargain prices for outstanding franchises. Stop trying to predict the direction of the stock market, the economy, interest rates, or elections, and stop wasting money on individuals who do this for a living. Study the facts and the financial condition, value the company's future outlook, and purchase when everything is in your favor. Many people invest in a way similar to playing poker all night without ever looking at their cards.
Very few investors would have had the knowledge and courage to purchase GEICO at $2 or Wells Fargo or General Dynamics when they were depressed, as there were numerous learned people saying those companies were in substantial trouble. However, Warren Buffett also purchased stock of Capital Cities/ABC, Gillette, Washington Post, Affiliated Publications, Freddie Mac, or Coca-Cola (which have produced over $6 billion of profits for Berkshire Hathaway, or 60 percent of the $10 billion of shareholders' equity); these were all well-run companies with strong histories of profitability, and they were dominant business franchises.
In addition to his own shareholders, Warren Buffett uses the Berkshire annual report to help the general public become better investors. On both sides of his family he is descended from newspaper editors, and his Aunt Alice was a public school teacher for more than 30 years. Warren Buffett enjoys both teaching and writing about business in general and investing in particular. He taught on a volunteer basis when he was 21 at the University of Nebraska in Omaha. In 1955, when he was working in New York City, he taught an adult education course on the stock market at Scarsdale High School. For 10 years in the late 1960s and 1970s he gave a free lecture course at Creighton University. In 1977 he served on a committee headed by Al Sommer Jr., to advise the Securities and Exchange Commission on corporate disclosure. After that involvement, the scale of the Berkshire annual report changed dramatically with the 1977 report written in late 1977 and early 1978. The format became more similar to the partnership reports he had produced from 1956 to 1969.
Since the early 1980s, the Berkshire annual reports have informed shareholders of the performance of the holdings of the company and new investments, have updated the status of the insurance and the reinsurance industry, and (since 1982) have listed acquisition criteria about businesses Berkshire would like to purchase. The report is generously laced with examples, analogies, stories, and metaphors containing the dos and don'ts of proper investing in stocks.
Warren Buffett has established a high standard for the future performance of Berkshire by setting an objective of growing intrinsic value by 15 percent a year over the long term, something few people, and no one from 1956 to 1993 besides himself, have ever done. He has stated it will be a difficult standard to maintain due to the much larger size of the company, but there are always opportunities around and Berkshire keeps lots of cash ready to invest, and it grows every year. His confidence is somewhat underlined by the final nine words of the June 1993 annual report on page 60: “Berkshire has not declared a cash dividend since 1967.”
Warren Buffett has stated that he has always wanted to write a book on investing. Hopefully that will happen someday. However, until that event, his annual reports are filling that function in a fashion somewhat similar to the 19th-century authors who wrote in serial form: Edgar Allan Poe, William Makepeace Thackeray, and Charles Dickens. The Berkshire Hathaway annual reports from 1977 through 1993 are 17 chapters of that book. And also in the interim we now have The Warren Buffett Way, in which Robert Hagstrom outlines Buffett's career and presents examples of how his investment technique and methods evolved as well as the important individuals in that process. The book also details the key investment decisions that produced Buffett's unmatched record of performance. Finally, it contains the thinking and the philosophy of an investor who has consistently made money using the tools available to every citizen no matter one's level of wealth.
PETER S. LYNCH
OCTOBER 1994
Foreword to the Second Edition
When Robert Hagstrom first published The Warren Buffett Way in 1994, it quickly became a phenomenon. To date [2004], more than 1.2 million copies have been sold. The book's popularity is a testimony to the accuracy of its analysis and the value of its advice.
Any time the subject is Warren Buffett, it is easy to become overwhelmed by the sheer size of the numbers. Whereas most investors think in terms of hundreds or perhaps thousands, Buffett moves in a world of millions and billions. But that does not mean he has nothing to teach us. Quite the opposite. If we look at what he does and has done, and are able to discern the underlying thinking, we can model our decisions on his.
That is the profound contribution of Robert's book. He closely studied Warren Buffett's actions, words, and decisions for a number of years, and then he set about analyzing them for common threads. For this book, he distilled those common threads into 12 tenets, timeless principles that guide Buffett's investment philosophy through all circumstances and all markets. In just the same way, they can guide any investor.
The enduring value of Robert's work is due to this clear focus—although the book talks about investment techniques, it is fundamentally about investment principles. And principles do not change. I can almost hear Warren saying, with his wry smile, “That's why they call them principles.”
The past 10 years have given us a vivid demonstration of that basic truth. In those 10 years, the trends of the stock market changed several times over. We witnessed a high-flying bubble that made many people rich, and then a steep crash into a protracted, painful bear market before the market finally hit bottom in the spring of 2003 and started to turn back up.
All along the way, Warren Buffett's investment approach never changed. He has continued to follow the same principles outlined in this book:
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 analyze.
Demand a margin of safety between the purchase price and the company's long-term value.
Berkshire Hathaway investors, as usual, reap the benefits of that steady approach. Since the recovery began in 2003, Berkshire Hathaway stock is up about $20,000 per share, more than 30 percent, far surpassing the returns of the overall market over the comparable period.
There is a chain of thinking for value investors that begins with Benjamin Graham, through Warren Buffett and his contemporaries, to the next generation of practitioners such as Robert Hagstrom. Buffett, Graham's best-known disciple, frequently advises investors to study Graham's book The Intelligent Investor. I often make the same recommendation myself. And I am convinced that Robert's work shares with that classic book one critical quality: The advice may not make you rich, but it is highly unlikely to make you poor. If understood and intelligently implemented, the techniques and principles presented here should make you a better investor.
BILL MILLER
CHAIRMAN AND CHIEF INVESTMENT OFFICER, LMM, LLC
OCTOBER 2004
Foreword to the Third Edition
What accounts for Warren Buffett's exceptional investment success? That's one of the questions I'm asked most often. It's also the question I want to explore in this foreword.
When I studied for my MBA at the University of Chicago in the late 1960s, I was exposed to a new theory of finance that had been developed, largely there, in the preceding few years. One of the most important components of the “Chicago School” of thought was the Efficient Market Hypothesis. According to that hypothesis, the combined efforts of millions of intelligent, motivated, objective, and informed investors cause information to immediately be reflected in market prices such that assets will provide a fair risk-adjusted return, no more and no less. Prices are never so low or so high that they can be taken advantage of, and thus no investors can be capable of consistently identifying opportunities to benefit. It's this hypothesis that gives rise to the Chicago School's best-known dictum: You can't beat the market.
The Efficient Market Hypothesis supplies the intellectual basis for that conclusion, and there are lots of empirical data showing that, despite all their efforts, most investors don't beat the market. That's a pretty strong case for the inability to outperform.
It's not that no investors beat the market. Every once in a while some do, and just as many underperform; market efficiency isn't so strong a force that it's impossible for individual investors' returns to deviate from the market's return. It's merely asserted that no one can do it to a sufficient degree and consistently enough to disprove the Efficient Market Hypothesis. There are outliers, as in most processes, but their superior returns are described as being based on randomness and thus ephemeral. When I grew up, there was a saying that “if you put enough chimpanzees in a room with typewriters, eventually one of them will write the Bible.” That is, when randomness is present, just about anything can happen once in a while. However, as my mother used to say, “It's the exception that proves the rule.” A general rule may not hold 100 percent, but the fact that exceptions are so rare attests to its basic truth. Every day, millions of investors, amateur and professional alike, prove you can't beat the market.
And then there's Warren Buffett.
Warren and a few other legendary investors—including Ben Graham, Peter Lynch, Stan Druckenmiller, George Soros, and Julian Robertson—have performance records that fly in the face of the Chicago School. In short, they've outperformed by a big enough margin, for long enough periods of time, with large enough amounts of money, that the advocates of market efficiency are forced into the defensive. Their records show that exceptional investors can beat the market through skill, not chance.
Especially in Warren's case, it's hard to argue with the evidence. On his office wall, he displays a statement, typed by him, showing that he started The Buffett Partnership in 1956 with $105,000. Since then, he has attracted additional capital and earned returns on it such that Berkshire Hathaway now has investments totaling $143 billion and a net worth of $202 billion. He's kicked the hell out of the indices for many years. And in the process, he's become the second wealthiest man in America. This last achievement wasn't based on dynastic real estate assets or a unique technological invention, as with so many on Forbes's lists, but on applying hard work and skill in investment markets that are open to everyone.
What's responsible for Warren Buffett's singular accomplishments? In my view these are the keys:
He's super-smart.
One of the many bon mots attributed to Warren is the following: “If you have an IQ of 160, sell 30 points. You don't need them.” As Malcolm Gladwell pointed out in the book
Outliers
, you don't have to be a genius to achieve great success, just smart enough. Beyond that, incremental intelligence doesn't necessarily add to your chances. In fact, there are people so smart that they can't get out of their own way or can't find the path to success (and happiness) in the real world. A high IQ isn't enough to make someone a great investor; if it were, college professors would probably be the richest people in America. It's important to also to be business-oriented and have “savvy” or “street smarts.”
I have a sneaking suspicion that Warren's IQ is well above 130 … and that he hasn't made any effort to dispose of those “nonessential” extra points. His ability to cut to the core of a question, to reach a well-founded conclusion, and to hold that conclusion even if things initially go against him are all key elements in who he is and what he's accomplished. In short, he's fiercely analytical.
He's also incredibly quick. It doesn't take him weeks or months to reach a conclusion. He also doesn't need a cadre of analysts pushing numbers. He doesn't feel the need to know and consider every data point: just the ones that matter. And he has a great sense for which they are.
He's guided by an overarching philosophy.
Many investors think they're smart enough to master anything, or at least they act that way. Further, they believe the world is constantly changing, and you have to be eclectic and change your approach to adapt, racing to stay up with the latest wonder. The trouble with this is that no one really can know everything, it's hard to constantly retool and learn new tricks, and this mindset prevents the development of specialized expertise and helpful shortcuts.
Warren, however, knows what he doesn't know, sticks to what he does know, and leaves the rest for others. This is essential, since as Mark Twain said, “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” Warren only invests in industries he understands and feels comfortable with. He emphasizes fairly prosaic fields and avoids, for example, high-tech companies. He famously passes on things that are outside his philosophy and ken. Importantly, he can live with the possibility that the things he passes on will make money for others and he'll be left looking on as they do. (Most people can't.)
He's mentally flexible.
The fact that it's important to have a guiding philosophy doesn't mean it's never good to change. It can be desirable to adapt to significantly changed circumstances. It's even possible to come across a better philosophy. The key lies in knowing when to change and when to hold fast.
Early in his career, Warren adopted the approach of his great teacher, Ben Graham. It's called “deep value”—buying castoffs when they're being given away, especially when companies can be bought for less than their net cash. It has sometimes been derided as “picking up cigar butts.” After a while, however, with urging from his partner, Charlie Munger, he switched to emphasizing high-quality companies with protective “moats” and pricing power, led by outstanding people, at reasonable (but not necessarily giveaway) prices.
It was long an aspect of Warren's approach to eschew companies that were capital-intensive, but he was able to overcome that bias to buy the Burlington Northern Santa Fe railway and take advantage of its economic sensitivity coming out of the 2008 financial collapse, and the outlook for increasing rail carriage.
A philosophy should supply guidance but not rigidity. This—like many other things in investing—is a tough dilemma to master. Warren doesn't shrink from the challenge, neither changing with every new fad nor letting his thinking get stuck in cement.
He's unemotional.
Many of the obstacles to investment success relate to human emotion; the main reason for the failure of the Efficient Market Hypothesis is that investors rarely satisfy the requirement of objectivity. Most become greedy, confident, and euphoric when prices are high, causing them to celebrate their winners and buy more rather than take profits. And they get depressed and fearful when prices are low, causing them to sell assets at bargain prices and invariably discouraging them from buying. And perhaps worst of all, they have a terrible tendency to judge how they're doing based on how others are doing, and to let envy of others' success force them to take additional risk for the simple reason that others are doing so. Envy is enough to make people follow the crowd, even into investments they know nothing about.
Warren appears absolutely immune to these emotional influences. He doesn't get overjoyed when things appreciate, or downcast when they don't, and for him success is clearly defined by himself, not the masses or the media. He doesn't care whether others think he's right, or whether his investment decisions promptly make him look right. (He was written off as “past his prime” early in 2000 because of his failure to participate in what turned out to be the tech bubble, but he never changed his spots.) He only cares what he (and Charlie Munger) thinks … and whether his shareholders make money.
He's contrarian and iconoclastic.
Whereas the typical investor thinks he should follow the herd, despite its susceptibility to the errors of emotion, the best investors behave in a contrarian fashion, diverging from the herd at the key moments. But it's not enough to do the opposite of what others are doing. You have to understand what they're doing, understand why it's wrong, know what to do instead, have the nerve to act in a contrary fashion (that is, to adopt and hold what Yale's David Swensen calls “uncomfortably idiosyncratic positions”), and be willing to look terribly wrong until the ship turns and you're proved right. That last element can feel like it's taking forever; as the old saying goes, “Being too far ahead of your time is indistinguishable from being wrong.” Take it all together and it's clear that this isn't easy.
It's obvious that Warren is highly capable of contrarian behavior. In fact, he revels in it. He once wrote me that he had seen high-yield bonds when the market priced them like flowers and he had seen them when they were considered weeds. “I liked them better when they were weeds.” The contrarian prefers to buy things when they're out of favor. Warren does it like no one else.
He's counter-cyclical.
Investing consists of dealing with the future, and yet many of the best investors accept that they can't predict what the macro future holds in terms of economic developments, interest rates, and market fluctuations. If we can't excel at the thing that most people want to hang their hat on, what can we do? In my view, there are great gains to be had from behaving counter-cyclically.
It's emotionally easy to invest when the economy is improving, companies are reporting higher earnings, asset prices are rising, and risk bearing is being rewarded. But buying appreciated assets doesn't hold the key to superior investment results. Rather, the greatest bargains are accessed by buying when the economy and companies are suffering: that's more likely to be the climate in which asset prices understate their merits. However, this, too, is not easy.
Warren has repeatedly demonstrated his ability—in fact, his preference—for investing at the bottom of the cycle, when optimism is in short supply. His investments of $5 billion each in 10 percent preferred stock of Goldman Sachs and General Electric at the depths of the 2008 financial crisis, and his purchase of economically sensitive Burlington Northern for $34 billion in 2009, are emblematic of this. The wisdom of these investments is obvious today in retrospect, but how many acted as boldly when fear of a financial collapse was rampant?
He has a long-term focus and is unconcerned with volatility.
Over my 45 years in the business, investors' time horizons have gotten shorter and shorter. This is likely the result of increased media attention to investment results (there was none in the 1960s), its contagion to investors and their clients, and the striving for yearly gains introduced by hedge funds' annual incentive fees. But as other people allow nonsensical biases to affect their thoughts and actions, we can profit from avoiding them. Thus, most investors' excessive concern with quarterly and annual results creates profit opportunities for those who think in terms of longer periods.
Warren has famously said that his “holding period is forever,” and that he “prefers a lumpy 15 percent a year over a smooth 12 percent.” This allows him to stick with great ideas for long periods of time, compounding his gains and allowing profits to build up untaxed, rather than turning over the portfolio every year and paying taxes at short-term rates. It also helps him avoid getting shaken out in times of volatility, and instead lets him take advantage of them. In fact, rather than insist on liquidity and take advantage of the ability to exit from investments, Warren's actions make clear that he is happy making investments he could never shed.
He's unafraid to bet big on his best ideas.
Diversification has long played a leading part in so-called prudent investment management. In short, it reduces the likelihood of large individual losses (and of being sued for having had too much in a losing position). But while it reduces the pain caused by losing investments, a high degree of diversification correspondingly reduces the potential gain from winners.
As in many things, Warren takes a divergent view of diversification: “The strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it.”
Warren understands that great ideas come along only on rare occasion, so he keeps the bar high, only invests in great ideas, and bets big when he sees one. Thus, he commits significantly to the companies and people he believes in; he doesn't hold anything just because others do and he's worried it may perform well without his being represented; and he refuses to diversify into things he thinks less of just to mitigate the impact of errors—that is, to practice what he calls “de-worstification.” It's obvious that all of these things are essential if you're to have a chance at great results. But that doesn't keep them from being the exception in portfolio management, not the rule.
He's willing to be inactive.
Too many investors act as if there's always something great to do. Or perhaps they think they have to give the impression that they're smart enough to always be able to find a brilliant investment. But great investment opportunities are exceptional … and by definition, that means they're not available every day.
Warren is famously willing to be inactive for long periods of time, turning down deal after deal until the right one comes along. He's famous for his analogy to one of baseball's greatest hitters, Ted Williams, standing at the plate with his bat on his shoulder and waiting for the perfect pitch; it exemplifies his insistence on making investments only when they're compelling. Who would argue that the supply of good deals is steady, or that it's always an equally good time to invest?
Finally, he's not worried about losing his job.
Very few investors are able to take all the actions they think are right. Many are constrained in terms of their ability to buy assets that are illiquid, controversial, or unseemly; sell appreciating assets that “everyone” is sure will go further; and concentrate their portfolios in their few best ideas. Why? Because they fear the consequences of being wrong.
“Agents” who manage money for others worry that acting boldly will expose them to the risk of being fired by their employers or terminated by their clients. Thus, they moderate their actions, doing only that which is considered prudent and uncontroversial. That's the tendency that caused John Maynard Keynes to observe, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” But that tendency introduces an important conundrum: if you're unwilling to take a position so bold that it can embarrass you if it fails, it's correspondingly impossible to take a position that can make a real difference if it works out well. Great investors are able to follow up their intellectual conclusions with action; in short, they dare to be great. Warren obviously doesn't have to worry about being let go by his employer. His position is as close to permanent as there is, as is his capital. There are no clients able to withdraw their capital, mandating the sale of assets at bargain prices as befalls the typical money manager during market crashes. This simple fact plays a significant part in any great investor's success, and I'm sure it's no coincidence that Warren set things up this way, transitioning from a hedge fund structure to Berkshire Hathaway's corporate form. He wouldn't have it any other way.
Of course, Warren Buffett shares many other attributes of outstanding investors. He's focused, disciplined, and purposeful; he's hard working; he's highly numerate and logical; he's a voracious collector of information, through both reading and networking with people he respects; and at this point, he invests because he enjoys solving the complex intellectual problem that it represents, not to gain fame or make money. Those latter things are the byproduct of his efforts, but not his goal, I'm sure.
In theory, many others could have done what Warren Buffett did over the last 60 years. The attributes listed are rare, but not unique. And each one makes compelling sense; who would take the other side of any of these propositions? It's just that few people are able to demonstrate all of them in action. It's the combination of all of them—and the addition of that intangible “something” that makes a special person special—that has enabled Warren to succeed so exceptionally by applying The Warren Buffett Way.
HOWARD MARKS
JULY 2013
Preface
I first met Warren Buffett 40 years ago. Not in person, but by reading his chairman's letter in the 1983 Berkshire Hathaway annual report. I was training to be a stockbroker with an aid-Atlantic brokerage firm. Part of my studies included analyzing Berkshire's annual reports. Like so many, I was instantly impressed with the clarity of Buffett's writing. Most important, I was struck with how sensibly he laid out the idea that owning a stock was equivalent to owning a business. As a liberal arts major in college, I didn't study accounting or finance, so trying to understand stocks only using rows of numbers in balance sheets and income statements did not come easily.
But when Warren Buffett introduced me to Rose Blumkin at Nebraska Furniture Mart, Stan Lipsey at Buffalo Evening News, Chuck Huggins at See's Candy Shops, and Jack Byrne at GEICO, I instantly connected to Buffett's persuading argument that the most intelligent way to think about stocks was from a businessperson's perspective. In buying a stock, I was in fact becoming an owner in a company. It now all made sense. In one epiphanic moment, Warren Buffett revealed the inner nature of investing. The balance sheet and income statements were still there, but those numerical skeletons had suddenly grown muscle, skin, and purpose. In a word, common stocks had come alive. Instead of seeing just numbers, I began to think about companies and the people who were running the businesses selling products and services that ultimately generated sales and earnings; the numbers, in turn, filled a spreadsheet.
When I earned my broker stripes and went into production I knew exactly what I was going to do. I would invest my client's money in good businesses. Put differently, I was going to heed Warren Buffett's advice and become a “business picker” not a “stock picker.” And most of all, I was going to dedicate myself to continually studying the investment strategies of Warren Buffett. I wrote to the Securities and Exchange Commission for all the past Berkshire Hathaway annual reports and the annual reports of the public companies Berkshire owned. Over the years, I collected all the newspaper and magazine articles written about Warren Buffett and Berkshire. I was like a kid following a ballplayer.
Years later, Warren Buffett stated, “What we do is not beyond anybody else's competence. It's just not necessary to do extraordinary things to get extraordinary results.” Now, I'm sure whoever read this chalked it up to Buffett's Midwestern humility. Buffett is not a braggart, but neither does he mislead. I was sure he would have not made this statement if he did not believe it to be true. And if it were true, as I believed it was, it meant there was the possibility of uncovering a road map or, better yet, a treasure map that would describe how Buffett thinks about investing in general and stock selection specifically. This was my motivation for writing The Warren Buffett Way.
The principal challenge I faced in writing the book was to actually prove Buffett's claim that what I do is not beyond anybody else's competence. Some critics argue that, despite his success, Warren Buffett's idiosyncrasies mean his investment approach cannot be widely adopted. I disagreed. Buffett is idiosyncratic—it is the source of his success—but his methodology, once understood, is applicable to individuals and institutions alike. The goal of this book is to help investors employ the strategies that made Warren Buffett successful.
To do this, I culled the best of Warren Buffett's writings from Berkshire's chairman's letters, countless magazine and newspaper articles, television interviews, and of course the annual shareholder meetings. No stone was left unturned. From this I gleaned how Buffett examines a company from a business perspective, management behavior, financial returns, and, lastly, how to value common stocks. These became the 12 Investment Tenets of The Warren Buffett Way. These core principles are called out, to detail and clarify Buffett's four-part investment strategy:
Analyze a stock as a business.
Demand a margin of safety for each purchase.
Manage a low-turnover, focused portfolio.
Protect yourself from the speculative and emotional forces of the market.
The Warren Buffett Way describes at its core a simple approach. There are no computer programs to learn, no two-inch-thick investment manuals to decipher. Whether you are financially able to purchase 10 percent of a company or a hundred shares of stock, this book can help you achieve profitable investment returns.
Still there are skeptics. The major pushback we received over the years is that reading a book about Warren Buffett will not ensure you will be able to generate the same investment returns that Buffett has achieved. First, I never insinuated that by reading the book an individual could achieve the same results as Buffett. Second, I was puzzled why anyone would think so. It seemed to me that if you bought a book about how to play golf like Tiger Woods, you shouldn't expect to become Tiger's equal on the golf course. You read the book because you believe there are some tips in the book that will help improve your game. The same is true of The Warren Buffett Way. If, by reading this book, you pick up some lessons that help improve your investment results, then the book is a success.
The buy-and-hold investment strategy that is at the core of Warren Buffett's approach appeals intuitively to people. The concept of buying and holding an investment for several years, thus achieving returns commensurate with the economics of the business, is simple and straightforward. Investors can easily understand the mechanics of this approach. Warren Buffett's attraction is twofold. One, he is the designated representative of the buy-and-hold approach and, two, in doing so he also became the world's greatest investor.
In the 30 years since I wrote The Warren Buffett Way, the noise in the stock market has continued to rise. And just when you think it can't get any louder, it turns into a deafening screech. Television commentators, financial writers, analysts, and market strategists are overtalking each other, all vying for investors' attention. The stock market appears to have become a cynical game for many who know the price of everything and the value of nothing.
Yet, despite an avalanche of information, investors continually struggle to earn a profit. Some are hard-pressed to even continue. Stock prices skyrocket for little reason, then plummet just as quickly. People who have turned to the stock market to invest for their children's education or even their own retirement are bewildered. There appears to be no rhyme or reason to the stock market, only folly.
But far above the market madness stands the wisdom and counsel of Warren Buffett. In an environment that seems to favor the speculator over the investor, Buffett's advice has proven, time and again, to be the safe harbor for millions of lost investors.
Long-term investing used to be a prudent course of action. Now when you tell someone you are a long-term investor, you are considered old-fashioned, out of step, clinging to a quaint idea for a time that has come and gone. The world is on the move, we are told. If you are not constantly buying and selling, you must be falling behind.
Being a business-driven investor in the stock market can sometime feel like you are a round block trying to fit into a square hole. But we have been educated by Warren Buffett and we have learned how to thoughtfully measure our progress without having to rely on the market's short-term prices to tell us whether or not we are doing a good job. The question is not whether business-driven investors can be successful operating in the stock market, rife with all its challenges. It is a question of whether we have acquired the right mindset—studying the lessons learned from the ultimate investor.
CHAPTER 1World's Greatest Investor
We investors have a built-in need to understand the world, especially that sliver that has a direct impact on our financial well-being. And when the unexpected occurs, we seek answers.
That surely was the case in 1973, when stock prices started a brutal downhill slide that only got worse the following year. By the end of 1974, the overall stock market was down an agonizing 50 percent. Investors were left shaken, wondering what happened to their portfolio, their retirement savings. And they asked themselves, What should I have done differently?
As it happens, academicians at leading universities had been thinking about the stock market for some time. Working separately, they had developed and refined several ideas about the behavior of markets, particularly the core concept of risk and return.
One idea, with its roots in psychology, starts with the acknowledgment that most people get emotional when it comes to money. Specifically, most investors abhor the thought of losing money, which these financial scholars equated with price volatility. If investors don't have the emotional fortitude to remain calm when stock market prices start bouncing wildly, they are almost certain to panic and make bad decisions. Therefore, the ideal investment strategy must reflect their specific point on the risk/reward scale, which measures their ability to tolerate price volatility.
Another concept, closely tied to risk tolerance, is the notion of diversification. The core idea is that volatility can be better managed if a stock portfolio is diversified among different companies and industries. Thus, if any one particular area of the economy is hit by some disaster, a widely diversified portfolio has the built-in protection that works to mitigate price losses.
Over the years both these general theories—risk equals price and diversification tempers price volatility—have been debated, amended, expanded, published, footnoted, and debated again. Eventually, through a kind of cloistered evolution, those separate ideas coalesced into one overall concept that came to be known as
