The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy

by Robert G. Hagstrom

The Warren Buffett Way provided the first look into the strategies that the master uses to pick stocks. A New York Times bestseller, it is a valuable and practical primer on the principles behind the remarkable investment run of the famed oracle of Omaha. In this much-awaited companion to that book, author Robert Hagstrom takes the next logical step, revealing how to profitably manage stocks once you select them. THE WARREN BUFFETT PORTFOLIO will help you through the process of building a superior portfolio and managing the stocks going forward.

Building a concentrated portfolio is critical for investment success. THE WARREN BUFFETT PORTFOLIO introduces the next wave of investment strategy, called focus investing. A comprehensive investment strategy used with spectacular results by Buffett, focus investing directs investors to select a concentrated group of businesses by examining their management and financial positions as compared to their stock prices. A strategy that has historically outperformed the market, focus investing is based on the principle that a shareholder's return from owning a stock is ultimately determined by the economics of the underlying business.

Hagstrom explains in easy-to-understand terms exactly what focus investing is, how it works, and how it can be applied by any investor at any level of experience. He demonstrates how Buffett arranges his stocks in a focus portfolio and reveals why this is as responsible for his incredible returns as the individual stocks he picks. Ultimately, Hagstrom shows how to use this technique to build and manage a portfolio to achieve the best possible results.

Genres: Finance, Business, Nonfiction, Economics, Personal Finance, Money, Audiobook

256 pages, Paperback

First published January 1, 1999

About the author

Robert G. Hagstrom is Senior Vice President and Director of Legg Mason Focus Capital. He has authored the New York Times best-selling The Warren Buffett Way and The Warren Buffett Portfolio, as well as The Nascar Way. He lives with his family in Wayne, Pennsylvania.

Reviews

[Chung Chin · Rating 4 out of 5]

In The Warren Buffett Portfolio, Robert Hagstrom lays down the latticework of models used by Buffett and Charlie Munger in their investing work. If you're looking for a hard figure, technical how-to, financial modeling book, this is NOT the book for you. Instead, this is a book about mindset and approach.

Reading through the book, you'll learn about things that Buffett and Munger thinks is important for an investor, their view on modern portfolio theory and risk/return, people who have influenced them, as well as the mindset and attitude to have as an investor. Although all these things cannot guarantee that readers will eventually succeed in their investment venture, all these "soft skills" may be a guiding light on how to think about investment. And for that, I think that the book is immensely priceless.

While the book talks a lot about the soft skills, the author also presents some statistical findings based on his research to validate certain theories. I personally think that this is a nice touch.

Why the four star then after all the rave for the book? While I think it's a great book, I have a sense that the author comes across as very biased for Buffet style of investing. This is not entirely a bad thing, but for investors who already subscribe to this line of thought, the book will be more of a confirmation to their belief and hence, an amplification of confirmation bias. If you're already a believer, skip this one.

[Jeff · Rating 5 out of 5]

Excellent primer on focus investing, behavioral economics and a counter balance to my bias towards passive index investing. While I was not quite converted, the book covers critical principles/reminders that are broadly applicable to the investor:
-investing is gambling, you can only improve your odds with math and strategy
-today, it is more important to understand how investors will react to the market than understanding the market itself
-as money managers and investing tools continue to improve, it's harder to be a break away investor today than in Buffet's early days
-portfolio turnover is a top wealth destructor
-you can achieve sufficient diversity with ten well chosen stocks
-when investing in individual companies, evaluate them like they are your own companies, you ARE becoming an owner
-understand behavioral economics

[Stefan Bruun · Rating 3 out of 5]

A good book for introducing general investing and specific value investing principles, but not much new for anyone who's read a bit around investing. Good for people new to value investing.

[Ian Mewhinney · Rating 3 out of 5]

3/5: This was a good book overall. Great narration from Stefan Rudnicki on audiobook. A fairly quick listen at 6 hours. Overall the basis of the book is just an overview of how Warren Buffet decides to pick stocks based on how they are performing as a forecast to the future, with respect to being worth more than they are priced, and then Warren just camps a lot of his money on the big growing companies. This book definitely shows it's age of publication of 1999 as they constantly reference AOL and the dot com boom of the time. Also references the successes of former Vice Chairman Charlie Munger of Berkshire Hathaway, who was also very successful with trading stocks during his tenure. I will read his full biography for more information on his life. This was pretty dry and boring on the investment information, but I understood the gist of the book.

Summary: The Warren Buffett Way provided the first look into the strategies that the master uses to pick stocks. A New York Times bestseller, it is a valuable and practical primer on the principles behind the remarkable investment run of the famed oracle of Omaha. In this much-awaited companion to that book, author Robert Hagstrom takes the next logical step, revealing how to profitably manage stocks once you select them. THE WARREN BUFFETT PORTFOLIO will help you through the process of building a superior portfolio and managing the stocks going forward.

Building a concentrated portfolio is critical for investment success. THE WARREN BUFFETT PORTFOLIO introduces the next wave of investment strategy, called focus investing. A comprehensive investment strategy used with spectacular results by Buffett, focus investing, directs investors to select a concentrated group of businesses by examining their management and financial positions as compared to their stock prices. A strategy that has historically outperformed the market and focus investing is based on the principle that a shareholder's return from owning a stock is ultimately determined by the economics of the underlying business.

Hagstrom explains in easy-to-understand terms exactly what focus investing is, how it works, and how it can be applied by any investor at any level of experience. He demonstrates how Buffett arranges his stocks in a focus portfolio and reveals why this is as responsible for his incredible returns as the individual stocks he picks. Ultimately, Hagstrom shows how to use this technique to build and manage a portfolio to achieve the best possible results.

[Nkenna · Rating 5 out of 5]

I finally read this. Here's how it went.

Started off with cheerful remarks and I was settling in to the rhythm.
Next thing it switched up so fast into one of my CFA preparatory text books, I felt some PTSD reading about Capital Asset Pricing Models again, but the longer I read the better it got, it was like a bitter bitter pill that you had to swallow.
Investing isn't what the movies make it seem, it's actually sweaty hard work 😭, you have to do the work.
Then the central tenet of the book is elaborated goodness even my CFA classes didn't mention focus investing like this.
Buffet makes the argument for long periods of holding and very little turnover.
Midway into the book, I realise it's a manual more than a book chapters 41 and a few others have to be referenced over and over again because it's real, algebra has useful purposes, it's shocking.
But the most revealing fact for me, isn't the fact of focus investing, it's the fact that I only just realized that Buffet is actually a genius, not that he's smart, I mean he's gifted with the gift of genius and in many ways, appreciating that fact strikes a humility in the reader, like a daring that could you ever be as good as Buffet was at his prime, I have a lot of thoughts about this book, I could write a review the size of the book it's self. But let me just end by saying you need to read this. Especially if you care any bit about money.

[Terry Koressel · Rating 2 out of 5]

The Warren Buffet Portfolio is not nearly as insightful or enjoyable as the The Warren Buffet Way by the same author (I gave The Warren Buffet Way a Goodreads 5 star rating!). But it is a decent book nonetheless. I am a long-time value investor, influenced heavily by Ben Graham's two books I read shortly after college. Warren Buffet deserves all the praise he receives for his investing success....he is simply the best pure business investor there is. The Warren Buffet Portfolio concentrates more on Warren Buffet's methodology rather than the man and his investing philosophy. There are other books that accomplish this better than The Warren Buffet Portfolio, including Buffetology by Mary Buffet. Recommendation: Yes if you've read the better Warren Buffet library of books.

[Ann Richards]

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[Nainpriya Gupta · Rating 4 out of 5]

My first book on investments. It makes sense. :)

[Oliver Sung · Rating 5 out of 5]

Concentrated investments are critical to achieving market-beating returns for many years.

This is Robert Hagstrom's main argument throughout The Warren Buffett Portfolio.

Hagstrom illuminates how Warren Buffett throughout his entire career has achieved his legendary performance by managing a very concentrated portfolio with occasional huge bets on great opportunities - an approach he calls focus investing.

The book is really good. I resonated immediately with the mental framework described. I always knew of Buffett's history of making concentrated investments within his circle of competence, but I didn't recognize it's vital importance until I read The Warren Buffett Portfolio.

What I find striking about it is how Hagstrom manages to keep every argument clear and structured throughout the entire book. Like Buffett, Hagstrom has a great ability to explain difficult topics in an easy-to-understand format and he connects each argument very smoothly as you pass through the book.

The Warren Buffett Portfolio is divided into two large parts where the first part introduces the concept of focus investing and its main elements including both academic and statistical rationales. The second part turns attention to other fields of study: mathematics, psychology, and the science of complexity. The book ends with Hagstrom giving clear guidance for how every investor can initiate a focus investment strategy.

Read my entire summary and notes of the book at Junto

[Hendarto · Rating 1 out of 5]

Why not name this book as the robert g. Hagstrom portfolio rather than warren buffett portfolio
He only borrow warren buffet name to sell this book, it didn't have or describe any value about warren buffett teaching about value investment or his portfolio in this book, all he said about warren buffett in this book can summarize in just 10 pages, rather than 200+ pages book all talking repeatedly about century ago writer or thinker then to scientists, how is that have anything to do with warren buffett value investing portfolio ?? When most of the book he wrote was about other people thinking about system, system, and system, which keep repeating and repeating, in a paragraph you can find almost half a dozen words keep repeating saying the same word system, or kelly, kelly and kelly
It seems like mostly idea and the value to investment in this book is from the writer himself rather than from buffett, when he come to describe buffett all he can say was a guessing of what might be buffett thinking, not the exactly a real study or research to buffett original thoughts on investment
warren buffett name only appear at the end of all the chapter
Mostly just empty result, couple times talk about investment research and wrote couple pages talking repeatedly boring thing and then there is nothing about his result at all, so what is the point when he wrote so much but didn't prove anything at all
Most time this book just keep repeating promoting his warren buffett way book
This book just waste of time, not worth to read it at all

[Arindam · Rating 3 out of 5]

This is a book which fundamentally argues in favor of the logic that 'Less is More.' It asks investors to ignore all short term noise and focus on long term capital formulation.Through some historical data and examples,the book presents numerous cases where legendary investors created long term wealth by following basic principles of focus investing.
The mathematical part of the book was not up to the standard and felt very compressed.I also felt that it would be better for a reader to first read another book named 'The Warren Buffett Way' by the same author since he refers to it a lot of times during the course of this book.

[Dat Pham Cong · Rating 5 out of 5]

The lessons are good but it is quite repetitive, that's why I think give the book 4.5 stars instead of a 5, but I can't. His take on focus investing, real thinking about risk, probabilistic thinking, odds, psychological traits, patience, the complex world, and speculation. Analyzing how the market works is much easier than predicting the market in a complex world that changes and adapts constantly by people who are sometimes (but not always or never) rational. Focus investing lies in the fact that the more knowledge you gain, the less risk you take and the more return you might get.

[Rameswar · Rating 5 out of 5]

I picked this as it was recommended by Charlie in Poor Charlie's Almanac. A very good book on Focused investing, basically the way of Berkshire Hathaway. Talks why it's important, what are the things to look for, probabilistic thinking and how to prepare if you're looking to follow focused style of investing.

Also this book is complements the book "The Warren Buffett Way" which talks much about the tools to use I believe.

[Harj · Rating 3 out of 5]

Think of stocks as businesses. Read annual reports. Buffett and Munger think of investing like the game 'bridge'. Recommend read is Why You Lose at Bridge by S. J. Simon. In Warren Buffets view the two things an investor needs instead of a college education is the following two skills; how to value a business and how to think about market prices.

[Sam · Rating 3 out of 5]

Robert Hagstrom explains why Warren Buffett advises knowledgeable value investors to hold a small number of stocks.

[Denny Troncoso · Rating 5 out of 5]

A must read for investors and buffett munger fans. A classic.

[Zahwil Dossa · Rating 3 out of 5]

Imagine your life savings invested in only 10 or 15 companies, and you hold those same stocks for many years. To a lot of people that sounds like a risky proposition.

The premise of this book is that such a portfolio – “focus investing” – is a sensible approach, provided you give careful attention to the companies you hold, assign probabilities to your investing assumptions, and stay invested for at least 5 years.

In other words, you too can be like Warren Buffet, consistently beating the market.

To be clear, you will experience years when your portfolio’s return is negative or below that of a benchmark index like the S&P 500.

In any given year, stock prices are a distraction at best, and often a red herring.

The game of guessing short term stock prices is the losing game of “speculation” and not the winning game of long term “investing”.

If stock prices are not your guiding light, what should you use instead to measure performance?
You should regard stocks as what they are: part ownership in an underlying business. The economics of the business drives its future cash flows, and the managers of the business, if they are honest and capable, channel those cash flows to their best use (reinvesting or returning to shareholders).

Your “look-through” earnings, independent of the share price, are the Earnings Per Share times the number of shares you own. Your goal should be to maximize your portion of the earnings over a long time horizon.

As your share of the company’s earnings grows, the share price will eventually reflect that growth.

This sounds all well and good. However, what makes you think you can pick a winning portfolio of 10 or 15 companies that will outperform the broader market? Isn’t that the job of a slew of very smart fund managers, and hasn’t it been shown that they consistently fail? Yes and Yes.

The reason is that fund managers chase short term returns and fund rankings and consequently churn their portfolios to the detriment of their investors.

By closely following companies, reading their annual reports, assessing management behavior, and waiting for the “fat pitch”, you can, claims Hagstrom, consistently beat the market and the pros.

The next step, however, is to assign probabilities to your investment assumptions and use the “Kelly” formula to decide how much of your nest egg to invest: 2(p)-1. For example, you invest zero dollars with a 50% probability, and 10% of your funds with an 55% probability of success.

To me this sounds like a daunting task. Not because the math is too advanced, but because I don’t think a company’s future earnings, with so many myriad factors weighing on it, lends itself to that level of precision.

How would you course correct? Let’s say the earnings don’t pan out. Was it because your probability assessment of 55%, or because reality fell into the 45% you anticipated.

Notwithstanding, I think Hagstrom is probably right. With sufficient diligence, patience, self-awareness of cognitive bias, and tolerance for volatility, you probably can outperform the market over 10 years.

For the rest of us, index investing retains its appeal.

[Peter Fox · Rating 4 out of 5]

I started consciously investing on the 1st of July 2020, and as of writing this review i am still angry with not knowing about or understanding Warren Buffett and Charlie Munger.

Thankfully though there are books out there in the universe that dispense and share the learnings and understandings of such interesting people; and this book is one of those great sharers of refined incite.

Robert G. Hagstrom has pulled together a significant body of information and condensed that information into a format that is easy to read and understand but challenges the reader to consider what they thought they knew and what they need to consider.

As Hagstrom dips into maths, psychology or share market nuances he tips the nose forward and dives straight into the subject but does dive into the bottom of the barrel to lose the reader in endless details. His deep regard for narrative is evident from the use of allegories, quotes, examples, charts and reflections that show the complexity and subtlety of managing funds and working with stocks as part of a greater business.

Time and again Hagstrom reinforces the sound business management style which has become synonymous as Buffett's investing strength, and the he turns around to display that Buffett is far from being unique or rare, but is a member of a select group of individuals who understand that quality investing takes, time, patience, research and certain form of psychological perspective to bring about the growth and returns that great money managers are able to comprehend and deliver over long periods of time.

One of the items i enjoyed most about this book is that as a retail investor i can quite easily apply the principles, lessons and applications directly to the investments that i make, and i don't need to be super rich to either achieve this. I simply need to be focused and have a strategy to make my investing valid in a world of ephemeral rewards.

I was able to take a lot out of this book and to develop a better understanding of what i need to look for in myself and my style of investing. I see for myself a better and much more comprehensive way in understanding the dynamics that need to be applied to my current investing strategies and the way in which i analyse a business or the greater thematic of economy and markets.

I am unsure if Robert Hagstrom has written any books specifically on Charlie Munger, but if he has i will be buying it because he has picked up a new fan after reading this qualitative book.

[Firsh · Rating 5 out of 5]

This has to be the first investing book outside of the "Best Practice EVA" that even mentioned EVA. It's so rare. Also, I do like the idea of a focused portfolio, but I think I'm not quite ready for it yet. I mean, on some level it is focused because I have huge position sizes but then lots of small positions, but it's not that 100% well-thought-out in a way that I would follow the handful of companies that I have highest position sizes in. Because I follow an investment newsletter and they do this kind of job for me. But once I started kind of deviating from it by introducing a few of my own picks, I maybe should be following these outlier companies that I have big positions in. I don't know. But even though I have read Buffett's letters, and that is arguably a better source to learn from, as they are his actual writings, and you get to learn from the man himself, those are not to the point. Yet, some books do a pretty good job summing up his and his partner Charlie Munger's wisdom as derivative works based on letters and their sayings at conferences and annual meetings. It is definitely the case with this one. The book has also helped me formulate a few questions that are a little bit provocative to the newsletter provider that I'm subscribed to.

The book's side topics are surprisingly comprehensive and not always strictly quotes and about Buffett. You get to learn a lot about investing and first and foremost the importance of position sizing. The other half was a nice recap of what I've learned from other works.

At 43% it mentions EVA vs. Buffett.

EVA is one type of measuring stick, one specific hurdle rate. Buffett has a different measuring stick. He measures a company's hurdle rate by its ability to grow its market value by a rate that is at least equal to the value of the company's retained earnings. For every dollar a company retains, Buffett argues, it should create at least one dollar in market value.

From high above, it may appear that Buffett's one-dollar-retained-for-one-dollar-market value and Stern Stewart's EVA are intellectually similar. But Buffett has trouble embracing the finer points of EVA.

First, the EVA formula is based on the CAPM, which relies on price volatility to measure risk. We already know Buffett's opinion on the idea that a more volatile stock is riskier. Second, because cost of equity is always higher than cost of debt, in the EVA model the cost of capital actually declines when the relative use of debt increases. EVA proponents would have a hard time convincing Buffett, with his liking for companies that are debt-free or close to it, that higher debt is a good thing because it equals lower cost of capital.

The cost of capital is one of the business world's great mysteries. EVA is but one approach that seeks to set that cost. Buffett may not use EVA to calculate the cost of capital, but that doesn't mean he disregards the question.

[...]

Berkshire Hathaway and EVA are both setting a cost of capital. Granted, they attack the problem is different ways; but both seek the same end result—to reward companies that earn more than the cost of capital, and to penalize the group that earns less than the cost of capital. As Buffett remarked at Berkshire's 1995 annual meeting, "I don't think it's a very complicated subject. I didn't need [EVA] to know that Coca-Cola has added a lot of value."

[Aly Mawji · Rating 4 out of 5]

Good book. Hagstrom argues that if you want to have investment results that are different that the index, you need to run a smaller portfolio. This increases your chance for better or worse results.

If you want your results to be great, you need to find mispriced bets and bet heavy when the odds are in your favor. It's similar to counting cards in blackjack and then beating heavy when the time is right.

Though a short book, it is a little repetitive and has some extraneous information. But Hagstrom communicates a critical piece of information and it is worth reading to really let it sink in. Understanding concentration is key to understanding Buffett and Munger's success in investing.

[Camillo Anania · Rating 5 out of 5]

Good book, rich of insights and not too tough for beginners.
You get a good introduction covering the main factors to evaluate when deciding an investment in a company according to author's interpretation of Warren Buffett style.
The book does not contains detailed formulas about company valuations and in general the author does not spend much time going into too much details on finance calculations, I think because Buffett never disclosed a specific formula to evaluate company value.
Anyway, according to me, a great starting point to dive into value investment.

[Kaustubh Chaharia · Rating 4 out of 5]

I came across this book via Charlie Munger's (open) recommendation. The book gets more and more interesting as we go further ahead. It reasons out why a concentrated portfolio of stocks is the best way to go about investing, states the factors which come in our way of doing the same and how we can overcome those. With different chapters devoted to different aspects, and all of them distilled well in the last chapter of the book, this can be used as a guiding principle throughout one's investment journey.

[Genesis · Rating 3 out of 5]

[Audiobook] Book can be summarized into 3 points sentence: 1) invest in a concentrated portfolio of high quality stocks, 2) buy at a discount to intrinsic value, 3) have lower portfolio turnover (ie buy/sell less).

Gave it only 3 stars as the author didn’t sufficiently consider the implications of volatility / drawdown. Also, in hindsight, would read The Warren Buffet Way before reading this book. This book serves more as a sequel on how to manage a portfolio using investment techniques taught in The Warren Buffet Way.

[Abhishek Chauhan · Rating 5 out of 5]

It is an excellent primer on almost everything that is important for long term investing (other than the financial and business evaluation of the company itself). It gives you the entire toolkit including, thinking of stocks as business, making large focused bets, holding patiently, benchmarking companies on parameters different from stock price, importance of staying away from forecasts, psychology of misjudgement and probabilities.

The book has excellent breadth. However, one shortcoming is that it lacks the required depth on some of the topics. Still a good place to begin.

[Kian.ting · Rating 5 out of 5]

The book talks about mental models before it was written. And as I read the mental model book it talks about how Charlie Munger mentioned it. Learned a lot about focused portfolio and using economic model to pick companies and not merely stock. Will need to re-read this book as I understand more about investment. Highly recommend it to people who are learning investment like me.

[Nik Carpentieri · Rating 5 out of 5]

No matter where you sit in the investing world, this is an extremely useful book. It’s timeless, fundamental principles can be applied across venture, private equity, and entrepreneurship. It will make the reader want to read the adjacent books referenced within which would be smart to round out these principles.

[Jim · Rating 5 out of 5]

I would go as far as to call this book a masterpiece. It is one of the only books where it gets better toward the end, and is readable in only a few hours despite being packed with useful ideas. I would highly recommend it.

[Ronny Blankenberg · Rating 5 out of 5]

A very good book on forming a proper framework for investing and the reasons behind it. Supposedly builds on «The Warren Buffett Way» by the same author, but stood very well on it’s own. Well written.

[Madlyn · Rating 4 out of 5]

Great read.

[Michael · Rating 4 out of 5]

Interesting read with good advice. It is curious though that Robert Hagstrom himself seems to not have mastered the strategy.