The Warren Buffett Way: Investment Strategies of the World's Greatest Investor (Wiley Investment Classic) by Bill Miller (Foreword), Robert G. Hagstrom (12-Nov-2004) Hardcover

by Robert G. Hagstrom

Unknown Binding

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

[Erik Carmona · Rating 4 out of 5]

I've read other books in the past about Buffett's methodology and I must say this book has surprised me, it's an easy read and very enjoyable. Even though it doesn't delve deep into technical aspects, it's excellent for opening one's eyes to stock market investing. The following concepts are things that called my atention and which I would like to share.

Modern Portfolio Theory (MPT):

Emphasizes diversification to reduce risk.
The relationship between risk and expected return.
Efficient Frontier: Set of portfolios offering the highest return for a given level of risk.
Capital Asset Pricing Model (CAPM): A model to estimate the expected return of an asset based on its systematic risk.
Kelly Criterion: A formula to optimize the size of bets/investments using the probability of success and the reward-to-risk ratio.
Myopic Loss Aversion: Excessive sensitivity to short-term losses leading to conservative and potentially suboptimal investment decisions.
Buffett's Concept of Risk: Long-term investment in a solid company minimizes the risk of transactions.
Mental Accounting: The subjective division of money into different mental "accounts" that can result in inefficient financial decisions.
Fungibility and Holistic Approach: Treating money as interchangeable and assessing finances in an integrated manner.
Overconfidence as per Kahneman: The tendency to overestimate our abilities and knowledge, influencing decision-making.
System 1 and System 2 by Kahneman: Preference for quick, intuitive thinking over detailed and rational analysis.

Warren Buffett's Investment Principles:
Seeking a consistent operational history.
Analyzing favorable long-term prospects.
Assessing the rationality and candor of management.
Considering management's resistance to institutional imperative.
Focus on return on equity (ROE), not earnings per share (EPS).
The importance of calculating owner earnings to value a company.
Preference for companies with high profit margins and efficiency in reinvesting earnings.
Valuation based on intrinsic value and seeking purchase opportunities at a discount.
Buffett's Educational Focus on Investing:

"Investment students need only two well-taught courses: how to value a business, and how to think about market prices."

[Hong Kai]

3 forewords from 3 editions, an introduction, and a preface – till page xxxvii (37). A pretty long introduction!

Anyways, Buffett’s tenets in summary:

Business
- Is the business simple and understandable? (Do you understand the economic process?)
- Does the business have a consistent operating history? (Can it stand the test of time through different economic cycles and competitive forces?)
- Does the business have favourable long-term prospects? (Is it a franchise or just a commodity business?)

Management Tenets
- Is management rational? (Observe actions of management with regard to capital allocation.)
- Is management candid with its shareholders? (Does management confess its failures as openly as it trumpets its success?)
- Does management resist the institutional imperative? (Do they think for themselves and avoid the herd mentality?)

Financial Tenets
- Focus on return on equity, not earnings per share.
- *Calculate "owner earnings." (An adjusted value to reflect a business’s cash-generating ability)
- Look for companies with high profit margins. (Shows strong business and management spirit for controlling costs)
- For every dollar the company retained, make sure the company has created at least one dollar of market value. (Add the company's retained earnings over a 10-year period.)

Market Tenets
- *What is the value of the business? (Estimated cash flows expected to occur over the life of the business, discounted at an appropriate interest rate.)
- Can the business be purchased at a significant discount to its value? (Margin of safety)

*The new concepts I picked up from reading

[Apurva Parashar · Rating 5 out of 5]

This book has gone through many revisions and the reason it keeps being valuable still is because the learnings are still relevant in today’s investment world. Intrinsic value, measure of safety, risk vs. reward, understanding of what one is investing in and time horizons are some of the great lessons Warren Buffet has taught the world through Berkshire Hathaway annual letters and his investment management style over the decades. Great read and highly recommend!!

[Parker Wilkinson · Rating 5 out of 5]

This was a gift from a very successful investor after I asked him for where to start. This book is the one-stop shop for value investing and the book I will always recommend for those who want to learn how to build generational wealth. I love it because of its simplicity and qualitative approach. Entry level and yet hyper advanced at the same time.

[Mohan Krishnan · Rating 4.5 out of 5]

Every investor should read this book to sharpen their investment knowledge, make better decisions, and excel in their long-term investment journey.