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What do I love about: The Warren Buffett Way?
The writer does a great job describing the investment philosophy of Warren Buffet. I particularly enjoyed this read because Warren Buffet approaches stock investment as a business investment and I was very fortunate to be reading this book in parrel to the book title “ Buy then Build” A book about purchasing businesses.
What do I not love about: The Warren Buffett Way?
Nothing
Who should read: The Warren Buffett Way?
Anyone interested in stock market investment and also interested in learning the Warren Buffet way.
Who should not read: The Warren Buffett Way?
Anyone who doesn’t want to be bothered about stock market investment.
Notes about The Warren Buffett Way
- Warren Buffet stresses that the critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.
- Warren Buffet never invests in businesses he cannot understand or that are outside his “Circle of Competence”. All investors can overtime 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 life time as Warren states that 12 investments decisions in his forty year career have made all the difference.
- Buy great businesses when they are having a temporary problem or when the stock market declines and creates bargain prices for outstanding franchises.
- Your goal as an investor should simply be to purchase at a rational prices, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, 5,10, and 20 years from now. Over time, you will find only a few companies that meet those standards-so when you see one that qualifies, you should buy a meaningful amount of stock.
- If you didn’t get an A then you got an F
- Associate with the best, don’t be wrong about that, and then don’t tell them what to do.
- Contemplate others criticism of you but never consider them your judge.
Chapter 1: The world’s Greatest Investors
- When stocks of a strong company are selling below their intrinsic value, act decisively.
Chapter 2: The education of Warren Buffet
- An investment operation is one which upon thorough analysis, promises safety of principal and a satisfactory return.
- The value of a business is determined by the net cashflows expected over the life of the business discounted at an appropriate interest rate.
- It is better to buy a wonderful company at a fair price than a fair company at a wonderful price.
- You are neither wrong or right because the crowd disagrees with you. You are right because your data and reasoning are right.
Chapter 4: Buying a Business
- Buying stock means buying a business and requires the same discipline.
- What type of company will Warren purchase: It must be the type of company that he understands, possessing good economics, and run by trustworthy managers.
- Investing is most intelligent when it is most businesslike
Business Tenets
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favorable long-term prospects?
Management Tenets
- Is management rational?
- Is management candid with its shareholders?
- Does management resist institutional imperative?
Financial Tenets
- What is the return on equity?
- What are the company’s owner earnings (SDE)
- What are the profit margins
Chapter 5: Investing Guidelines- Business Tenets
- I want to be in business so good even a dummy can make money.
- Moat- Something that gives the company a clear advantage over others and protects it against incursions from the competition.
Chapter 6: Investing Guidelines- Management Tenets
- Managers who behave like owners tend not to lose sight of the company’s prime objective-increasing shareholder value-and they tend to make rational decisions that further that goal.
- Most managers cannot control their lust for activity. Managers are constantly comparing the sales, earnings, and executive compensation of their business with other companies in and beyond their industry. Managers have an exaggerated sense of their own management capabilities.
- In evaluating people, you look for 3 qualities: integrity, intelligence and energy. If you do not have the first, the other 2 will kill you.
- Watch out for companies that do not expense stock options.
- Be suspicious of companies that trumpet earnings projections and growth expectations.
Chapter 7: Investment Guidelines- Financial Tenants
- He does not take yearly results too seriously. Instead, he focuses on 4-5 year averages.
- Focus on return on equity not earnings per share
- Look for companies with high profit margins
- Instead of cashflow (net income after taxes + depreciation + depletion + amortization + other noncash charges), Buffet prefers to use what he calls owner earnings -SDE (net income + depreciation +depletion + amortization – capital expenditures – any other working capital that might be needed)
- I would rather be vaguely right than precisely wrong
- Attack costs as vigorously when profits are at record level as when they are under pressure.
Chapter 8: Investing Guideline- Value Tenants
- Price is what you pay. Value is what you get.
- The value of a business is the total of the owners earnings expected to occur over the life of the business, discounted by an appropriate interest rate.
- He looks for companies whose future earnings are as predictable as certain as the earnings of bonds.
Chapter 9: Investing in fixed income securities.
- Warren admits that he does not know of a proper way to value technology companies.
Chapter 10: Managing you portfolio
- As of Nov 1998, 90% of actively managed funds were underperforming the market (averaging 14% lower than S&P 500)
- We just focus on a few outstanding companies. We are focus investors.
- Focus investing means choosing a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments int hose stocks, an have the fortitude to hold steady during the short term market gyrations.
- If the company is doing well and managed by smart people, eventually the stock prices will reflect its inherent value. Buffet devotes most of his attention not to tracking share prices but to analyzing the economics of the underlying business and assessing its management.
- Given a choice between active and index approaches, Warren Buffet would unhesitatingly pick indexing.
- Hold companies between 5 to 10 years
- If the new thing you are considering purchasing is not better than what you already know is available then it has not met your threshold. This screens out 99% of what you see.
The Focus Investor Golden Rule
- Concentrate your investments in outstanding companies run by strong management.
- Limit yourself to the number of companies you can truly understand. 10-20 is good, more than 20 is asking for trouble
- Pick the very best of your good companies, and put the bulk of investment there
- Think long-term: 5 to 10 years minimum
- Volatility happens. Carry on
Chapter 11: The psychology of money
- Two emotions that drive decisions most profoundly are fear and gread. Motivated by fear or greed, or both, investors frequently buy or sell stocks at foolish prices.
- Success in investing does not correlate with IQ once you are above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into the trouble in investing.
- Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.
- We do not have to be smarter than the rest we have to be more disciplined than the rest.
- It is optimism that is the enemy of the rational buyer
- Be fearful when others are greedy and be greedy only when others are fearful.
- People tend to overreact to bad news and react slowly to good news. It is called the overreaction bias.
- The pain of loss is far greater than the enjoyment of gain.
Chapter 12: The unreasonable man
- Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability.
- If you believe that the stock market is smarter than you are, give it your money by investing in index funds. But if you have done your homework and understand your business and are confident that you know more about your business than the stock market does, turn off the market.
- Buffet prefers to buy businesses that have the opportunity to profit in any economy.
Buffet Investment Tenants
- Is the business simple and understandable, with a consistent operating history and favorable long-term prospects?
- Is it run by honest and competent managers, who allocate capital rationally, communicate candidly with shareholders and resist the institutional imperative.
- Are the company’s economics in good shape- with high profit margins, owners earnings, and increased market value that matches retained earnings?
- Finally, is it available at a discount to its intrinsic value?