The Essential Buffett: Timeless Principles for the New Economy [Secure eReader]
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eBook by Robert G. Hagstrom
eBook Category: Personal Finance
eBook Description: From the bestselling author of The Warren Buffett Way and The Warren Buffett Portfolio comes The Essential Buffett: Timeless Principles for the New Economy. In this fresh take on Buffett's irrefutable investment methods, Robert Hagstrom shows readers how to apply Buffett's principles to technology and international investing using real-life case studies of successful fund managers like Legg Mason's Bill Miller. Following the Buffett model, Hagstrom explains Buffett's four timeless principles: 1) analyze a stock as a business; 2) demand a margin of safety for each purchase; 3) manage a focus portfolio; 4) protect yourself from the speculative and emotional forces of the market. Then Hagstrom shows how Buffett's thinking can be applied in the new economy, addressing technology investing, international investing, small cap stocks, and socially responsible investing. Perhaps most valuable are Hagstrom's insights into the psychology behind Buffett's focus investing. For the first time, we are given sure-fire guidelines on how to become a winning Buffett disciple. The Essential Buffett will include convenient sidebars featuring key Buffett ideas, enabling readers to quickly compare Buffett's fundamental tenets.
eBook Publisher: John Wiley & Sons, Inc./John Wiley & Sons, Inc., Published: 2001
Fictionwise Release Date: September 2002
With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtalking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Some are hard-pressed even to continue. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. There appears to be no rhyme or reason to the market, only folly.
Far above this market madness stand the wisdom and counsel of Warren Buffett. In an environment that seems to favor the speculator over the investor, Warren Buffett's investment advice has proven, time and again, to be a safe harbor for millions of lost investors.
Over the years, critics have argued that Warren Buffett's idiosyncratic approach to investing is impossible to duplicate. I wouldn't disagree that his approach is unique -- in a market that emphasizes the frenetic buying and selling of securities, Buffett's buy-and-hold philosophy is an anomaly. But I do take issue with those who say that only Buffett can do what Buffett does.
The goal of this book is to showcase Buffett's entire methodology: to make it accessible and useful to all investors -- individuals and professionals alike -- and to demonstrate how Buffett's thinking can be applied successfully in the New Economy.
To do all of this, I have culled the best from two earlier books and highlighted their core principles: The Warren Buffett Way, which describes how Buffett analyzes companies and selects stocks, and The Warren Buffett Portfolio, which describes the guidelines by which he manages the Berkshire portfolio. Throughout, fundamental Buffett principles are called out, to detail and clarify Buffett's four-part investment strategy:
- 1. Analyze a stock as a business.
- 2. Demand a margin of safety for each purchase.
- 3. Manage a focus portfolio.
- 4. Protect yourself from the speculative and emotional forces of the market.
With that background as your framework, you will learn how the Buffett principles can be, and successfully have been, applied in three areas Buffett has traditionally not explored: technology, small-cap, and international stocks. Chapter 8, "New Opportunities, Timeless Principles," gives you an inside look at how three successful investors are applying Warren Buffett's investment principles in their special areas of expertise. Bill Miller, manager of the Legg Mason Value Trust, explains how he has extended Buffett's methodology into the technology arena. Wally Weitz, manager of the Weitz Value Funds, discusses how he uses Buffett's approach to invest in small-and mid-capitalization stocks. Mason Hawkins, manager of the Longleaf Funds, demonstrates how he uses Buffett's principles to invest in foreign companies.
Many people are aware of Buffett's long-standing decision to avoid technology stocks. However, it is important to realize that Buffett's unwillingness to invest in technology is not a statement that technology stocks are unanalyzable. As he confessed during Berkshire's 2000 annual meeting, "It is not that we don't understand a technology business or its product. The reason we don't invest is because we can't understand the predictability of the economics ten years hence." It is this lack of economic predictability that has prevented Buffett from venturing into the technology world. But it has not prevented others from applying Buffett's investment tenets to technology companies, with much success.
In fact, I would argue that what is missing in many analytical reports on technology companies is a businessperson's understanding of how the company operates, how it generates profits, and how a businessperson would then value the technology company. As you will discover in the chapters on portfolio management, one way to compensate for the lack of economic predictability in any company is to reduce its weighting in your portfolio, and another is to require a larger margin of safety with that purchase. The key point is: Warren Buffett's investment tenets are the only sensible way to invest in any company, technology or otherwise.
Is there a "New Economy"? While thoughtful people disagree on this question, I believe the answer is yes. We moved from an agriculture-based economy in the nineteenth century to a manufacturing-based economy in the twentieth. Now, in the twenty-first century, it is easy to observe our economy rapidly evolving into one dominated by technology. Broadly speaking, "technology" encompasses many different businesses and industries. Hardware machines fitted with software applications manipulate bytes of information that are then transported around the world to other hardware machines and software applications. In a nutshell, this instantaneous transmission of information is a technological revolution, and it is changing the entire business landscape.
The New Economy is also having a profound impact on the behavior of individual investors. Today, investors have a full menu of stocks to choose from. They can purchase small-capitalization stocks that only yesterday were venture capital investments. They can purchase shares of foreign companies in markets around the world, and obviously they can purchase technology stocks if they so choose. In the New Economy, individuals have easy access to information that only a short while ago was considered so highly valued and proprietary that it was available only to professional investors. Never before has so much information been so readily available to so many investors. In the New Economy, individuals no longer have to rely on investment professionals. They can now electronically trade stocks with a push of a button, or personally change their 401(k) retirement plan on a daily basis, if they wish.
In a world littered with information, the scarce resource is understanding. Information itself is not enough to ensure investment success. What is required is an understanding of how best to use the information to achieve the desired goals. We are indeed operating in a New Economy, but the rules of investing have not changed. Businesses still require profits to operate, and investors still calculate these profits to determine value. At first glance, Warren Buffett, who makes no bones about staying away from technology companies, may appear far removed from the New Economy, but a closer inspection will reveal that his investment principles are timeless.
The Chairman's Letters that Warren Buffett writes to shareholders in the Berkshire annual reports are famous; in the early days of my career, they were a profound influence. Taken together, these letters form the best investing textbook I could possibly imagine.
Here is one succinct and powerful lesson, from the 1996 report: "Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty 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."
Whatever level of funds you have available for investing, whatever industry or company you are interested in, you cannot find a better touchstone than that.
ROBERT G. HAGSTROM
Copyright © 2001 by Robert G. Hagstrom