The basic reading that every value investor should have
The basic reading that every value investor should have
This was a book that I was looking forward to getting my hands on so much. Several investment blogs spoke very highly of “The Warren Buffett Way” by Robert Hagstrom! Needless to say, expectations were high on this one. At the same time, the markets experienced one of the worst crashes since March 2009 due to the COVID-19 pandemic. There’s no better time to tap into the infinite wisdom of the Oracle of Omaha than now.
It was interesting to note that global searches for “Warren Buffett” on Google spiked between 3-9 May 2020. Coincidentally, Singapore generated the highest interest in the legendary investor during that time. The Berkshire Hathaway 2020 Annual Shareholders Meeting had just concluded on 2 May 2020. Was this perhaps this was the classic kiasu spirit among Singaporean investors?
The spike happened in the week of 3-9 May 2020
Anyways, enough fun-facts. Let’s get right into the book!
The early years of Warren Buffett
There is a common theme across investment books to introduce the back-stories of investment gurus and their mentors; The Warren Buffett Way is no exception. The book begins with insightful accounts of Buffett’s business ventures in his youth and the experiences that formed the basis of his wisdom. It later introduces the three most important people that influenced his investing style – Benjamin Graham, Philip Fisher and Charlie Munger.
It is also here where we first get an overview of Buffett’s investment philosophy:
"He thinks about the business, the people who run the business, the economics of the business, and then the value of the business"
By now, you’d have been aware that Warren Buffett likens investing to buying great businesses. Eventually, this sets the stage for the next part of the book…
The 12 Immutable Tenets of Buying a Business
Based on an analysis of Buffett’s purchases, Hagstrom distils Buffett’s investment philosophy down into “12 immutable tenets”. These are broadly grouped into 4 categories:
- 3 Business Tenets – The basic characteristics of the business
- 3 Management Tenets – The way that the business is run
- 4 Financial Tenets – The performance metrics that a business must measure well against
- 2 Market Tenets – The relative cost of owning the business
The author does a great job to explain the concepts behind these tenets to make it easy to understand. To summarize this section here will be doing Hagstrom and Buffett an injustice to their amazing work and wisdom. As such, I’ll be writing a separate post to explore this topic in greater detail.
Hagstrom later offers nine case studies to illustrate these tenets at work. I believe these case studies were chosen because they had the most significant impact on Buffett’s portfolio. In my opinion, this was probably the most enjoyable chapter mainly for two reasons.
First, every investment opportunity presents itself with a different set of considerations. Therefore, while it is important to make investment decisions based on a framework, it is crucial to be adaptable as well. This highlights one of Buffett’s earlier beliefs:
“A philosophy should supply guidance but not rigidity”
Warren Buffett
Secondly, the case studies provide clear explanations of how Buffett arrives at his decision to purchase a company or not. Again, while this is easy to follow, putting it into practice will take some time.
The focus investing approach
Buffett also advocates for the focus investing approach, in which he restricts a portfolio to no more than 8-10 businesses. These businesses must be able to leverage their competitive advantage to generate above-average returns over time. Furthermore, Buffett only buys them when they are priced below their intrinsic values.
This approach exemplifies two things that Buffett learnt from his mentors. First, this illustrates the concept of the “margin of safety” which Buffett picked up from Benjamin Graham. By purchasing a business below its intrinsic value, he protects from downside risks to some degree.
Secondly, by only purchasing businesses that he fully-understands, he is emulating Philip Fisher by investing within his circle of competence. This allows Buffett to build a strong conviction in his investment decisions to weather any market volatility over the long-run.
The case against Efficient Market Theory
“Diversification serves as protection against ignorance”
Warren Buffett
In the later part of the book, Hagstrom also explores Buffett’s opinion against the Efficient Market Theory (EMT). Proponents of EMT believe that risk equates to market volatility that is reflected in the stock prices. This should, therefore, be minimized in order to optimize market returns.
(Doesn’t this sound like what index investors might say? John Bogle and Taylor Larimore talk about this extensively in their books; do check them out as well!)
Conversely, Buffett believes that risk is a function of knowledge and time. Furthermore, fear and greed are the main culprits of short-term price volatility. It is because of this that stock prices do not reflect the true value of the underlying businesses. Rational investors should thus focus on buying outstanding companies with a margin of safety.
Closing thoughts
Before the book, I’ve always had an impression that Warren Buffett follows a complicated framework in his investment philosophy. Now I’m convinced that a lot of that is based on common sense. I’d wish that Hagstrom could have made it clearer
Notably, Buffett had never written an investment book himself. Personally, this book is probably the closest anyone can get to that. The Warren Buffett Way is not a pool of information charged with financial jargon; It is a fun and exciting read for anyone interested in investing like the legend. The only thing I’d change is to have Hagstrom spend more time on how Buffett values a company. Besides this, I still strongly recommend this book as a basic reading for any value investors.
DISCLAIMER: OPINIONS EXPRESSED IN THE ARTICLE ARE PURELY MY OWN AND SHOULD NOT BE TAKEN AS INVESTMENT ADVICE. PLEASE DO YOUR DUE DILIGENCE BEFORE MAKING ANY INVESTMENT DECISIONS.
Share your thoughts with me!
If you’ve read The Warren Buffett Way by Robert Hagstrom, I’d love to hear your thoughts on the book. Drop a comment below, or share this post with your friends with the tag @kopi.thoughts!
4 comments
Thank you for this review, Terry. Can you refer me to more up-to-date writing by Hagstrom or Buffett on the subjects covered in the book. Many thanks.
Great concise summary of this book – would love to know more about the 12 tenets in details! Warren Buffett has great investing wisdom that I’m trying to incorporate and the tenets seem to be similar to the investing selection framework described in The Intelligent Investor by Ben Graham (which isn’t surprising). Do you identify yourself as a value investor?
Thank you! I’ll be sharing a post to deep-dive into the 12 tenets over the next couple of days, so watch this space!
As to what type of investor I am, I’d say I’m leaning more towards the value end of the spectrum. I like to evaluate businesses for what they are – Does the business model make sense to me? Are they run by a competent management team that makes rational decisions? Are they able to defend or improve their market position over the long run? It sometimes feels more like an art rather than a science, in which I’m still learning as a novice investor. But I’ll also like to embrace the mindsets of other investing legends like John Bogle to keep things simple. How about you?