Book Synopsis: The Warren Buffett Way by Robert G Hagstrom Jr

A slightly old-ish book (first published in 1994), I chanced upon this book and picked it up again at the library recently, though I had read it a few years back.

While after so many years, it may not seem to have anything new, given that there is so much written about Buffett since 1994 and there are so many books with ‘Buffett’ in the title because it sells; at the time it was first published, it was quite well received.

A lot of the first half of the book is honestly quite disappointing, as it is essentially a repetition of what Buffett himself has already said in his letters to his shareholders over the years. The author himself is said to have confessed later though, that the book was actually meant to be marketing material for a hedge fund based on Buffett’s investment principles which he planned to launch later.

Nevertheless, setting that apart, the book contains quite a detailed analysis of the business, financial and market metrics of many of Buffett’s principal investments through his early partnerships and via Berkshire till then; as well as a detailed description of the circumstances under which some of these investments were actually made. Definitely till it was published, and perhaps even later, no other book seems to have done such an in-depth analysis so far of Buffett’s investments individually.

This includes not only major holdings like GEICO, Washington Post, Capital Cities and Coke, but also other equity holdings like Gillette, Wells Fargo, Freddie Mac, as well as significant fixed income or bond investments that Buffett made till 1994. That part alone makes it decent learning for anyone interested in trying to emulate them.

But the last chapter of this book titled ‘ An Unreasonable Man’ makes good reading for anyone interested in a summary of what constitutes the Warren Buffett way – even after 19 years.

Here are some excerpts from this summary chapter:

The Warren Buffett Way

Step 1: Turn off the stock market

Step 2: Don’t worry about the economy

Step 3: Buy a business, not a stock

Step 4: Manage a portfolio of businesses

And in evaluating businesses, the author describes what he calls Buffett’s Tenets:

1. Business Tenets

– Is the business simple and understandable?

– Does the business have a consistent operating history?

– Does the business have favorable long-term prospects?

2. Management Tenets

– Is management rational?

– Is management candid with its shareholders?

– Does the management resist the institutional imperative?

3. Financial Tenets

– Focus on return on equity, not earnings per share

– Calculate ‘owner earnings’

– Look for companies with high profit margins

– For every dollar earned, look for at least one dollar of market value created

4. Market Tenets

– What is the value of the business?

– Can the business be purchased at a significant discount to its value?

It seems like an oft-repeated but decent set of common factors if one were to evaluate Buffett’s purchases over the years. Though of course, a lot of these can be said to be qualitative and imprecise beyond a certain point, and seem to have changed a bit in recent years.

Of course, it is not necessary (in fact, not even recommended) for every investor to imbibe these in their investing approach as such – that will only make investing complex for normal individual investors. It is not required for most investors to even attempt it.

But for those who have formulated their investing approach, and are interested in studying Buffett’s methods, though the book title promises more, The Warren Buffett Way does have a decent analysis of past investments and a checklist for the enterprising investor.