My Review Of A Warren Buffett Investment Book, “The Warren Buffett Way”
I have read so many investment books in the past that I often forget where I’ve picked up a certain investment concept from. However, there are a few investment books that literally changed my life – I remember what I’ve learnt from those books very clearly.
One such book is “The Warren Buffett Way” by Robert G. Hagstrom. In this article, I will provide a review and share why I think the book is great.
Simple to understand concepts
Hagstrom broke down the concepts of how Warren Buffett invests into four simple easy-to-understand segments. He called it the four tenets and it helps other investors greatly simplify how they could be looking at an investment.
The business tenet
The first tenet is on the business of the company. In his book, Hagstrom wrote that we should be asking three basic questions about a business before we invest. They are:
1. Is the business simple and easy to understand?
2. Does it have a consistent operating history?
3. Does it have good long-term prospects?
If we are able to answer “yes” to all three questions, that means the company we are studying is one that (a) we can understand, (b) has a good track record, and (c) bright future growth prospects. All are ingredients that make up a potentially great investment.
The management tenet
Secondly, after we understand what the business is about, we should be looking deeper into the management of a company. Here, we are also supposed to answer three questions about management:
1. Is management rational?
2. Is management candid to shareholders?
3. Does management resist what the industry is doing?
If we are able to find companies that fit the profile above, we would have found management teams that are rational (and not delusional), honest, and have the ability to act independently. Such characteristics are actually quite hard to come by in a management team, especially if they are to appear concurrently. This makes it all the more amazing for you if you are able to find such a company.
The financial tenet
We now move on to the financials of a company. According to Hagstrom, Buffett focuses on a company’s returns on equity, profit margins, and reinvestment track record. A company must have a reasonably high profit margin, and a history of generating good returns on its retained earnings (this shows up partly via a high return on equity) before Buffett would consider it as a potential investment.
The valuation tenet
Lastly, we have to know how to value a company and have the discipline to buy it only when the price is right to us. Do note that Buffett thinks about the quality of a business first before focusing on its valuation. This means that he would only invest in a great company and not buy any company just because it has a cheap valuation.
In my view, this might be the key to the long-term investing success of Buffett.