The Warren Buffett Way by Robert G. Hagstrom - A Book Review

This book has the power to change mindsets, if not lives...

Warren Buffett used to study businesses thoroughly, understand them, and identify value in them, which would grow compoudedly in the years to come. Then he used to wait till these businesses or their stock would sell at a decent discount to their actual value. When such an opportunity came, he would place a big bet, i.e. go in for a big purchase. After that he would sit on the purchase, and watch his earnings compound tremendously. Prime example - American Express - In the early 1960s, Buffett earmarks American Express as an ideal buy. There's a scandal, and AmEx drops from 65$ a share to 35 $ a share overnight. In comes Buffett next morning, and purchases AmEx shares to the extent of 40% of his total cash-assets. Within 3 years, Buffett and his partners make a cool 20 million $s in profit!!!

Charles Munger, his best buddy and also his alter ego, influenced Buffett in a terriffic way. He taught Buffett to pay a premium for top quality. Buffett purchased an 7% stake in Coke and is still sitting on it, one of the best share purchases in history. Buffet's 200 million shares of Coke, which cost Berkshire 1.3 Billion US $, had a market vlaue of 10.2 Billion US$ in 2003.

Buffett's company, Berkshire Hathaway owns diverse businesses and a focus-invested portfolio of stocks, and was worth more than 100 Billion US $ in 2003, with it's shares quoting at about 93000 US $ (per share) at that time. [Perhaps one other, who has enriched investors as Buffett has, is Dhirubhai Ambani].

What has led to such tremendous success?

It's the Warren Buffet way.

Hagstrom classifies 12 tenets which make up the Warren Buffet way, business tenets, management tenets, financial tenets and value tenets. Implementing these tenets into one's style of investing can create tremendous wealth ...

Buffett will always understand thoroughly any business he gets into. He is not purchasing only shares; for him it's a stake in the business. He will buy intrinsic value at a favourable discount. This margin of safety will save him from the pressure of any underlying volatility. Buffett only goes into any deal when the management is A1, read QUALITY. He needs to know well the management of the company in question and must be convinced of their impeccability. This assures future growth to a great extent. Also, Buffett wants to have a say in capital allocation. Buffett prefers to buy entire companies so that he can control capital allocation.

Buffett only moves in his circle of competence. He doesn't tinker with any business he doesn't understand, read TECHNOLOGY. Buffett believes in KISS (keep it simple, st*p*d). This is one area where people like you and I can really benefit, i.e by implementing the Warren Buffett Way in technology or hi-tech / gizmo stocks. We're the modern generation that understands technology and innovation, right?

So, how does the Trader benefit from Warren Buffett? I mean, the itchy trader's hands want to buy and sell. Then what? Here's one way. Focus-invest in a portfolio of A-Grade stocks, preferably not more than 10, but max 20. Pledge the portfolio to a good bank, and get a loan of 50 - 60% of the portfolio value against the pledged equity. Do your trading from the money of the loan. This way, your core portfolio will not be sold and will definitely multiply, seeing the growth story that India is. Profits from trading can service the loan, and if you make huge profits , you can buy more shares of the companies in your core portfolio...........

Best Regards,

Uday.

Uday

Very nice one. Looking forward to more posts from you.

regards

karthik