Distilled Warren Buffett


Investment Strategies of the World's Greatest Investor

By Robert G. Hagstrom Jr.

Wiley 274pp $24.95

Warren Buffett is a phenomenon--one of the savviest investors of the past half-century. Stockholders in his holding company, Berkshire Hathaway Inc., have seen per-share book value grow at an astounding annual rate of 23.3% in a 29-year period.

But Buffett's legend depends on more than a stunning investment record. Hedge fund operator George Soros and former mutual-fund manager Peter S. Lynch are also stellar investors. It's only Buffett, the folksy, unpretentious billionaire, who's seen as a hero. In an era of hot money, derivative securities, and gunslinging money managers, he seeks out good companies and invests for the long haul. He steers clear of fads, makes deals worth hundreds of millions on a handshake--and seems to mint money.

How does he do it? For years, Buffett has been sharing his philosophy and strategies in BH's annual reports. Now, Robert Hagstrom Jr. usefully collects for the average investor much of that material, extrapolates Buffett's major tenets and illustrates each with examples from BH's portfolio. Hagstrom didn't interview Buffett for The Warren Buffett Way, but he did send him copies of what he was writing, since Buffett had to approve the use of material from the annual reports.

Hagstrom nicely lays out Buffett's value investment strategy, a marriage of quantitative financial discipline and shrewd judgments about management. And he explores Buffett's strongly held beliefs: Don't diversify. Ignore market swings. Don't worry about the economy. Buy a business, not a stock. Evaluate a company as a potential owner.

Perhaps Buffett's mystique accounts for The Warren Buffett Way's best-sellerdom, for the book itself is plodding and worshipful. That contrasts with the annual reports, in which Buffett comes across as brilliant, erudite, and curmudgeonly. What's more, Hagstrom makes clear how much work and knowledge goes into Buffett's investing, which is to say--even given these insights, the average guy can't do what Buffett is able to do.

Buffett is well aware that the demands of job and family mean many people can't learn enough about business economics to follow his example and uncover sensibly priced companies with important long-term competitive advantages. For them, he recommends index funds and dollar cost averaging--and says they'll still outperform most investment professionals. "Paradoxically," says Buffett, "when `dumb' money acknowledges its limitations, it ceases to be dumb."

Like many investment books, The Warren Buffett Way is best skimmed and kept as a reference. When a broker calls with a hot tip or your neighbor recommends a high-flying mutual fund, you can take it down, read some of Buffett's scathing insights into the market--and save yourself a bundle.