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The Essential Buffett: Timeless Principles for the New Economy

by Robert G. Hagstrom, 2001, John Wiley & Sons, Inc., hardcover, 283 pages, list US$ 27.95

Warren Buffett is recognized by many as the world's greatest investor.  This is Robert Hagstrom's third book about "the Sage from Omaha."

I learned of this book from a course participant, who thought that some ideas contained were at odds with things we discussed in class.  Despite some minor issues, e.g., end-year discounting (corrected Excel schedule for Coca Cola Example, page 119), I found this book both useful and interesting.  I recommend it to anyone interested in stock investments.

"Investing is easier than you think but harder than it looks"—Buffett

The most interesting parts of the book, for me, were the stories about great ideas and great investors.  Buffett's thinking was especially influenced by three persons:

• Benjamin Graham (who, with David Dodd, wrote the famous investment handbook, Security Analysis.  Buffett was Graham's student at Columbia Business School.   Later, Buffett worked for Graham's investment firm. Graham, Hagstrom writes, taught Buffet (a) the wisdom of looking for companies that provide safety of principle and promise an adequate return and (b) buying stocks that are selling at a substantial discount from their intrinsic value (capitalized earnings).
  
• Philip Fischer champions "focus investing," investing in less than 10 good companies.  Find companies that can sustain above-average growth and can fund that growth internally.  Superior management is essential.  Because of increased volatility, the investor should be able to tolerate wide swings in individual year performance (one of the best features in the book is the discussion and data about this).   Fischer investigates companies in depth, including what competitors are saying.
  
• Charles "Charlie" Munger is Buffett's partner in Berkshire Hathaway.   Munger is especially interested in integrating different paradigms, such as "emotional finance." Chapter 7, "The Emotional Side of Money," is especially interesting.  Munger taught Buffet that it is okay to pay a fair price for a quality company (rather than buying at discount). [Hagstrom has also written a book about Munger's integration of ideas : Latticework: The New Investing, 2000, New York: Texere.]

Chapter 4, "Guidelines for Buying a Business: Twelve Immutable Tenets," summarizes what Hagstrom believes to be the Buffett approach.  These tenets are good advice, to be sure.  Then, in Chapter 8, Hagstrom suggests that one might relax (mutate?) these constraints in investing in "new economy" growth stocks, international stocks, and small-cap stocks.

Buffett is at odds with most financial theorists and modern portfolio theory (MPT).  Portfolio theory strives to maximize returns for a given level of risk.   Buffet buys companies at little risk: those with superior earnings predictability when held for a long time. He also buys, usually, with a margin of safety.  A foundation of MPT is disproved by some investors being able to consistently outperform the market.

The Buffett approach to stock investing may not be for everyone.  However, I think that any investor can benefit from the ideas in this book.

—John Schuyler, December 2001.

Copyright © 2001 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.