More Warren Buffett books

The Warren Buffet Way: Investment Strategies of the World's Greatest Investor, Robert G. Hagstrom, 1994, John Wiley & Sons, Inc., 274p. 0-471-04460-1 (paperback edition, 1997, 0-471-17750-4)

The Warren Buffet Portfolio: Mastering the Power of the Focus Investment Strategy, Robert G. Hagstrom, 1999, John Wiley & Sons, Inc., 246 p., ISBN 0-471-24766-9 (paperback edition, 0-471-04460-1)

In shelving The Essential Buffet, I found two more books about Warren Buffet by Robert Hagstrom. I had read The Warren Buffet Way, several years ago, and somehow missed reading The Warren Buffet Portfolio.

At first, I felt that I had probably already read what this author had to say about the "world's greatest investor." I quickly reviewed my annotations in The Warren Buffet Way and undertook skimming The Warren Buffet Portfolio. I quickly settled into reading the Portfolio with some care. There isn't that much overlap among the three books. Perhaps the stories that do overlap are worth the repeat emphasis.

If you are an active investor and self-directed, I think any or all of the three books are worthwhile and entertaining reading.

Here are some summary points about The Warren Buffet Portfolio that I feel are most important:

This is a companion to the first book, The Warren Buffet Way. In this second book (1999), Hagstrom describes how to implement the investment philosophy of (mostly) Warren Buffet. Mr. Hagstrom is a sophisticated portfolio manager in his own right, and he expands upon Mr. Buffet's methods on occasion.
The emphasis is on "focus investing":

"Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady during nay short-term gyrations." (Hagstrom, p. 2)

"I wouldn't want to buy anything where I wouldn't want to put 10 percent of my net worth into it." (Buffett, p. 190)
"If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantages, conventional diversification [broadly based active portfolios] makes no sense for you." (Buffett, p. 9)
Hagstrom describes the essential features of "efficient market theory"—stock prices are not predictable because the market is too efficient." Buffett discounts this theory because:

a. Investors are not always rational (leading to the new area of "behavioral finance");

b. Investors to not process information correctly; they use shortcuts rather than rigorous analysis of business fundamentals; and

c. Investors use short-term performance yardsticks, inappropriate when the goal is beating the market over the long-term.
Much of the book describes legendary investors: Buffet, John Maynard Keynes, Charles Munger, Lou Simpson, Bill Ruane, and Bill Miller. Where available, the investment performance of person is tracked over a couple of decades or more. In each case, the bad years are greatly offset by the performance in superior years.
The mathematical methods are described gently, so this book should not intimidate most readers.

While I'm unconvinced about the Kelly Optimization Model, it is interesting: : If your probability of success is p, the fraction of your bankroll that you should bet is x = 2p-1. Reportedly this is an optimal growth strategy (p. 126).
Chapter Seven, "The Psychology of Investing," describes many of the psychological bias in judgments under uncertainty. Most investors: trade too much, jump too easily to conclusions, overreact, and overestimate their knowledge. "Most investors would be better off if they didn't receive monthly statements!" Advice: "Invest in stocks and don't open the mail."

Here are some summary points about The Warren Buffet Way (1994), Hagstrom's first Buffet book:

Warren Buffet was born in 1930 in Omaha, Nebraska, where he lives today. His father was a local stockbroker, and as a boy, Warren often worked in the office. He was so impressed with the classic book, The Intelligent Investor, that he enrolled at Columbia Graduate Business School to study under Benjamin Graham. Buffet later worked in Graham's investment company until Graham retired.
Buffet founded an investment partnership in 1956. It averaged an annual return of 29.5% for the thirteen years of its life. Buffet disbanded the partnership 1969 when he saw values increasingly scarce.
Some of the interesting reading is biographies of several legendary investors Benjamin Graham and Philip Fisher.
Three key areas important in valuing a business, according to Buffett:

a. Is the business simple?
b. Does the business have a consistent operating history?
c. Does the business have good long-term prospects? ["turn-arounds seldom turn" p. 78]
"The most important management act is allocation of the company's capital."
For a discount rate, Buffett uses the rate of the long-term U.S. government bond. He does not add a risk premium, because he avoids risks. "I put a heavy weight on certainty. If you do that, the whole idea of a risk factor doesn't make any sense to me. Risk comes from not knowing what you're doing."
Buffet would not be disturbed if the market closed for a year or two. When your attention turns to the market, it should be primarily to answer the question, "Has anybody done anything foolish lately that will allow me an opportunity to buy a good business at a great price?" (p. 226)

—John Schuyler, February 2002.