“The Warren Buffett Way” by Robert Hagstorm has become a classic investment book and it is considered by many to be on par with the famous Ben Graham text, “The Intelligent Investor.” I was personally fortunate enough to have picked up “The Warren Buffett Way” roughly five years ago, prior to the occurrence of the financial crisis and the resulting fallout. In fact, I was extremely fortunate, in that this book was the first book I had ever read on the subject of investing. I took it to the beach with me for a week long vacation, by the week’s end I had read, annotated, highlighted, and studied the text from cover to cover. I would personally recommend the book to anybody who is serious

about the stock market, or retirement, or to anyone who generally works too hard to have their money be lazy. The following posts are summaries of each of the chapters of “The Warren Buffett Way.”

There are two forwards, one preface, and one introduction, before the first chapter of the book even begins. They are all written by authors who are accomplished investors in their own right and who know Buffett on a personal level. The first forward is written by the famous mutual fund manager and author Peter Lynch. (I would also recommend reading Lynch’s books if you are new to investing.) All of the writings are fantastic and well worth a read, however the real meat of the book begins, as expected, with the first chapter.

(to skip to chapter two click here)

Chapter One: The World’s Greatest Investor

This chapter cites that Warren Buffett has been in the top 5 richest people in the world, according to Forbes Magazine, more than anybody else. Therefore unlike many other billionaires Buffett seems to be one of the few that can consistently stay on the list, showing that he knows not only how to not lose money, a trait that several billionaires seem to lack, he knows how to make money!

At age 25 Buffett started his investment partnership with a 100 dollar investment. He started this partnership after he had worked in New York City for two years under his mentor, Ben Graham. Through management fees and capital appreciation he left his partnership with 25 million dollars. All of this took place within the span of 13 years.

He had achieved an annual return of 29.5%, as detailed here. The other investors in his partnership were cashed out as well, all of them profiting handsomely. The reason that Buffett closed his partnership in 1969 was that he believed that the stock market was overvalued and that it was not possible to find the good deals that he was able to find several years earlier. Several investors in the partnership did not want to cash out their money from their investments, so Buffett recommended to them his trusted friend and former classmate, Bill Ruane, to manage their money. This was the beginning of the Sequoia Fund, a mutual fund that is still around today. Here is the performance of the Sequoia Fund since it’s inception in 1970.

Here is even more information on the Sequoia Fund.

Buffett took his 25 million dollars and purchased a controlling interest in a textile company called Berkshire Hathaway. While under Warren Buffett’s control, Berkshire Hathaway’s book value has grown at a rate of over 20% per year. The book value of a company is the value of the assets financially owned by the company. On a personal level this would be called net worth. An example would be if you have a home that is worth $100,000 and a $75,000 mortgage on that home, your net worth is $25,000. Buffett has grown his companies “net worth” by over 20% per year since the 1960’s.

He made his fortune by valuing an investment and buying the investment below it’s value. In the exact same way that most people buy goods and services, like cars, clothes, and food. Buffett essentially did the same exact thing with financial assets, which usually took the form of an ownership share in a business.

As famous as Buffett is for his money making abilities, he is perhaps more well known for his values, ethics, and modest lifestyle. He has given over 99% of his fortune to charity. He has often spoken out against the extravagant compensation that CEO’s, other executives, and fund managers, grant to themselves. He has even spoken out against the low tax rate, as a percentage of income, that the multi-millionaires and billionaires (such as himself) are required to pay in the United States. For all of these statements, views, and actions he has received both praise and backlash. It would be safe to assueme that Buffett is unswayed, either positively or negatively, by how his views are publicly perceived. He has, after all, made his fortune by taking action with conviction, regardless of what the general public thinks.

Continue to Chapter Two…

Chapter Two: The Education of Warren Buffett

This chapter describes the four men who have had the largest impact on Warren Buffett’s thinking. These four men are Benjamin Graham, Philip Fisher, John Burr Williams, and Charles Munger. Described below is a summary of the investment philosophy of the four men and the impact that they had on the investing style of Warren Buffett.

Benjamin Graham

Ben Graham was Buffett’s teacher at Columbia University while Buffett was getting his MBA. Graham was also the author of the book “The Intelligent Investor”. A book that many, including Buffett, consider to be the best book on the subject of investing ever written. (A summary of the book, and a free audio version of the book, can be found here).

Graham was a brilliant teacher, author, and business man. At age 25 he was a partner in an investment firm and earning a salary of $600,000 per year. This was in the year 1919!!! Adjusting for inflation, Graham was making $7,494,692 per year at age 25!!!! (in 2010 dollars).

However, Graham’s fortune was destroyed by the crash of 1929. The stock market crash and loss of almost all of his money had a great impact of Graham, and therefore had a great impact on Buffett. Graham developed his theories on investment based on a highly conservative approach to investing, and began rebuilding his fortunes.

Dissipate the fact that Graham was personally finically ruined by the market crash of 1929 , the investment business that he co-founded in 1926 remained in business until 1956. Graham and his partner managed to the fund by an average of 17% per year while they were in business, during this same period the stock market only returned 7% per year.

Graham’s considered an investment to only be a true investment if it met his following definition: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirement are speculative”

To find out more about Ben Graham, I recommend “The Intelligent Investor” or this post (here).

Philip Fisher

The next major influence on Buffet was Phil Fisher. Fisher also wrote a well known investment book, called “Common Stocks, Uncommon Profits.” This book details the famous “15 points” of Fisher, a checklist for investors and businesses alike.

Fisher’s investment philosophy was to identify and invest in great companies with great management. Therefore “Common Stocks, Uncommon Profits” is not just a good read for investors, but it is a great book for all those interested in running a business. This is because Fisher identifies 15 common traits that great business share.

Fisher differed from Graham in that he was much more qualitative, and much less quantitative than Graham. He was interested in the quity of the business and the management. Whereas Graham was much more interested in guaranteeing the safety of his investment, by buying something when it was cheep and selling it when it was expensive. Fisher was much less interested in getting something cheep and much more interested in buying a high quality investment. Buffett managed to bled these two concepts by buying high quality investments at reasonable prices.

John Burr Williams

John Burr Williams got his doctorate in economics from Harvard in the year 1940. His doctoral dissertation is called “The Theory of Investment Value.”  It has become a widely  published and highly regarded book. Warren Buffett has called the book one of the most important investment books ever written.

The very well known theory that came from the book was called the dividend discount model. Today this same model would go by the name of “net present value” or “discounted future cash flows.” Don’t let the boring names fool you, this model can be used calculated how much any investment is worth. Buffett has used this model throughout his investment career to “buy dollars for fifty cents.” This model is important because, if you know how much an investment is worth, you can know when it’s on sale.

Charles Munger

Charlie, as Buffett calls him, is one of Warren’s best friends as well as his most trusted business partner. Munger is the vice chairman of Berkshire Hathaway, and runs many of its most important investment operations. Buffett never makes a major investment division without first talking it over with Charlie.

Charlie achieved outstanding investment returns with his own partnership, (detailed below) before joining Buffet at Berkshire. His approach is similar to Phil Fisher’s, in that he likes to buy high quality businesses run by talented and ethical managers.

Charlie is often very blunt when speaking or writing, and often gets straight to the point of an issue. He is absolutely a brilliant thinker and he seems to have an opinion on just about everything. Many of his thoughts, including those thoughts on investing, can be found in the book “Poor Charlie’s Almanack.”

Warren Buffet has managed to take some of the best ideas from each of the four investors described above and combine them into an investing framework that succeeds.  By following this single comprehensive approach, no matter what the circumstances, Buffet has managed to achieved the best investment record of any investor to date.