Hagstrom - The Essential Buffet.pdf - Investing - r.olivia

title : The Essential Buffett : Timeless Principles for the New Economy

author : Hagstrom, Robert G.

publisher : John Wiley & Sons, Inc. (US)

isbn10 | asin : 047138979X

print isbn13 : 9780471389798

ebook isbn13 : 9780471151036

language : English

subject Investments, Buffett, Warren, Portfolio management.

publication date : 2001

lcc : HG4521.H227 2001eb

ddc : 332.6

subject : Investments, Buffett, Warren, Portfolio management.

The Essential Buffett

Timeless Principles for the New Economy

Robert G. Hagstrom

Published by John Wiley & Sons, Inc.

No part of this publication may be reproduced, stored in a retrieval system or transmitted

in any form or by any means, electronic, mechanical, photocopying, recording, scanning

or otherwise, except as permitted under Section 107 or 108 of the 1976 United States

authorization through payment of the appropriate per-copy fee to the Copyright

Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978)

750-4744. Requests to the Publisher for permission should be addressed to the

Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY

10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM.

This publication is designed to provide accurate and authoritative information in regard

to the subject matter covered. It is sold with the understanding that the publisher is not

engaged in rendering professional services. If professional advice or other expert

assistance is required, the services of a competent professional person should be sought.

Robert G. Hagstrom. Reprinted with permission of John Wiley & Sons, Inc.

This title is also available in print as ISBN 0-471-38979-X

For more information about Wiley products, visit our web site at www.Wiley.com

Investing is context dependent. The best investment advice is general and timeless, but

not very helpful if you have to figure out what to do today. "Buy low, sell high" is advice

that works in all investing environments. It doesn't matter if it's the twenty-first century

and you're Warren Buffett buying junk bonds, or the nineteenth century and you're a

Rothschild taking advantage of the panic surrounding Waterloo, or 500 B.C. and you're

the pre-Socratic philosopher Thales of Miletus, making his fortune in commodity markets.

The trouble with that advice, though, is that if you know what's low and what's high, you

don't need it. If you don't know, you don't need it either, since you won't be able to use it.

The more specific the advice, the more its use depends on the current environment

and how it evolves. The answer to almost every investment question is the same: It

depends. Are technology stocks a good investment? They were from 1996 through 1999,

but in 2000 they had their biggest yearly decline in history.

Are stocks a better long-term investment than bonds? It depends. Does your long

term start in the late 1920s and end in the late 1940s? Then the answer is "no." Or does it

start in the late l940s and end in the late 1960s? In that case, the answer is "of course."

The amount of time is the same; the result is totally different. When the answer is "it

depends," the question is context dependent.

Context dependence is why so much investment writing is useless after a few

weeks. The more specific the advice, the quicker it becomes dated. No one reads last

year's investment "strategy" pieces from the major Wall Street firms to get insight about

what to do. The demand for investment books is context dependent, too. Books about

monetary crises dominated the bestseller lists in the early to mid-1970s, inflation titles

were the rage in the early 1980s, and books about the Internet just finished their

briefflurry of fame.

The list of perennially useful investment books is short. Reminiscences of a Stock

Operator is a book most professional investors and nearly every successful trader has

read and found worthwhile. It is the thinly veiled story of legendary stock operator Jesse

Livermore, told in his own words and transcribed by Edwin Lefèvre, who is listed as the

author. Its value lies in its descriptions of situations that recur in every investment era,

and the strategies Livermore used to deal with them. He became adept at recognizing

recurring patterns and profiting from them. He was not so adept at recognizing that

superficially similar patterns can turn out to be substantially different. He made and lost

several fortunes; the last loss led him to shooting himselfin the men's room of the Sherry

Netherland hotel.

Another fine investment book is known more by its title than its contents. Where

Are the Customers' Yachts? by Fred Shwed is interesting as a period piecean amusing

picture of a mostly vanished world.

The rarest investment books are those that can be profitably read by everyone

interested in the craft of investing: books that inform, illuminate, and teach, that can be

reread in different periods and contexts and that will deepen our understanding or provide

new insights into the current situation.

For value investors, one classic is Ben Graham's The Intelligent Investor. First

published in the late 1940s, it reflects Security Analysis, his pioneering text, without the

heavy lif ting. You can be a good investor and never have read The Intelligent Investor,

but you'll be a better one if you have. Graham inspired and shaped the thinking of a

generation of value investors, the best known, of course, being Warren Buffett.

I first became aware of Warren Buffett in the mid-1970s through Adam Smith's now out

of print Super Money, the sequel to his best-selling tale of the late 1960s bull market, The

Money Game. Written after the severe declines of 1969 and 1970 and the bankruptcy of

the Penn Central Railroad, Super Money introduced Buffett in Chapter 5, titled

"Somebody Must Have Done Something Right: The Lessons of the Master." The chapter

was about Graham's principles of margin of safety and intrinsic value, illustrated through

the activities of Warren Buffett, then in his early forties and comfortably rich. Unlike the

famous fund managers of the 1960s such as Fred Carr, Fred Mates, and Gerry Tsai,

Buffett avoided the collapse, disbanding his partnership when speculative excess

removed the margin of safety he deemed necessary to continue investing in public

markets.

I was then in my mid-twenties and what immediately got my attention was that

Buffett's initial capital rounded to zero, but when he ended the partnership at 39 he had

$25 million. The way "Adam Smith" told it, Buffett got some money from friends and

family, and "sat in his bedroom of fice, reading through the manuals . . ." He bought

"quiet simple stocks, easy to understand, with a lot of time left over for the kids, for

hand-ball, for listening to the tall corn grow." Having an almost infinite capacity for

indolence, I thought this sounded pretty good. Start with nothing, read some stuff, buy a

few stocks, wait, get rich, and then hang it up before 40.

I read Ben Graham and began looking around for stuffon Buffett. I got some

money from friends and began buying stocks, simple, easy-to-understand companies

trading at low price-earnings multiples, preferably with lots of hard assets and a good

current ratio. I looked for net/nets, just as Graham advised. It was a little more work than

the method Nicholas Darvas advocated in How I Made $2,000,000 in the Stock Market,

which involved drawing boxes around the pattern of price action of a stock, as I recall,

but I figured if it was too easy then others might get the excess returns before I did.

I need not have worried. Twenty-five years later, it seems people are just as eager to

avoid thinking about the businesses underlying the stocks they buy as they ever were.

Markets behave pretty much as they have since the time of Thales. Most people prefer to

buy what is going up rather than what will go up. Peter Lynch has of ten said people will

do more research on a $1,000 purchase of a refrigerator than they will before they spend

$10,000 on a stock.

Today's markets are larger, deeper, offer more investment choices, move more

quickly, and are accompanied by much more noise than the markets of the past. Markets

have become democratized; more people own stocks than ever before, and governments

cannot ignore markets as they once thought they could.

Markets are all about value. Their function is to price assets and, despite their

shortcomings, no better system has been devised. Value is rarely overlooked for long.

That is true in the market for books, as well as in the market for stocks.

I have always been mystif ied by the desire to write books. If you are unknown to

the public, writing must surely have among the lowest probabilities of achieving an

adequate economic return of any activity. We are fortunate that Robert Hagstrom writes

books the way I eat cottage fries at the Post House in New York: compulsively. His

compulsion, unlike mine, is good for you.

The Essential Buffett revises, updates, and expands Robert's analysis of Warren

Buffett's investment methodology. It covers both stock selection and Buffett's style of

portfolio management, which Robert calls focus investing. It also contains much new

material about how to think about and apply Buffett's approach to the "New Economy."

One of the challenges for investors who believe intrinsic value and margin of

safety are the keys to investment success is how to use those concepts in a world that

seems increasingly without firm valuation moorings. Many of the old rules no longer

work. It used to be that stocks were unattractive relative to bonds when their yields

Hagstrom - The Essential Buffet.pdf

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