Tuesday, April 17, 2007

The Warren Buffet Way

I finished reading The Warren Buffet Way last week. The book is about Warren Buffet and his investment philosophies. It made for a very interesting reading. The author has very nicely demonstrated Buffet's principles using examples of his investments in Coca Cola, American Express, Gillette, Clayton Homes, Pampered Chef, Wells Fargo etc.

An important point discussed in the book is the difference between investors and speculators which Buffet learnt from Benjamin Graham, Buffet's guru at Columbia and also the author of Intelligent Investor - a masterpiece written around 60 years ago.

The essence of the book is the way Buffet looks at stocks; According to him, investing in stocks should be like buying a business - one should have a long term time horizon while investing.

The author also talks about the guiding principles behind Buffet's investment and groups those principles in the following tenets:

Business Tenets
Is the business simple and understandable?
Does the business have a consistent operating history?
Does the business have favourable long term prospects?

Financial Tenets
Focus on return on equity, not earnings per share.
Calculate "owner earnings" to get a true reflection of value.
Look for companies with high profit margins.
For every dollar retained, make sure the company has created at least one dollar of market value.

Management Tenets
Is management rational?
Is management candid with the shareholders?
Does management resist the institutional imperative?

Market Tenets
What is the value of the business?
Can the business be purchased at a significant discount to its value?

In short Buffet's investment strategy is:
1) Buy a business at a price which is below its intrinsic value
2) Turn off the stock market
3) Don't worry about the economy
4) Manage a portfolio of businesses

The book ends with a chapter on the "Psychology of Money" which presents a very interesting perspective on the role played by our psyche in our investment decisions.

All in all, this is a must read book for anyone who is even remotely interested in the world of investment.


Vinay said...

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May be, you'll find it interesting place to post your book review.

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Paras Tierea
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