The Warren Buffett Way

Summary Written by Chris Taylor

The Big Idea

Act Independently

"‘You are neither right nor wrong because the crowd disagrees with you,’ he wrote. ‘You are right because your data and reasoning are right.’"- The Warren Buffett Way, page 26

Buffett plays by his own rules. He doesn’t follow the crowd, but he doesn’t not follow the crowd either. In fact, “the crowd” hardly ever factors into his decision making at all.

At his core, Buffett has confidence in his own abilities, and in the research he’s diligently collected, to make decisions based on fact, rather than on public opinion. Buffett’s criteria for companies to invest in boils down to this: Within an industry you understand, find established companies that are run by good people, and are currently undervalued (for whatever reason). Then bet big.

You’ll notice that none of Buffett’s criteria has anything to do with the latest stock prices, media hype or public opinion. Certainly, the news may be a great place to pick up indicators of companies that fit the other criteria, but at the end of the day, Buffett looks for companies and managers that exhibit trust, integrity and value.

His theory is simple – invest in what you know, and know what you know extremely well. We can all take a lesson from his book.

Insight #1

Define Your Circle of Competence

"Diversification serves as protection against ignorance."- The Warren Buffett Way, page 166

Here’s the neat thing about Buffett – at any given time, 80% of his portfolio is comprised of less than fifteen companies. He doesn’t diversify, in fact he actively works not to. He is what is defined as a “focus” investor – he knows certain industries extremely well, and invests in companies within those industries with big, swift bets. He “buys and holds”, rather than buying and selling based on the market. In his opinion, diversification breeds mediocrity. And it’s common sense, if you think about it. By focusing your attention, interest and education on a select industry or topic, you allow yourself to go deeper, and become more knowledgeable in that industry than someone who tries to learn five or six industries. Whether you’re an investor or not, the same holds true for all aspects of life. Those who dedicate themselves to select, specific tasks or roles put themselves in a better position to be an expert in that field. Seth Godin touches upon this concept in The Dip. Malcolm Gladwell talks about it in Outliers. John Maxwell discusses focus in detail in Talent is Never Enough. Jim Collins shows how returning to core competencies can help struggling companies regain past success. In fact, most business and personal development authors allude in some way to the power of focus. Warren Buffett is living proof that the process can be extremely rewarding, financially, as well. It begs the question – what’s your circle of competence? What are you working on/in that you have the potential to know better than anyone else?

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Insight #2

Avoid the Institutional Imperative

"…the institutional imperative – the lemming-like tendency of corporate management to imitate the behaviour of other managers, no matter how silly or irrational that behaviour may be."- The Warren Buffett Way, page 96

The stock market is a funny creature. In an ideal world, the value of stocks would be directly related to the success of the company. We don’t live in an ideal world. Media attention, public opinion, fear and greed all play central roles in the rise and fall of stock prices. Stock prices start to fall a little due to a blown-out-of-proportion media story and the stock price falls a little. People panic, and ask the dreaded “what if?” questions and sell out of fear. The snowball effect builds until the company/analysts/Jim Kramer, etc. say the company is actually more stable than people give it credit for. The price starts to climb again as greed kicks in and people jump on the band wagon. It’s totally irrational, and yet it affects the market by billions of dollars every day. Life is no different. At work, in your social world, at home, peer pressure and public opinion play a role every day. Buffett has enjoyed his success precisely because he has trusted his analytical mind. He doesn’t buy just because everyone else is, and he doesn’t sell for that reason either. He looks at the facts and buys based on what he knows… not what other people think they know. We’d all be well suited to follow the same thought process, especially when it comes to our most precious resources – time, money and energy.

The Warren Buffett Way is a book about investing, written for the investment world. It explores in great detail the nine tenants that Buffett has used in his investment history and explores the nuances of all of the major purchases he’s made over the past fifty-something years. The Warren Buffett Way explores his influences, his mentors and his partners. It’s very much a financial book. But it’s also a book about Buffett himself. As such, it’s rich with anecdotes, colourful commentary, and the piercing insight that while we as human beings often overcomplicate things, there is tremendous advantage to following a few simple, yet timeless principles.

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Robert G. Hagstrom

Robert Hagstrom currently serves as Portfolio Manager of the Legg Mason Growth Trust mutual fund (formerly Legg Mason Focus Trust) and manages the Growth Equity strategy for institutional investors. Previously, Robert served as President and Chief Investment Officer of Legg Mason Focus Capital and prior to that was General Partner of Focus Capital Advisory. Prior to working with Focus Capital, he was a Principal at Lloyd, Leith and Sawin. Robert acted as Portfolio Manager with First Fidelity Bank from 1989 to 1991. From 1984 to 1989, he was a Financial Advisor for Legg Mason Wood Walker, Inc. Robert earned a B.A. and M.A. from Villanova University. Robert received the CFA designation in 1992 and is a member of The CFA Institute and the CFA Society of Philadelphia.Robert is also known for his best-selling book, The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor. He has also written a number of investment books including: The NASCAR Way: The Business That Drives the Sport; The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy; The Essential Buffett: Timeless Principles For a New Economy; Investing: The Last Liberal Art; and his latest book The Detective and The Investor: Uncovering Investment Techniques from the Legendary Sleuths. Robert received the CFA designation in 1992 and is a member of The CFA Institute and the CFA Society of Philadelphia.

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