Book Review - The Warren Buffett Way by Robert Hagstrom

Warren Buffett is arguably one of the best businessmen and investors to ever live. His drive to make money and turn that into more money started when he was a little boy, and has turned him into one of the richest men in the world. His estimated worth is approximately 30-40 billion dollars, and that is after he donated billions of dollars to the Bill and Melinda Gates Foundation.Many books have been written about Buffett and his ways of conducting business, but most of these authors are just trying to sell mediocre books and make money. However, Hagstrom has written a book that captures Buffett's life as CEO of Berkshire Hathaway and how he continues to acquire companies either through buying stock or buying the companies directly. Hagstrom does not delve into Buffett's personal life much; this book is mostly about business and money.After a forward and preface by the author, Bill Miller, and Kenneth L. Fisher, the reader gains a feeling how Warren Buffett is an extraordinary
man and even praises this book himself. Chapter one is titled, "The World's Greatest Investor." This chapter gives you a snapshot of Buffett and his life of investing. It is almost a mini-biography that takes you from his birth in Omaha, Nebraska where he was reading stock market analysis books at age eight, to billionaire CEO of Berkshire Hathaway. He has been in charge of several companies along the way such as The Buffett Partnership, Ltd., and many of his ventures are briefly covered in this chapter.The second chapter is titled, "The Education of Warren Buffett." This section of the book is focused on who taught and made Warren Buffett who he is today in the financial world. First and foremost is Benjamin Graham. He is considered the most important man in history in terms of financial analysis and wrote The Intelligent Investor in 1934 which is still a bestselling financial analysis book. Another man who had a huge influence on Buffett was Philip Fisher, who taught him
that management in a company is extremely important. Fisher taught that a company cannot be successful without good leadership. The other two men mentioned who had a large influence were John Burr Williams and Charlie Munger. Williams is famous for his theories on investment value and discounted net cash-flow analysis, and Munger is well-known for being a successful lawyer and businessman, and Buffett's present vice chairman at Berkshire HathawayChapter three is titled, "Our Main Business is Insurance." Buffett is a great stock picker and knows a value company when he sees one. He started buying insurance companies in 1967 in Nebraska, introducing Berkshire to the complicated world of insurance. In two years he managed to increase the stock/bond value of both companies by 11 million dollars. After his first two insurance company purchases, he set his sights on GEICO and bought large quantities of stocks and made GEICO a profitable company as well. He later paid 2.3 billion d
ollars to acquire the rest of GEICO, and then paid about 16 billion dollars to acquire General Re. Berkshire Hathaway's insurance division has continued to be extremely profitable, with a cash stream of 44.2 billion dollars in 2003 alone.Chapter four is titled, "Buying a Business." Buffett and his company are experts at buying companies; he owns over 100 of them. This chapter introduces the reader to a key fundamental: whether you own stock in a company or own a company outright, you own the company. Buying large amounts of stock in a company gives you partial ownership, but Buffett says it never allows you to do what he likes most, and that is capital allocation. If you do not own a company, you cannot tell officers what to do with money and when, and that is a negative to Buffett. This chapter also discusses what Buffett looks for when buying a company. One of the main things is he only buys companies he understands. If he buys a company which is too complex or makes a pro
duct he does not comprehend, he risks losing large sums of money.Chapter 5, titled, "Investing Guidelines," gets down to what Buffett really looks at when selecting a company to invest in or buy. He uses three main areas when examining the workings of a business. The first is if the business is simple and understandable. Basically, does Buffett understand what the business sells/produces and how they do it. Second, does the business have a consistent operating history? This means that the company is not simply a hot stock that will surely increase in value in the short term, but a company that will increase year after year, even if only a yearly 5% increase. Third, Buffett looks for favorable long term prospects. This ties in with the second idea, that a company should get better realize more profits year after year. If a company does not meet these three criteria, Buffett is not interested. After all, there are thousands of companies out there to choose from.The sixth chapt
er is titled, "Investing Guidelines." In this chapter, the author examines Buffett's three management traits he looks for in a business. First, he looks for a rational management. He wants to know that the CEO and other officers make logical decisions that are best for the company and the shareholders who own parts of the company. Second, Buffett wants to know that management is candid with the shareholders. Warren Buffett looks for managers and leaders in a company who are able to communicate the performance of the company without hiding ugly details and information many CEOs choose to withhold. Lastly, he looks for management that resists the institutional imperative, or the urge to imitate the behavior of other leaders and managers, even if the other manager's behavior is ridiculous.Chapters seven and eight continue to dissect Buffett's investing guidelines. Chapter seven focuses on financial tenets such as: 1)Focus on return on equity, not earnings per share, 2)Calculate
"owner earnings" to get a true reflection of value, 3)Look for companies with high profit margins, and 4)For every dollar retained, has the company created a least a dollar of market value. Chapter eight focuses on value tenets. In specific, Buffett is concerned with determining the value of a business and buying only when the price is right - when the business is selling at a significant discount to its value. This chapter deals with finding the right stock in the right company. Hagstrom details how Warren Buffett can spot a cheap company and pour large amounts of money into partial or full ownership of the company.Chapter nine is called, "Investing in Fixed-Income Securities." This chapter does not deal with common stocks, but instead preferred stock, bonds, cash, corporate and government bonds, and even high-yielding junk bonds. Buffett has a reputation for buying companies through common and preferred stock, and holding the stock until the value of the company is realiz
ed. He applies the same principles of holding a common stock for the long-term as he does for bonds, cash, etc. Buying stock one week and selling it the next is not the most efficient way to make money, and Buffett buys his stocks and bonds for the long term.Chapters ten, eleven, and twelve deal with managing your money reasonably. Specifically, some issues with the psychology of money and the emotional roller coaster that comes with investing in the stock market. Buffett has proven to have a rare confidence in picking his stocks and companies to invest in, and he has made billions of dollars in the process. I feel that this part of the book is most interesting, because it is what really sets Buffett apart from the average investor. It is human nature to doubt and second-guess ourselves, and this may include backing out of a stock purchase before it realizes its true value or the company proves its worth. Buffett does not second-guess. He simply uses his background and crite
ria to pick his companies, and never looks back.The Warren Buffett Way is an excellent read for investors of nearly any age. The book does not get very technical and is not full of hard-to-understand financial talk. It is a book about a great man with a great personality, who has the ability to invest and make money which is arguably the best in the world. You will learn several ideas from this book that will help you to rethink how to invest in companies and the stock market, and might even make you some money after reading. You can learn how Buffett makes his financial decisions with real examples of companies he owns such as Coca Cola, GEICO, Level 3 Communications, and the Washington Post Company in every chapter. This book is rated 5 out of 5.

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