Book Review: The Essential Buffett

The Essential Buffett: Timeless Principles for the New Economy by Robert G. Hagstrom (John Wiley & Sons, 2001)

A great starter for those who are new to Buffett-style investing. Provides all you need to know to kick-start as a value-growth based long-term investor.

This book is an extension of the author's first book on Buffett, The Warren Buffett Way.

While the first book is based on examples from Buffett's stock picking decisions, the sequel focuses more on the ideologies and inspirations of Buffett-style investing. The first two chapters are a recap of his first book. It sets the stage by giving an overview of Buffett-style investing, his thinking and his history, growing up as an investor with an acute interest in crunching numbers and thinking independently.

Influences and Inspirations of Buffett's Investing Approach

Having been influenced by his father, who was a stock broker, and his penchant for numbers Buffett tested the stock market at the age of eleven. He read all the books he could during his teens and when he was ready to go to college he already knew most of the subject matter taught in his undergrad classes. Apart from his readings, there are three important people whose teaching and acquaintance greatly shaped Buffett into what he is today.

They were: Ben Graham, Buffett's mentor, employer and the father of value investing; Charlie Munger, Buffett's partner in business; and Philip Fisher, the pioneer of growth investing. Buffett blended the principles from Ben Graham's value based approach, Philip Fisher's "soundness of business growth prospect" approach and Charlie Munger's "great business does not sell cheap" approach.

Tenets of Buffett-style Investment

The author dissects Buffett's principles into twelve investing tenets categorized as Business Tenets, Management Tenets, Financial Tenets, and Marketing Tenets. These tenets form the foundation of Buffett's blended approach to investing. Just by adhering to these tenets and spending time to research about a company can help an investor do better than the market average.

Focused Investing is the Key to Success

The essence of the book is in the concept of focused investing. Buffett thinks of investing as a punch card which can be used for only 20 punches for the lifetime. An investor should be so diligent that he/she should use those 20 punches wisely. The book provides results of a statistical analysis of the performance of sample stock portfolios with varying numbers of stocks.

The results reveal that the fewer the number of stocks in the portfolio, the greater the return over a long term. Needless to say, these stocks should be carefully selected based on sound research, estimate of intrinsic value, and margin of safety.

Ocean of Opportunity in Technology & Emerging Economies

While Buffett has set his foot into all kinds of traditional businesses from candies to insurance, he has always stayed away from the technology industry. The model of traditional businesses has pretty much remained the same since the dawn of time and they will not change. On the other hand, technology business models are ever-changing, evolving and are more competitive.

This book was published at the peak of the technology bubble and there has been a tremendous change in the information and communication technologies. The value of a technology can be calculated using the financial statements. But predicting the growth of a technology company is relatively very difficult.

The book provides a few factors that can be used to evaluate a technology company. But these factors keep changing according to the technology. This industry is an unexplored frontier for a "value-growth' based investor and the author sees a great opportunity in this. Buffett has not invested a lot in other countries. The author sees a plethora of opportunity in emerging economies as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.