Book Review > The Essays of Warren Buffett (Lessons for Investors & Managers)

Warren Buffet is widely known as one of the world’s most successful investors and much has been written about his investment philosophies and techniques through his conglomerate holding company, Berkshire Hathaway. Additionally, readers of Buffett’s letters to the shareholders of Berkshire have gained “an enormously valuable informal education” over the years.

According to the editor, Lawrence A. Cunningham, “Many people speculate on what Berkshire and Buffett are doing or plan to do. Their speculation is sometimes right and sometimes wrong, but always foolish. People would be far better off not attempting to ferret out what specific investments are being made at Berkshire, but thinking about how to make sound investment decisions based on Berkshire’s teachings. This means they should think about Buffett’s writings and learn from them, rather than try to emulate Berkshire’s portfolio.”

In his book, “The Essays of Warren Buffett”, Cunningham has arranged Buffett’s writings as “thematic essays” providing the reader with a guide to business analysis and investing. The essays cover a wide variety of topics, some of which the reader at first glance, might be tempted to dismiss as being irrelevant or unimportant to them. However readers are reminded of Buffett’s philosophy that “investors should view their investment in a stock as an investment in a business” and that “management, through their actions, are greatly responsible for the future net worth of the business.”

The chapters and a brief breakdown of their contents are as follows:

• Corporate Governance – including Business Principles, Disclosure, Boards and Managers, Executive Pay and Audit Committees
• Corporate Finance and Investing – including Mr Market, Debunking Standard Dogma, Value Investing and Debt
• Alternatives to Common Stock – including Bonds, Preferred Stock, Derivatives, Foreign Currencies and Unconventional Commitments
• Common Stock – including Transaction Costs, Dividend Policy, Stock Splits, Shareholder Strategies and Recapitalization
• Mergers and Acquisitions – including Bad Motives and High Prices, Sensible Share Repurchases, Leveraged Buyouts and Sound Acquisition Policies
• Accounting and Valuation – including Accounting Shenanigans, Earnings, Goodwill, Cash Flow, Intrinsic Value, Book Value and Market Price
• Accounting Policy and Tax Matters – including Standard Setting, Stock Options, Charges, Taxes, Retiree Benefits, and Taxation and Investment Philosophy.

Throughout the essays, business analysis principles which were first formulated by Buffett’s teachers, Ben Graham and David Dodd, are discussed together with his own views. Buffett challenges the teachings of Modern Portfolio Theory and the Efficient Market Hypothesis, and talks of “certain perils that lurk in investment strategies” based on models used by financial institutions.

In a nutshell, I believe that Buffett’s key message is that investors, rather than focusing on the market, should seek to “allocate capital by concentrating on businesses with outstanding economic characteristics and run by first-rate managers” and holding these for the long-term. Embedded in this are the following two principles:

• “Margin of safety” principle – “one should not make an investment in a security unless there is sufficient basis for believing that the price being paid is substantially lower than the value being delivered”
• “Circle of competence” principle – “consider investments only concerning businesses you are capable of understanding with a modicum of effort.”

Overall, I found the book to be well structured and easy to read. Included throughout are snippets of Buffett’s own “folksy wisdom” and quotes from others that provide some common-sense and humour to what otherwise might be very dry topics. It contains an abundance of information that will appeal to all readers from individual investors, managers and company directors. Finally, for those readers who wish to conduct their own research, Cunningham has included a “Disposition Table” showing where you may find excerpts from the various annual letters. As usual, investors should conduct their own research and seek guidance from trusted advisers, but at $32.95, Cunningham’s book is well worth reading.

Vimal Mehta is a member of the AIA.