Book Review > The Warren Buffet Way 2nd Edition

How do you sell 1.2 million copies of an investing book? By writing about Warren Buffet of course.

The first edition of this book, the million seller, was published in 1994 and was always going to be a hard act to follow. The market is crowded with books on Buffet / Buffetology / Secrets of Buffet / Buffet for Dummies / I-Once-Passed-Buffet-In-The-Street, all jostling for your attention. This one needs to provide some valuable insights to justify its purchase. Hagstrom states his goal as: "to examine Buffet's more recent actions for the investment lessons they hold, and to consider whether changes in the financial climate have triggered changes in his strategies".

Chapter 1, "The World's Greatest Investor" briefly surveys Buffet's investment performance from small beginnings in 1956. Chapter 2, "The Education of Buffet" talks about his key influences - Fisher, Williams and Munger. It's also a neat potted summary of their philosophies. Chapter 3, "Our Main Business is Insurance" charts the evolution of Berkshire Hathaway, under Buffet's chairmanship, from an ailing textile manufacturer to an investment and insurance giant. Chapter 4, "Buying a Business" starts getting its teeth into Buffet's strategies, which I could summarise as "buy a wonderful company at a fair price and keep it for life". The book is about expanding and explaining what this means. Chapter 4 closes on "The Warren Buffet Way", four tenets broken into twelve principles. The next four chapters on the four tenets are the heart of the book. (For interest, the OED defines "tenet" as a "central principle or belief".)

Chapter 5, "Business Tenets" explains what Buffet looks for in a business. The writing is very systematic. Hagstrom takes a Buffet-ism, such as "a simple and understandable business ... with favourable prospects", breaks the quotation into pieces, explains each piece, and offers supporting evidence from Buffet's investment decisions. Chapter 6 repeats the approach for "Management Tenets", starting from the principle of "... honest and competent management". Chapter 7, "Financial Tenets" deals with which financial measures are important, complemented by Chapter 8, "Value Tenets", which emphasises long-term value instead of market price. It doesn't tell you how to actually estimate value - refer John Burr Williams for that - but identifies the principles involved.

Chapter 9 opens up the lesser-known Buffet activity of "Investing in Fixed Income". Berkshire makes huge investments in fixed income securities and Hagstrom argues that the investment decisions are just like those for a business. Chapter 10, "Managing Your Portfolio" can be summed up by "When you find a good opportunity, make a large investment (Warren Buffet)". Goodbye modern ideas of diversification reducing risk! Chapter 11, "The Psychology of Money" attributes its principles to Ben Graham rather than Buffet, and stresses that you must avoid the herd mentality if you are to succeed. Chapter 12, "The Unreasonable Man" (ignore the chapter title) is a recap. It provides four steps to "Investing the Warren Buffet Way", but these are about adopting Buffet principles rather than being an action plan.

Does the book achieve its goal? Well, it isn't only about Buffet's recent actions - indeed, a central theme is that Buffet's investment principles have remained constant. Buffet's recent change (ie last 10 years) has been to buy whole businesses rather than stocks, attributed to lack of value in the market and the huge scale of Berkshire's investments. Instead, the added value in this book is summed up by "Almost everything Buffet does is public, but it is loosely noted". In other words, Buffet is open about what he does and why, but you have to figure out what that means for yourself. The book provides a well-structured and readable account of the 'why', the principles underlying Buffet's actions. Don't look for criticism or even evaluation here - the justification is in Buffet's results, and (by association) what he does is sound. I also enjoyed reading a literate work - no ugly jargon or grammatical errors here.

Of course I have a few gripes. The Value chapter is nearly all explanation, so you have to infer the method used for yourself: I suspect that's an effort to accommodate the arithmetically challenged reader. I grew a little weary of the same examples being repeated, notably Gillette, Coca-Cola and Washington Post. The paper used for the book feels like paperback quality. And those who have read the First Edition won't find too much that's new, though the material is better structured.

Overall, this book deserves to sell well. Buffet is still the world's best investor and the book does an excellent job of structuring and explaining his principles. To use a culinary analogy you can take the principles here, mix with a helping of your own research, a sprinkle of mathematics and a large slice of self-discipline, than top with enough patience to wait for an investing opportunity. Just don't expect a recipe that always makes good bread (groan!).

Mike Barrett is a member of the AIA.