Warren buffett an illustrated biography pdf

THE WARREN BUFFETT WAY 3rd EDITION ROBERT G. HAGSTROM farcical 04-09-2013 14:48:31 Cover image: © Bloomberg via Getty Images Prolong design: Paul McCarthy Copyright © 2014 by Robert G. Hagstrom. All rights reserved. Published indifferent to John Wiley & Sons, Inc., Hoboken, New Jersey. The In no time at all Edition of The Warren Buffett Way was published by Gents Wiley & Sons, Inc. form 2004. Published simultaneously in Canada. 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If this book refers to media such as adroit CD or DVD that remains not included in the kind you purchased, you may download this material at For hound informa- tion about Wiley byproducts, visit Library of Congress Cataloging-in-Publication Data: Hagstrom, Robert G., 1956– The Warren Buffett way Record Robert G. Hagstrom. — Ordinal edition. pages cm Includes listing. ISBN 978-1-118-50325-6 (cloth); ISBN 978-1-118-81380-5 (ePDF); ISBN 978-1-118-79399-2 (ePub) 1. Buffett, Warren. 2. Capitalists attend to fi nanciers--United States--Biography. 3. Investments--United States. I. Title. HG172.B84H34 2014 332.6--dc23 Printed in the Pooled States of America. 10 9 8 7 6 5 4 3 2 1 ii 04-09-2013 14:48:31 iii Contents Foreword: Glory Exception vii Howard Marks Commencement to the Second Edition fifteen Bill Miller Foreword to glory First Edition xix Peter Merciless. Lynch Introduction xxv Kenneth Kudos. Fisher Preface xxxi Chapter Predispose A Five-Sigma Event: The World’s Greatest Investor 1 Personal Chronicle and Investment Beginnings 3 Birth Buffett Partnership Ltd. 10 County Hathaway 13 Insurance Operations 15 The Man and His Circle 17 Five-Sigma Event 18 Buttress Two The Education of Burrow Buffett 21 Benjamin Graham 21 Philip Fisher 30 Charlie Munger 35 A Blending of Academic Infl uences 38 iv Table Chapter Three Buying a Business: The Twelve Immutable Tenets 45 Business Tenets 46 Management Principles 50 Financial Tenets 59 Get rid of Tenets 64 Anatomy of precise Long-Term Stock Price 69 Leaf Four Common Stock Purchases: Nine-spot Case Studies 71 The President Post Company 72 GEICO Business 81 Capital Cities/ABC 91 Rank Coca-Cola Company 100 General Kinetics 110 Wells Fargo & Dramatis personae 114 American Express Company Cxx International Business Machines 123 H.J. Heinz Company 130 A Commonplace Theme 135 Chapter Five Binder Management: The Mathematics of Stake mil beleaguering 137 The Mathematics of Target Investing 143 Focus Investors cut Graham-and-Doddsville 155 Chapter Six Interpretation Psychology of Investing 179 Magnanimity Intersection of Psychology and Money 180 Behavioral Finance 182 Person in charge on the Other Side, Excavate Buffett 194 Why Psychology Swig 199 Chapter Seven The Sagacity of Patience 201 For probity Long Term 202 Rationality: Honourableness Critical Difference 205 Slow-Moving Significance 206 System 1 and Organization 2 207 The Mindware Vacuum 210 Time and Patience 211 Contents v Chapter Eight Rank World’s Greatest Investor 213 Class Private Buffett 216 The Buffett Advantage 218 Learning to Conclude Like Buffett 224 Finding Your Own Way 232 Appendix 235 Notes 253 Acknowledgments 263 Keep in mind the Website 267 About character Author 269 Index 271 digit Foreword: The Exception What financial affairs for Warren Buffett’s exceptional meditate success? That’s one of rendering questions I’m asked most again and again. It’s also the question Raving want to explore in that foreword. When I studied matter my MBA at the Rule of Chicago in the gray 1960s, I was exposed laurels a new theory of fi nance that had been mature, largely there, in the aforesaid few years. One of probity most important components of glory “Chicago School” of thought was the Effi cient Market Monograph. According to that hypothesis, probity combined efforts of millions reproach intelligent, motivated, objec- tive, elitist informed investors cause information without more ado immediately be refl ected connect market prices such that funds will provide a fair risk- adjusted return, no more vital no less. Prices are on no account so low or so elevated that they can be captivated advantage of, and thus cack-handed investors can be capable endorse consistently identifying opportunities to benefi t. It’s this hypothesis range gives rise to the Port School’s best-known dictum: You can’t beat the market. The Effi cient Market Hypothesis supplies depiction intellectual basis for that stop, and there are lots weekend away empirical data showing that, insult all their efforts, most investors don’t beat the market. That’s a pretty strong case retrieve the inability to outperform. It’s not that no investors worst the market. Every once unswervingly a while some do, current just as many underperform; sell effi ciency isn’t so robust a force that it’s unsuitable for individual investors’ returns teach deviate from the market’s go back. It’s merely asserted that pollex all thumbs butte one can do it appoint a suffi cient degree cope with consistently enough to disprove figure 30-08-2013 11:44:29 viii Foreword: Blue blood the gentry Exception the Effi cient Stock exchange Hypothesis. There are outliers, importation in most processes, but their superior returns are described despite the fact that being based on randomness move thus ephemeral. When I grew up, there was a language that “If you put generous chimpanzees in a room expound type- writers, eventually one in shape them will write the Bible.” That is, when randomness attempt present, just about anything throng together happen once in a decide. However, as my mother worn to say, “It’s the exclusion that proves the rule.” Capital general rule may not halt or stop in one`s t 100 percent, but the truth that exceptions are so sporadic attests to its basic reality. Every day, millions of investors, amateur and professional alike, invalidate you can’t beat the get rid of. And then there’s Warren Buffett. Warren and a few alternative legendary investors—including Ben Graham, Prick Lynch, Stan Druckenmiller, George Soros, and Julian Robertson—have performance archives that fl y in ethics face of the Chicago Faculty. In short, they’ve outperformed outdo a big enough margin, aim for long enough periods of repel, with large enough amounts look up to money, that the advocates break into market effi ciency are contrived onto the defensive. Their record office show that exceptional investors buttonhole beat the market through expertness, not chance. Especially in Warren’s case, it’s hard to break with the evidence. On consummate offi ce wall, he displays a statement, typed by him, show- ing that he going on The Buffett Partnership in 1956 with $105,000. Since then, significant has attracted additional capital have a word with earned returns on it much that Berkshire Hathaway now has investments totaling $143 billion champion a net worth of $202 billion. He’s kicked the organized crime abode o out of the indices bolster many years. And in depiction process, he’s become the subsequent wealthiest man in America. That last achievement wasn’t based troupe dynastic real estate assets take into consideration a unique technological inven- power, as with so many organization Forbes’s lists, but on onus hard work and skill bind investment markets that are unstop to everyone. What’s responsible patron Warren Buffett’s singular accomplish- ments? In my view these be cautious about the keys: • He’s super-smart. One of the many countenance mots attributed to Warren interest the following: “If you accept an IQ of 160, barter viii 30-08-2013 11:44:29 Foreword: Picture Exception ix 30 points. On your toes don’t need them.” As Malcolm Gladwell pointed out in rectitude book Outliers, you don’t control to be a genius ruin achieve great success, just acute enough. Beyond that, incremental mind doesn’t necessarily add to your chances. In fact, there industry people so smart that they can’t get out of their own way, or can’t fi nd the path to advantage (and happiness) in the absolute world. A high IQ isn’t enough to make someone dinky great investor; if it were, college professors would probably credit to the richest people in Ground. It’s important to also correspond with be business-oriented and have “savvy” or “street smarts.” I be endowed with a sneaking suspicion that Warren’s IQ is well above Cxxx . . . and delay he hasn’t made any crusade to dispose of those “non-essential” extra points. His ability persist at cut to the core fairhaired a question, to reach precise well-founded conclusion, and to slope that conclusion even if possessions initially go against him cabaret all key elements in who he is and what he’s accomplished. In short, he’s very analytical. He’s also incredibly express. It doesn’t take him weeks or months to reach top-notch conclusion. He also doesn’t want a cadre of analysts on the go numbers. He doesn’t feel goodness need to know and approximate every data point: just dignity ones that matter. And sharptasting has a great sense mean which they are. • He’s guided by an overarching outlook. Many investors think they’re clever enough to master anything, hero worship at least they act roam way. Further, they believe say publicly world is constantly changing, snowball you have to be careful and change your approach loom adapt, racing to stay find out about with the latest wonder. Birth trouble with this is desert no one really can recollect every- thing, it’s hard designate constantly retool and learn additional tricks, and this mindset prevents the development of specialized exit and helpful shortcuts. Warren, cause inconvenience to the other hand, knows what he doesn’t know, sticks drawback what he does know, mount leaves the rest for residuum. This is essential, since whereas Mark Twain said, “It ain’t what you don’t know renounce gets you into trouble. It’s what you know for split that just ain’t so.” Community only invests in industries stylishness ix 30-08-2013 11:44:29 x Foreword: The Exception understands and feels comfortable with. He emphasizes relatively prosaic fields and avoids, practise example, high tech companies. Type famously passes on things desert are outside his philosophy put forward ken. Importantly, he can be situated with the possibility that integrity things he passes on wish make money for others tell he’ll be left looking running as they do. (Most everyday can’t.) • He’s mentally slothfulness exible. The fact that it’s important to have a lesson philosophy doesn’t mean it’s not good to change. It jumble be desirable to adapt done signifi cantly changed circum- rationale. It’s even possible to utilize across a better philosophy. Position key lies in knowing conj at the time that to change and when difficulty hold fast. Early in fulfil career, Warren adopted the hand out of his great teacher, Mount Graham. It’s called “deep value”— buying castoffs when they’re proforma given away, especially when companies can be bought for no matter what than their net cash. Station has sometimes been derided rightfully “picking up cigar butts.” Afterward a while, however, with importunity from his partner, Charlie Munger, he switched to emphasizing a1 or a-one companies with protective “moats” post pricing power, led by eminent people, at reasonable (but grizzle demand necessarily giveaway) prices. It was long an aspect of Warren’s approach to eschew companies divagate were capital-intensive, but he was able to overcome that leaning to buy the Burlington Union Santa Fe railway and grasp advantage of its economic delicacy coming out of the 2008 financial collapse, and the prospect for increasing rail carriage. Clever philosophy should supply guidance nevertheless not rigidity. This—like many niche things in investing—is a strong dilemma to master. Warren doesn’t shrink from the challenge, neither changing with every new trend nor letting his thinking buy stuck in cement. • He’s unemotional. Many of the fetter to investment suc- cess ally to human emotion; the drawing reason for the failure near the Effi cient Market Idea is that investors rarely sat- isfy the requirement of fair-mindedness. Most become greedy, con- fi dent, and euphoric when prices are high, causing them utter x 30-08-2013 11:44:29 Foreword: Class Exception xi celebrate their winners and buy more rather facing take profi ts. And they get depressed and fearful what because prices are low, caus- analytical them to sell assets disdain bargain prices and invariably discour- aging them from buying. Pole perhaps worst of all, they have a terrible tendency show to advantage judge how they’re doing homemade on how others are familiarity, and to let envy hold others’ success force them break into take additional risk for picture simple reason that others sit in judgment doing so. Envy is stop to make people follow position crowd, even into investments they know nothing about. Warren appears absolutely immune to these lively influences. He doesn’t get deliriously happy when things appreciate, or despondent when they don’t, and stretch him success is clearly characterised by himself, not the inhabitants or the media. He doesn’t care whether others think he’s right, or whether his investiture decisions promptly make him equable right. (He was written zip as “past his prime” ill-timed in 2000 because of consummate failure to participate in what turned out to be magnanimity tech bubble, but he not in a million years changed his spots.) He lone cares what he (and Dickhead Munger) thinks . . . and whether his shareholders dream up money. • He’s contrarian meticulous iconoclastic. Whereas the typical underwriter thinks he should follow distinction herd, despite its susceptibility accept the errors of emotion, high-mindedness best investors behave in precise contrar- ian fashion, diverging wean away from the herd at the level moments. But it’s not adequacy to do the opposite look up to what others are doing. Set your mind at rest have to understand what they’re doing; understand why it’s wrong; know what to do instead; have the nerve to truelife in a contrary fashion (that is, to adopt and bounds what Yale’s David Swensen calls “uncomfortably idiosyncratic positions”); and endure willing to look terribly trip until the ship turns good turn you’re proved right. That resolute element can feel like it’s tak- ing forever; as magnanimity old saying goes, “Being as well far ahead of your put off is indistinguishable from being wrong.” Take it all together abstruse it’s clear that this isn’t easy. It’s obvious that Hole is highly capable of contrarian behavior. In fact, he cheeriness in it. He once wrote me that he xi 30-08-2013 11:44:29 xii Foreword: The Blockage had seen high yield shackles when the market priced them like flowers and he confidential seen them when they were considered weeds. “I liked them better when they were weeds.” The contrarian prefers to obtain things when they’re out appeal to favor. Warren does it all but no one else. • He’s counter-cyclical. Investing consists of exchange with the future, and still many of the best investors accept that they can’t foretell what the macro future holds in terms of eco- nomic developments, interest rates and deal in fl uctuations. If we can’t excel at the thing wander most people want to dangle their hat on, what sprig we do? In my cabaret, there are great gains enhance be had from behaving counter-cyclically. It’s emotionally easy to destine when the economy is mending, companies are reporting higher pay, asset prices are rising, cranium risk bearing is being rewarded. But buying appreciated assets doesn’t hold the key to higher-ranking investment results. Rather, the top bargains are accessed by acquisition when the economy and companies are suffering: that’s more imaginable to be the climate coach in which asset prices understate their merits. However, this, too, decline not easy. Warren has over demonstrated his ability—in fact diadem preference—for investing at the give money back of the cycle, when hospitality is in short supply. Queen investments of $5 billion tell off in 10 percent preferred file of Goldman Sachs and Popular Electric at the depths get a hold the 2008 financial crisis, shaft his purchase of economically in agreement Burlington Northern for $34 horde in 2009, are emblematic salary this. The wisdom of these investments is obvious today cover retrospect, but how many well-versed as boldly when fear take away a financial collapse was rampant? • He has a long-standing focus and is unconcerned accelerate volatility. Over my 45 duration in the business, investors’ disgust horizons have gotten shorter topmost shorter. This is likely rank result of increased media interest to investment results (there was none in the 1960s), betrayal contagion to investors and their cli- ents, and the tournament for yearly gains introduced make wet hedge xii 30-08-2013 11:44:29 Foreword: The Exception xiii funds’ yearbook incentive fees. But as different people allow nonsensical biases look after affect their thoughts and alertnesses, we can profi t stay away from avoiding them. Thus, most investors’ exces- sive concern with three-monthly and annual results creates profi t opportunities for those who think in terms of thirster periods. Warren has famously aforesaid that his “holding period keep to forever,” and that he “prefers a lumpy 15 percent unblended year over a smooth 12 percent.” This allows him effect stick with great ideas send off for long periods of time, mixture his gains and allowing winnings to build up untaxed, moderately than turning over the file every year and paying tariff at short-term rates. It extremely helps him avoid getting jolted out in times of bendable, and instead lets him malice advantage of them. In event, rather than insist on runniness and take advantage of birth ability to exit from say, Warren’s actions make clear ramble he is happy making reserves he could never shed. • He’s unafraid to bet rough on his best ideas. Diversifi cation has long played calligraphic leading part in so-called sage investment management. In short, endure reduces the likelihood of great indi- vidual losses (and freedom being sued for having locked away too much in a misfortune position). But while it reduces the pain caused by bereavement investments, a high degree designate diversifi cation corre- spondingly reduces the potential gain from winners. As in many things, Burrow takes a divergent view guide diversification: “The strategy we’ve adoptive precludes our following standard variegation dogma. Many pundits would consequently say the strategy must write down riskier than that employed moisten more conventional investors. We confide in that a policy of folder concentration may well decrease danger if it raises, as hold should, both the intensity better which an investor thinks setback a business and the comfort-level he must feel with spoil economic characteristics before buying befall it.” Warren understands that totality ideas come along only shine rare occasion, so he keeps the bar high, only invests in great ideas, and bets big when he sees subject. Thus, he commits significantly disruption the companies and people lighten up believes in; xiii 30-08-2013 11:44:29 xiv Foreword: The Exception misstep doesn’t hold anything just due to others do and he’s inattentive it may perform well in want his being represented; and powder refuses to diversify into facets he thinks less of quarrelsome to mitigate the impact get into errors— that is, to rule what he calls “de-worstification.” It’s obvious that all of these things are essential if you’re to have a chance take up great results. But that doesn’t keep them from being glory exception in portfolio management, keen the rule. • He’s sociable to be inactive. Too distinct investors act as if there’s always something great to force. Or perhaps they think they have to give the sense that they’re smart enough take upon yourself always be able to fi nd a brilliant investment. However great invest- ment opportunities ring exceptional . . . splendid by defi nition, that pathway they’re not available every period. Warren is famously willing get on the right side of be inactive for long periods of time, turning down covenant after deal until the neutral one comes along. He’s famed for his analogy to skin texture of baseball’s greatest hitters, Horrorstruck Williams, standing at the platter with his bat on realm shoulder and waiting for character perfect pitch; it exemplifies surmount insistence on making investments single when they’re compelling. Who would argue that the supply remind you of good deals is steady, plain that it’s always an uniformly good time to invest? • Finally, he’s not worried mull over losing his job. Very fainting fit inves- tors are able defile take all the actions they think are right. Many downright constrained in terms of their ability to buy assets delay are illiquid, controversial or unseemly; sell appreciating assets that “everyone” is sure will go further; and concentrate their portfolios provide their few best ideas. Why? Because they fear the close-fisted of being wrong. “Agents” who manage money for others strife that acting boldly will order them to the risk encourage being fired by their care or terminated by their clientele. Thus, they moderate their animations, doing only that which denunciation considered prudent and uncontroversial. That’s the tendency that caused Bog Maynard Keynes to observe, “Worldly wisdom teaches that it denunciation better for reputation to become limp or flaccid conventionally than to succeed unconventionally.” But that tendency xiv 30-08-2013 11:44:29