Robert G. Hagstrom is Senior Vice President and Director of Legg Mason Focus Capital. He has authored the New York Times best-selling The Warren Buffett Way and The Warren Buffett Portfolio, as well as The Nascar Way. He lives with his family in Wayne, Pennsylvania.The book takes about the principles that laid foundation and influenced Warren buffet in his decision making skills.He is successful investor of all times and there no one even today’s generation to match of his skills.I am usually a person who read fiction and never read books related to management and financial investment books.Ever since I wanted to start a career in investment I got inspired to start reading those and my first try was The Warren Buffet Way.
Warren Edward Buffet was born in Omaha and was seventh generation of Buffets to call Omaha their home.They ran a grocery shop and once warren buffet worked there for a while.Since his childhood he was always fascinated by numbers and was calculating machine even before he entered kindergarten.At the age of 10 he was introduced to son of Sidney Weinberg who was a senior partner in Goldman Sachs. He was famous person in the Wall Street .Warren buffet was intrigued with the stock market at very young age.So he would often visit his father’s brokerage firm and also visit Harris Upham brokerage in New York twice a week .He was interested in learning about securities,bonds and stocks .Not only that he visited the stock exchange with his relatives every week and reading trade column in Barron’s.He started understanding the numerical patterns.He brought his first shares of stock at the age of 11.He later enrolled himself in University of Pennysylvania’s Wharton school of business and finance.After graduation he got back to stock market and started detailed research.He got connected to brokers and subscribed to various publishing services.Then he came across a book The Intelligent Investor written by Benjamin Graham.Inspired by this approach towards investment and stock market,he attended classes of Graham which was class of 20.Turned out Buffet was brightest among the students and there was amazing chemistry between Benjamin Graham and him.After graduation he returned to Omaha,he joined his father’s brokerage firm,recommending stocks based upon the Graham’s approach.Later he got job in Graham-Newman and worked for 2 years until the firm broke off
The Buffet Partnership was started with totally 7 partners and total contribution of 105000$.The deal was the partners got 6% per year on their investment and 75% of the profits made above this.,whereas buffet received remaining 25% of the company’s profit.Initially the company brought undervalued stocks based on the Graham’s stock criteria .They also brought stocks of 2 merging companies are brought and sold to create risk less profit. As years progress the company made good progress and presented good growth and thereby attracting more investors to company.This in turn more partnership were formed and later it had to reorganized to single partnership by Buffet.Initially the firm confined to buying undervalued securities and merger arbitrage. But by the end of 5th year,he purchased in business the Dempster Mill Manufacturing company which was a farm equipment company. Despite shift in the market psychology and change inflection point Buffet Partnership was showing a outstanding results.But also with the change in market psychology,the market was highly speculative and stock were highly priced.He decided to end the partnership. In 1889 Berkshire Cotton Company was started and as it progressed they combined operations of other mills.In the year 1995 buffet merged Hathway manufacturing with Berkshire and named it as Berkshire Hathway. Though the textile industry didn’t work out buffet had learnt few lessons in business which had a long term impact.one was about corporate turnarounds and not necessary they succeed all the time.Enough capital was not generated to buy an insurance company.In March 1967,Berkshire Hathway purchased outstanding stock of 2 insurance companies who has their headquarters in Omaha.They were National Indemnity Company and National fire and Marine Insurance Company.Another addition to this GEICO and owned nearly half of it outstanding common shares by the 1991.In the next 3 years the company’s performance was fantastic.Another addition to berkshire hathway apart from many insurance companies were Ajit Jain.He had amazing management skills,decisiveness and smartness.What amazed to me about buffet was that he didn’t have the looks of big business tycoon.He liked being logical,simple and understandable.He tries to avoid complexity in business.Even in the annual report published by the company the data provided are very transparent.The report shows both the sides of the organisation,the risk and uncertainty involved.
Warren buffet education was influenced by 3 different people who had 3 different distinct philosophies towards investment. They were also very powerful people in this profession. They were Benjamin Graham, Philip Fisher and Charlie Munger. Buffet was influenced deeply by Graham. He initially learned the philosophies of investment through him and also worked for his company. Graham always believed in taking logical approach when considering whether to buy a stock or not. He developed strategies which helped investors to analyze in logical way. He also believed that it is important to buy undervalued stock No matter what market value so that there is always a good amount margin of safety. Also believed that to calculate the intrinsic value of stock it important to calculate the future growth of the firm as well. But calculating the growth is difficult for any analyst.
Philip Fisher started his career as a investment counselor and a gratitude from Standford graduate school of financial administration. Even in colleges with the help of his professor he visited various companies, understood their operation and came up with solutions to resolve them. Later he often recap with his professor. Learning’s from this were invest in companies with above average returns and also the companies should have better management. His main philosophy, was that it important for any investor to first analyse the company and industry thoroughly first. Understand their operation, how consistent have their earning have been, efficiency of the management and their future prospects of the firm. He felt that thorough research was lacking in these investors. Also invest in those companies or industries which are easy and understandable. Buffet met Charlie Munger through Dr. Davis when he had returned to Omaha at a local diner. Charlie was a lawyer practicing in Los Angeles. But had great interest in stock market and just intrigued by them. He always kept track of them. Later he started a investment firm simultaneously practicing law as well. The approach followed by Charlie was similar to that buffet. Later Charlie joined on Berkshire board and today he is vice chairman of the firm. Charlie laid business foundation apart from involving in investment decisions with buffet. Both of them took all the decisions and were always in the same page.there were certain set principles or tenets that acted as a guide in this decision making processes and they were grouped in 4 broad categories. They were Business tenets, Management tenets, Financial tenet and Market tenet. There are totally 12 tenets which served as principles based in which Buffet as well his firm Berkshire Hathaway worked. Although all the investments made by him didn’t follow all 12 of them at once. In some investment he applied few of them and forego the rest. In short it was combination of them. There were 9 amazing case studies in the book that help us understand how buffet applied his principles. The only exemption who has deviated this principles were General Dynamics and Wells & Fargo company(bank). With General Dynamics he initially brought arbitrage stocks in Dutch action. The major lesson from the case studies where the firm should have consistent operating history a period of time. The industry should be easy and understandable, efficient management. A firm with efficient management make sure they turnaround the company when it falls in a worst situation and bring it back to normal. The investment should be made for longer term to reap better benefits. Warren buffet after brought at better discount rate and ensures that there a good margin of safety. He always buys shares of a company and preferred the stock market to delay the recognition as it gives him occasion to buy more shares at bargain prices. It is also important to analyze the long term prospects or the future prospects of the company as well. Buffet also said for every penny invested in the market, the return should be at least one dollar. For me as a learner, I learnt that for a firm which makes excessively good amount of profit it either pays more dividends to its shareholder or buyback /repurchases of shares else they invest in buying or expanding in other business. They buy other companies from business line or other which might not be doing well. This increases the expenses of the firm and reducing the profit that is earned. This leads firm to a very bad position of the firm and it leads to change in management and liquidating the business. Another learning is that Buffet is not interested short term appreciation and is not in a hurry to sell that stocks. He prefers to keep them as long as the firm is functioning well management is efficient, competent and honest and business is not over valued. But it is not important that we analyze and buy stocks or owning business, it also important that we manage the portfolio that we invest in. Though decisions to buy stock are taken majorly based on margin to safety approach but there 3 other important constructs for portfolio management which buffet developed. There 2 types of strategies one being active portfolio management and other index management. Both the strategies offer more diversification, but do not offer exceptional returns on the investment made. But according to buffet there is a third category that is focus investment. This simply means that choose and invest in few stock that are likely to give above average returns over long period of time, rather than investing in bulk and also can sustain the short term fluctuations. He further talks about how focus strategies have advantage over the convectional diversification. We all know stock market, probability plays a very important role and one plays one of the determining factor of the stock prices. There were lot of theories explaining this concept and they are amazing and can be better understood in reading them. But I am was amazing to know the role of probability in the equity investment market though
People who are into the stock markets can divide their strategy into two ways one is prime bet and other action bets. Prime bets are serious bets. Action bets are for longer shots and hunches. Focus investing has been recommended by from the time of Graham. People like Graham, Philip, buffet and few others are known as superinvestors and believed strongly in focus investing. They even did study on it and compared it with conventional investing and found they got better returns though the focus investing. Also they were involved investing in stock market with the long term returns and invested in business or stocks after details research. But nowadays it’s different what they the investors tell the client and what they follow are completely different. Also the performance of people who recommend where invest, sell, buy or hold of the stock based on their return they in short term. They analyze their performance for each quarter and hence they do not get the exponential return on the investment but also they do not get to deep research on the recommendations they give. It is because of their nature of working on short term return, they are not able to achieve what people like Warren buffet, Graham was able to.
What shocked me was psychology and economics go hand in hand in the investment world.Psychology play a very important role in investing and combination of both the economics and Psychology and using it as framework to look though the issues of the finance is today’s world known as behavior framework.There are many theories in relation to this that has been published various academicians. Overconfidence and overreaction bias characteristics of any investor plays a very bad role.Today’s investors think they are over smart,have superior knowledge than other /their colleagues and are not ready to accept their mistakes. Also sometimes,rather often the investors follow what other people follow or act accordingly to the trend with understanding where they are headed and their impact.This effect is known lemming factor.Lemming is rodent whose behavior is not understandable to any scientist studying them and is usually not very stable. Also investors should be psychologically ready even bad effect of the stock market and stop reacting to them,rather they should analyze them and rectify the mistakes.According to buffet the definition of risk is different from others.Generally according to modern portfolio diversification, in order to reduce the impact of the its important diversification and selling the stock off in shorter time.But according to buffet risk refers to harm or anything bad.Also holding the investment for a longer period of time can minimize the risk or there can no risk.
Time and patience play a very important role in economics and investing.There are 2 sets of strategies involved in stock market that short term and long term.The risk involved with the short term is high and return is unpredictable. In long term investment, return are much higher and risk involved is lesser when compared to short term strategies. Also it is important for an investor be rationale in his decision making process in stock market.Rational meaning taking decision very logical and full knowledge rather than taking decision based on speculation or what others in the herd/group is following.Thus in long term investment,it important to consider the time factor and have perseverance to patience.In investing filed it not only important to have IQ and talent as they similar to horsepower to a motor (they are considered as inputs),but also necessary to have output in proportion.To get the desired output it is required to have rationale decision making process and also do a thorough research before deciding where to decide and how much to decide and hence acts as tip of iceberg