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THE WARREN BUFFETT WAY Investment Strategies of the World’s Greatest Investor ROBERT G. HAGSTROM MAIN IDEA Warren Buffett is one of the most successful stock market investors of the past 30 years. His entire approach is to focus on the value of the business and its market price. Once Buffett find s a business he understands. Tool 1 – Warren Buffett’s Own Portfolio The first tool you can use to invest like Warren Buffett is his own portfolio. Warren Buffett (and other investors) are required by law to. Free download or read online The Snowball: Warren Buffett and the Business of Life pdf (ePUB) book. The first edition of this novel was published in 2008, and was written by Alice Schroeder. The book was published in multiple languages including English language, consists of 929 pages and is available in Hardcover format. The main characters of this biography, business story are,. Warren Edward Buffett was born on August 30, 1930, to his mother Leila and father Howard, a stockbroker-turned-Congressman. The second oldest, he had two sisters and displayed an amazing aptitude for both money and business at a very early age. Warren Buffett Wants Two Nickels to Rub Together By the late '70s, the his reputation had grown to the point that the rumor Warren Buffett was buying a stock was enough to shoot its price up 10%. Berkshire Hathaway's stock was trading at more than $290 a share, and Buffett's personal wealth was almost $140 million.

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The Story of Berkshire Hathaway's Billionaire Chairman

Warren Edward Buffett was born on August 30, 1930, to his mother Leila and father Howard, a stockbroker-turned-Congressman. The second oldest, he had two sisters and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head - a feat Warren still amazes business colleagues with today.

At only six years old, Buffett purchased 6-packs of Coca-Cola from his grandfather's grocery store for twenty-five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making money. Five years later, Buffett took his first step into the world of high finance.

At eleven years old, he purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Shortly after buying the stock, it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.

Warren Buffett's Education

In 1947, Warren Buffett graduated from high school when he was 17 years old. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans and urged his son to attend the Wharton Business School at the University of Pennsylvania.

Buffett only stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Despite working full-time, he managed to graduate in only three years.

Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as 'too young'. Slighted, Warren then applied to Columbia where famed investors Ben Graham and David Dodd taught - an experience that would forever change his life.

Ben Graham - Buffett's Mentor

Ben Graham had become well known during the 1920s. At a time when the rest of the world was approaching the investment arena as if it were a giant game of roulette, Graham searched for stocks that were so inexpensive they were almost completely devoid of risk. One of his best-known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers.

The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share. The value investor tried to convince management to sell the portfolio, but they refused. Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors. The company sold its bonds and paid a dividend in the amount of $70 per share.

When he was 40 years old, Ben Graham published Security Analysis, one of the greatest works ever penned on the stock market. At the time, it was risky; investing in equities had become a joke (the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was around this time that Graham came up with the principle of 'intrinsic' business value - a measure of a business's true worth that was completely and totally independent of the stock price.

Using intrinsic value, investors could decide what a company was worth and make investment decisions accordingly. His subsequent book, The Intelligent Investor, which Warren celebrates as 'the greatest book on investing ever written', introduced the world to Mr. Market - the best investment analogy in history.

Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one-year-old Warren Buffett. Reading an old edition of Who's Who, Warren discovered his mentor was the Chairman of a small, unknown insurance company named GEICO. He hopped a train to Washington D.C. one Saturday morning to find the headquarters. When he got there, the doors were locked. Not to be stopped, Buffett relentlessly pounded on the door until a janitor came to open it for him. He asked if there was anyone in the building.

As luck (or fate) would have it, there was. It turns out that there was a man still working on the sixth floor. Warren was escorted up to meet him and immediately began asking him questions about the company and its business practices; a conversation that stretched on for four hours. The man was none other than Lorimer Davidson, the Financial Vice President. The experience would be something that stayed with Buffett for the rest of his life. He eventually acquired the entire GEICO company through his corporation, Berkshire Hathaway.

Flying through his graduate studies at Columbia, Warren Buffett was the only student ever to earn an A+ in one of Graham's classes. Disappointingly, both Ben Graham and Warren's father advised him not to work on Wall Street after he graduated. Absolutely determined, Buffett offered to work for the Graham partnership for free. Ben turned him down. He preferred to hold his spots for Jews who were not hired at Gentile firms at the time. Warren was crushed.

Warren Buffett Returns Home

Returning home, he took a job at his father's brokerage house and began seeing a girl by the name of Susie Thompson. The relationship eventually turned serious and in April of 1952, the two were married. They rented out a three-room apartment for $65 a month; it was run-down and the young couple shared the space with a family of mice. It was here their daughter, also named Susie, was born. In order to save money, they made a bed for her in a dresser drawer.

During these initial years, Warren's investments were predominately limited to a Texaco station and some real estate, but neither were successful. It was also during this time he began teaching night classes at the University of Omaha (something that wouldn't have been possible several months before. In an effort to conquer his intense fear of public speaking, Warren took a course by Dale Carnegie). Thankfully, things changed. Ben Graham called one day, inviting the young stockbroker to come to work for him.

Warren was finally given the opportunity he had long awaited.

Warren Buffett Goes to Work for Ben Graham

Warren and Susie moved into a house in the suburbs of New York. Buffett spent his days analyzing S&P reports, searching for investment opportunities. It was during this time that the differences between the Graham and Buffett philosophies began to emerge.

Warren became interested in how a company worked - what made it superior to competitors. Ben simply wanted numbers whereas Warren was predominately interested in a company's management as a major factor when deciding to invest, Graham looked only at the balance sheet and income statement; he could care less about corporate leadership. Between 1950 and 1956, Warren built his personal capital up to $140,000 from a mere $9,800. With this war chest, he set his sights back on Omaha and began planning his next move.

On May 1, 1956, Warren Buffett rounded up seven limited partners which included his sister Doris and Aunt Alice, raising $105,000 in the process. He put in $100 himself, officially creating the Buffett Associates, Ltd. Before the end of the year, he was managing around $300,000 in capital.

Small, to say the least, but he had much bigger plans for that pool of money. He purchased a house for $31,500, affectionately nicknamed 'Buffett's Folly', and managed his partnerships originally from one of the home's bedrooms, then later, a small office. By this time, his life had begun to take shape; he had three children, a beautiful wife, and a very successful business.

Over the course of the next five years, Buffett's partnerships racked up an impressive 251.0% profit, while the Dow was up only 74.3%. A somewhat-celebrity in his hometown, Warren never gave stock tips despite constant requests from friends and strangers alike. By 1962, the partnership had capital in excess of $7.2 million, of which a cool $1 million was Buffett's personal stake (he didn't charge a fee for the partnership - rather Warren was entitled to 1/4 of the profits above 4%).

He also had more than 90 limited partners across the United States. In one decisive move, he melded the partnerships into a single entity called 'Buffett Partnerships Ltd.', upped the minimum investment to $100,000, and opened an office in Kiewit Plaza on Farnam street.

In 1962, a man by the name of Charlie Munger moved back to his childhood home of Omaha from California. Though somewhat snobbish, Munger was brilliant in every sense of the word. He had attended Harvard Law School without a Bachelor's Degree. Introduced by mutual friends, Buffett and Charlie were immediately drawn together, providing the roots for a friendship and business collaboration that would last for the next forty years.

Ten years after its founding, the Buffett Partnership assets were up more than 1,156% compared to the Dow's 122.9%. Acting as lord over assets that had ballooned to $44 million dollars, Warren and Susie's personal stake was $6,849,936. Mr. Buffett, as they say, had arrived.

Wisely enough, just as his persona of success was beginning to be firmly established, Warren Buffett closed the partnership to new accounts. The Vietnam war raged full force on the other side of the world and the stock market was being driven up by those who hadn't been around during the depression. All while voicing his concern for rising stock prices, the partnership pulled its biggest coup in 1968, recording a 59.0% gain in value, catapulting to over $104 million in assets.

The next year, Warren went much further than closing the fund to new accounts; he liquidated the partnership. In May 1969, he informed his partners that he was 'unable to find any bargains in the current market'. Buffett spent the remainder of the year liquidating the portfolio, with the exception of two companies - Berkshire and Diversified Retailing.

The shares of Berkshire were distributed among the partners with a letter from Warren informing them that he would, in some capacity, be involved in the business, but was under no obligation to them in the future. Warren was clear in his intention to hold onto his own stake in the company (he owned 29% of the Berkshire Hathaway stock) but his intentions weren't revealed.

Warren Buffett Gains Control of Berkshire Hathaway

Buffett's role at Berkshire Hathaway had actually been somewhat defined years earlier. On May 10, 1965, after accumulating 49% of the common stock, Warren named himself Director. Terrible management had run the company nearly into the ground, and he was certain with a bit of tweaking, it could be better managed.

Immediately Mr. Buffett made Ken Chace president of the company, giving him complete autonomy over the organization. Although he refused to award stock options on the basis that it was unfair to shareholders, Warren agreed to cosign a loan for $18,000 for his new President to purchase 1,000 shares of the company's stock.

Two years later, in 1967, Warren asked National Indemnity's founder and controlling shareholder Jack Ringwalt to his office. Asked what he thought the company was worth, Ringwalt told Buffett the company was worth at least $50 per share, a $17 premium above its then-trading price of $33.

Warren offered to buy the whole company on the spot - a move that cost him $8.6 million dollars. That same year, Berkshire paid out a dividend of 10 cents on its outstanding stock. It never happened again; Warren said he 'must have been in the bathroom when the dividend was declared'.

In 1970, Buffett named himself Chairman of the Board of Berkshire Hathaway and for the first time, wrote the letter to the shareholders (Ken Chace had been responsible for the task in the past). That same year, the Chairman's capital allocation began to display his prudence.

Textile profits were a pitiful $45,000, while insurance and banking each brought in $2.1 and $2.6 million dollars. The paltry cash brought in from the struggling looms in New Bedford, Massachusetts had provided the stream of capital necessary to start building Berkshire Hathaway into what it has become today.

A year or so later, Warren Buffett was offered the chance to buy a company by the name of See's Candy. The gourmet chocolate maker sold its own brand of candies to its customers at a premium to regular confectionary treats. The balance sheet reflected what Californians already knew - they were more than willing to pay a bit 'extra' for the special 'See's' taste.

The businessman decided Berkshire would be willing to purchase the company for $25 million in cash. See's owners were holding out for $30 million, but soon conceded. It was the biggest investment Berkshire or Buffett had ever made.

Following several investments and an SEC investigation (after causing a merger to fail, Warren and Munger offered to buy the stock of Wesco, the target company, at the inflated price simply because they thought it was 'the right thing to do' - not surprisingly, the government didn't believe them), Buffett began to see Berkshire Hathaway's net worth climb.

From 1965 to 1975, the company's book value rose from $20 per share to around $95. It was also during this period that Warren made his final purchases of Berkshire stock. (When the partnership dolled out the shares, he owned 29%.

Years later, he had invested more than $15.4 million dollars into the company at an average cost of $32.45 per share.) This brought his ownership to over 43% of the stock with Susie holding another 3%. His entire fortune was placed into Berkshire. With no personal holdings, the company had become his sole investment vehicle.

In 1976, Buffett once again became involved with GEICO. The company had recently reported amazingly high losses and its stock was pummeled down to $2 per share. Warren wisely realized that the basic business was still intact; most of the problems were caused by an inept management team.

Over the next few years, Berkshire built up its position in this ailing insurer and reaped millions in profits. Benjamin Graham, who still held his fortune in the company, died in in September of the same year, shortly before the turnaround. Years later, the insurance giant would become a fully owned subsidiary of Berkshire.

Changes in Warren Buffett's Personal Life

It was shortly thereafter one of the most profound and upsetting events in Buffett's life took place. At forty-five, Susan Buffett left her husband - in form. Although she remained married to Warren, the humanitarian/singer secured an apartment in San Francisco and, insisting she wanted to live on her own, moved there.

Warren was absolutely devastated; throughout his life, Susie had been 'the sunshine and rain in [his] garden'. The two remained close, speaking every day, taking their annual two-week-long New York trip, and meeting the kids at their California beach house for Christmas get-togethers.

The transition was hard for the businessman, but he eventually grew somewhat accustomed to the new arrangement. Susie called several women in the Omaha area and insisted they go to dinner and a movie with her husband; eventually, she set Warren up with Astrid Menks, a waitress. Within the year, she moved in with Buffett, all with Susie's blessing.

Warren Buffett Wants Two Nickels to Rub Together

By the late '70s, his reputation had grown to the point that the rumor Warren Buffett was buying a stock was enough to shoot its price up 10%. Berkshire Hathaway's stock was trading at more than $290 a share, and Buffett's personal wealth was almost $140 million. The irony was that Warren never sold a single share of his company, meaning his entire available cash was the $50,000 salary he received. During this time, he made a comment to a broker, 'Everything I got is tied up in Berkshire. I'd like a few nickels outside.'

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This prompted Warren to start investing for his personal life. According to Roger Lowenstein's book, Buffett, Warren was far more speculative with his own investments than he was with Berkshire's. At one point he bought copper futures which were unadulterated speculation. In a short time, he had made $3 million dollars. When prompted to invest in real estate by a friend, he responded: 'Why should I buy real estate when the stock market is so easy?'

Berkshire Hathaway Announces Charitable Giving Program

Later, Buffett once again showed his tendency of bucking the popular trend. In 1981, the decade of greed, Berkshire announced a new charity plan which was thought up by Munger and approved by Warren. The plan called for each shareholder to designate charities which would receive $2 for each Berkshire share the stockholder owned.

This was in response to a common practice on Wall Street of the CEO choosing who received the company's hand-outs (often they would go to the executive's schools, churches, and organizations). The plan was a huge success and over the years the amount was upped for each share. Eventually, the Berkshire shareholders were giving millions of dollars away each year, all to their own causes.

The program was eventually discontinued after associates at one of Berkshire's subsidiaries, The Pampered Chef, experienced discrimination because of the controversial pro-choice charities Buffett chose to allocate his pro-rated portion of the charitable contribution pool. Another important event around this time was the stock price which hit $750 per share in 1982. Most of the gains could be attributed to Berkshire's stock portfolio which was valued at over $1.3 billion dollars.

Warren Buffett Buys Nebraska Furniture Mart, Scott Fetzer and an Airplane for Berkshire Hathaway

For all the fine businesses Berkshire had managed collect, one of the best was about to come under its stable. In 1983, Warren Buffett walked into Nebraska Furniture Mart, the multi-million dollar furniture retailer built from scratch by Rose Blumpkin. Speaking to Mrs. B, as local residents called her, Buffett asked if she would be interested in selling the store to Berkshire Hathaway.

Blumpkin's answer was a simple 'yes', to which she added she would part for '$60 million'. The deal was sealed on a handshake and a one-page contract was drawn up. The Russian-born immigrant merely folded the check without looking at it when she received it days later.

Scott & Fetzer was another great addition to the Berkshire family. The company itself had been the target of a hostile takeover when an LPO was launched by Ralph Schey, the Chairman. The year was 1984, and Ivan Boesky soon launched a counter offer for $60 a share (the original tender offer stood at $50 a share - $5 above market value).

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The maker of Kirby vacuum cleaners and World Book encyclopedia, S&F was panicking. Buffett, who had owned a quarter of a million shares, dropped a message to the company asking them to call if they were interested in a merger. The phone rang almost immediately. Berkshire offered $60 per share in cold, hard, cash.

When the deal was wrapped up less than a week later, Berkshire Hathaway had a new $315 million dollar cash-generating powerhouse to add to its collection. The small stream of cash that was taken out of the struggling textile mill had built one of the most powerful companies in the world. Far more impressive things were to be done in the coming decade. Berkshire would see its share price climb from $2,600 to as high as $80,000 in the 1990s.

In 1986, Buffett bought a used Falcon aircraft for $850,000. As he had become increasingly recognizable, it was no longer comfortable for him to fly commercially. The idea of the luxury was a lifestyle that was hard for him to accept, but he loved the jet immensely. The passion for jets eventually, in part, led him to purchase Executive Jet in the 90s.

The 80s went on with Berkshire increasing in value as if on cue, the only bump in the road being the crash of 1987. Warren, who wasn't upset about the market correction, calmly checked the price of his company and went back to work. It was representative of how he viewed stocks and businesses in general. This was one of 'Mr. Market's' temporary aberrations. It was quite a strong one; fully one-fourth of Berkshire's market cap was wiped out. Unfazed, Warren plowed on.

I'll Take a Coke

A year later, in 1988, he started buying up Coca-Cola stock like an addict. His old neighbor, now the President of Coca-Cola, noticed someone was loading up on shares and became concerned. After researching the transactions, he noticed the trades were being placed from the Midwest.

He immediately thought of Buffett, whom he called. Warren confessed to being the culprit and requested they don't speak of it until he was legally required to disclose his holdings at the 5% threshold. Within a few months, Berkshire owned 7% of the company or $1.02 billion dollars worth of the stock. Within three years, Buffett's Coca-Cola stock would be worth more than the entire value of Berkshire when he made the investment.

Warren Buffett's Money and Reputation On the Line During the Solomon Scandal

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By 1989, Berkshire Hathaway was trading at $8,000 a share. Buffett was now, personally, worth more than $3.8 billion dollars. Within the next ten years, he would be worth ten times that amount. Before that would happen, there were much darker times ahead (read The Solomon Scandal).

Warren Buffet at the Turn of the Millennium

During the remainder of the 1990s, the stock catapulted as high as $80,000 per share. Even with this astronomical feat, as the dot-com frenzy began to take hold, Warren Buffett was accused of 'losing his touch'. In 1999, when Berkshire reported a net increase of 0.5% per share, several newspapers ran stories about the demise of the 'Oracle of Omaha'.

Confident that the technology bubble would burst, Warren Buffett continued to do what he did best: allocate capital to great businesses that were selling below intrinsic value. His efforts did not go unrewarded. When the markets finally did come to their senses, Warren Buffett was once again a star. Berkshire's stock recovered to its previous levels after falling to around $45,000 per share, and the man from Omaha was once again seen as an investment icon.

Berkshire Hathaway (BRK.A) Chairman and CEO Warren Buffett is a great role model of the classic value-based investing style. Early in his legendary investing career, Buffett said, 'I'm 85% Benjamin Graham.' Graham is considered the godfather of value investing and introduced the idea of intrinsic value—the underlying fair value of a stock based on its future earnings power.

However, Buffett invests using a more qualitative and concentrated approach than Graham did. Graham preferred to find undervalued, average companies and diversify his holdings among them; Buffett favors quality businesses that have reasonable valuations and potential for large growth.

Buffett's Investing Style

There are a few things worth noting about Buffett's interpretation of value investing that may surprise you. Like many successful formulas, Buffett's looks simple. But simple does not mean easy. To guide him in his decisions, Buffett uses twelve investing tenets, or key considerations, which are categorized in the areas of business, management, financial measures, and value.

Buffett's tenets may sound cliché and easy to understand, but they can be very difficult to execute. For example, one tenet asks if management is candid with shareholders.

Conversely, there are interesting examples of the reverse: concepts that appear complex yet are easy to execute, such as economic value added (EVA). The full calculation of EVA is not easy to comprehend, and the explanation of EVA tends to be complex. But once you understand that EVA is a laundry list of adjustments, it is fairly easy to calculate EVA for any company.

​Economic Value Added=NOPAT−(CI×WACC)where:NOPAT=net operating profit after taxesCI=capital investedWACC=weighted average cost of capital​

Business Tenets

Buffett adamantly restricts himself to his 'circle of competence'—businesses he can understand and analyze. Buffett considers this deep understanding of the operating business to be a prerequisite for a viable forecast of future business performance. After all, if you don't understand the business, how can you project performance? For example, Buffett did not suffer greatly when the tech bubble burst back in the early 2000s because he was not heavily invested in dot-com stocks.

Buffett's business tenets each support the goal of producing a robust projection.

First, analyze the business, not the market, the economy, or investor sentiment. Next, look for a consistent operating history. Finally, use that data to ascertain whether the business has favorable long-term prospects.

Management Tenets

Buffett's three management tenets help evaluate management quality. This is perhaps the most difficult analytical task for an investor.

Buffett asks: 'Is management rational?' Specifically, is management wise when it comes to reinvesting (retaining) earnings or returning profits to shareholders as dividends? This is a profound question because research can suggest that historically, as a group and on average, management tends to be greedy and retain profits, as it is naturally inclined to build empires and seek scale rather than utilize cash flow in a manner that would maximize shareholder value.

Another tenet examines management's honesty with shareholders. That is, does it admit mistakes?

Lastly, does management resist the institutional imperative? This tenet seeks out management teams that resist a 'lust for activity' and the lemming-like duplication of competitor strategies and tactics. It is particularly worth savoring because it requires you to draw a fine line between many parameters, for example, between blind duplication of competitor strategy and outmaneuvering a company that is first to market.

Tenets in Financial Measures

Buffett focuses on return on equity (ROE) rather than on earnings per share. Most finance students understand that ROE can be distorted by leverage (a debt-to-equity ratio) and therefore is theoretically inferior to some degree to the return-on-capital metric. Here, return-on-capital is more like return on assets (ROA) or return on capital employed (ROCE). Buffett understands this, of course, but instead examines leverage separately, preferring low-leverage companies. He also looks for high profit margins.

His final two financial tenets share a theoretical foundation with EVA. First, Buffett looks at what he calls 'owner's earnings,' which is essentially cash flow available to shareholders, or technically, free cash flow to equity (FCFE). Buffett defines it as net income plus depreciation and amortization (for example, adding back non-cash charges) minus capital expenditures (CAPX) minus additional working capital (W/C) needs. Ultimately, with owners' earnings, Buffett looks at a company's ability to generate cash for shareholders, who are the residual owners.

Buffett also has a 'one-dollar premise,' which is based on the question: What is the market value of a dollar assigned to each dollar of retained earnings?

Value Tenets

Here, Buffett seeks to estimate a company's intrinsic value. Buffett projects the future owner's earnings, then discounts them back to the present. Keep in mind that if you've applied Buffett's other tenets, the projection of future earnings is, by definition, easier to do, because consistent historical earnings are easier to forecast.

Buffett ignores short-term market volatility and focuses on long-term returns. He only acts on short term fluctuations when looking for a good deal. If a company looks good at $50 per share and drops to $40, do not be surprised to see him pick up additional shares at a discount.

Buffett also coined the term 'moat,' which has subsequently resurfaced in Morningstar's successful habit of favoring companies with a 'wide economic moat.' The moat is the 'something that gives a company a clear advantage over others and protects it against incursions from the competition.' In a bit of theoretical heresy perhaps available only to Buffett himself, he discounts projected earnings at the risk-free rate, claiming that the 'margin of safety' in carefully applying his other tenets presupposes the minimization, if not the virtual elimination, of risk.

The Bottom Line

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In essence, Buffett's tenets constitute a foundation in value investing, which may be open to adaptation and reinterpretation going forward. It is an open question as to the extent to which these tenets require modification in light of a future where consistent operating histories are harder to find, intangibles play a greater role in franchise value, and the blurring of industries' boundaries makes deep business analysis more challenging.

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Everyone wants to buy like Buffett, but few have been able to mimic his success. Buffett himself suggests small investors buy a low-cost S&P 500 index fund rather than individual stocks.