How was Warren Buffet able to look past his conventional book-value approach to business valuation to purchase See’s Candy for US $25 million in 1972 (priced at three times net tangible assets which “made him gulp”), to go ahead with the acquisition that has earnt Berkshire Hathaway pre-tax over US $2 billion to date?
This book by Robert Hagstrom deals with the specific elements that characterise Buffets investing style, rooted initially in Benjamin Graham’s ideology with a “cigar butt” strategy and later influenced by Charlie Munger with a shift towards quality companies (no longer fair companies at great prices but great companies at fair prices). Hagstrom deals with well-known Buffet tenets such as the invocation of greed when others are fearful, the value of economic moats and the importance of keeping within ones ‘circle of competence’.
What makes this book so interesting is that it provides anecdotes of Buffet and Charlie Munger’s successful investments, which were in many cases amalgamations of previous business experiences, ideologies and so called ‘golden rules’.
One clear piece of portfolio advice is to hold a limited amount of positions with ‘high conviction’, reflected in Buffet’s decision to place 40% of his partnerships assets in American Express when short term storms smashed its share price to nearly halve. The enduring value of American Express (still to this day) ensured Buffet’s Berkshire netted a handsome profit shortly after and it is argued by Hagstrom that it was Buffet’s ‘focused’ investing within a select universe that allowed him to recognise this opportunity quoting: “I can’t be involved in 50 or 70 things. That’s a Noah’s Ark way of investing – you end up with a zoo. I like to put meaningful amounts of money in a few things” Warren Buffet, 1987.
The value of this book increases further due to its inclusion of Berkshire’s portfolio holdings through the 1980’s, 90s etc; along with fascinating data such as the return of Charlie Mungers partnership from 1962 to 1975 (which averaged 24.3% annually versus the Dow Jones Index at 6.4%).
It is a fantastic read, learning from extremely wise investors who have continued to learn and adapt with great success over the decades.