Warren Buffett Wealth
Review by Mike Price
On a recent trip to Florida I was in need of a good investment book to read. I was quickly disappointed at the local Books-a-Million (BAMM) because of the limited selection of good investing books.
Don’t get me wrong they had four sections of a bookshelf worth of investing books, but I had either read the book or had no interest in learning technical analysis of FOREX.
Luckily I found a good book in the business section: Warren Buffett Wealth.
I liked the table of contents and immediately bought it when I saw Robert P. Miles, author of Warren Buffett CEO and 101 Reasons to Own Berkshire Hathaway, wrote it.
I finished the book thinking it was repetitive and basically the same as other books on Buffett, but thought it had two good points:
Developing an Investment Philosophy is Vital
Characteristics of the Next Warren Buffett
Investment Philosophy
Miles dedicates 16 pages of the book to developing an investment philosophy saying, “Investment Philosophy is the cornerstone of all successful investing.”
Having an independent, evolving investment philosophy is essential to successful investing. Buffett’s investment philosophy, one which he has stuck to for over 40 years and one which has served him very well is:
Know What You Own
Research Before You Buy
Own a Business, Not a Stock
Only Invest in 20 Companies in Your Lifetime
Make One Decision to Own a Stock and Be a Long Term Owner
Part of having a set investment philosophy is to know how to analyze companies, know when to buy them, know how to develop a good portfolio, and most importantly know when to sell.
My still evolving philosophy is as follows:
Don’t rely on any outside research to buy a stock
Do as much proprietary research as possible before owning
Buy only quality companies with shareholder-oriented management
Only buy when a company is trading at least 40% below intrinsic value
Own 5-7 stocks with the potential of doubling in two years or less
Own 2-3 companies forever
Try to find as many special situations as possible and buy any with an expected annual return of 25% or more
The best course now is to examine these two investment philosophies, read as much as possible about great investors, and develop your own philosophy to acheive great long-term returns.
The Next Buffett
The other part of the book that I like is about GEICO’s Lou Simpson, who Miles calls the next Warren Buffett – this probably won’t happen because of the age similarity - like Buffett Simpson has great long-term returns, his investment philosophy is summarized below:
Think independently – The investor who relies on watching Jim Cramer’s Mad Money or reading Fortune for all of his investment decisions is destined to have poor returns. Look at what super-investors are buying for ideas, but then do your own research to decide if the investment is worth buying.
Invest in high return businesses, run for shareholders – Even if you find an insanely undervalued stock, if the business is bad or management is focused on its own interests the stock should be undervalued. Avoid these value traps.
Pay only a reasonable price, even for excellent businesses – Even if you find an excellent business with excellent management, buying an overvalued stock will not produce good long-term results. In the late 90s many great internet companies, like eBay (EBAY) and Cisco (CSCO), traded at extremely high prices relative to their intrinsic value – none of the companies survived without losing a good amount of market value.
Invest for the long term – Very few people have become rich by trading on rumors and expected earnings surprises. Those who have are forced to endure the side effects of this life style. Jim Cramer woke at 3 a.m. and threatened to kill employees; Jesse Livermore shot himself in a hotel room. Better returns will be garnered by sticking to a winning strategy of buying companies and not selling for a long time.
Do not diversify excessively – Simply put: If I own 10 companies I believe will deliver exceptional returns why should I dilute those returns with an eleventh company that may not produce those returns?
Conclusion
Warren Buffett Wealth is a very well written book, that I give 2.5 out of 5 stars only because the book is full of already well-known facts that can be found by simply reading one Berkshire annual report.
Don’t buy this book. But, if you ever find it at a library or book store sit down for a few minutes and read the chapters on Lou Simpson, investment philosophies and myths of investing.
Mike Price is a fifteen year-old value investor who has been investing since the age of thirteen. He started by reading the Motley Fool discussion boards and Robert Hagstrom's many Warren Buffet books. He now writes his own blog: Value Investing, and a Few Cigar Butts.