After the high of my first posting, sleeping is quite difficult. As such, would like to post my review on the book about the legendary Warren Buffet. The reason I picked this book is that the content is by Mr. Buffet himself and not interpreted by another person. That way, I hope to understand the principles practised by Warren Buffet himself and of course, to implement it in my investment and management duties.
Although the book is not that easy to read as it is a compilation of essays published by Warren Buffet in annual reports, letters to shareholders, etc., however, Lawrence Cunningham has done an excellent job in compiling the essays according to topics and aspiring investors and leaders will benefit from the insights of the legendary investor. Here, I would like to share some insights from reading the book:
1) If we have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an opportunity to increase our ownership at an attractive price.
2) Major additional investment in a terrible industry usually is about as rewarding as struggling in quicksand.
3) The CEO who misleads others in public may eventually mislead himself in private.
4) Charlie and I (Warren Buffet) tend to be leery of companies run by CEOs who woo investors with fancy predictions.
5) Three suggestions for investors: First, beware of companies displaying weak accounting. Second, unintelligible footnotes usually indicate untrustworthy management. Finally, be suspicious of companies that trumpet earnings projections and growth expectations.
6) Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers.
7) Many people who are smart, articulate and admired have no real understanding of business. That's no sin; they may shine elsewhere. But they don't belong on corporate boards.
8) David Ogilvy of Ogilvy & Mather: "If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants."
9) My (Warren Buffet) conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
10) Warren Buffet's old friend: "If you want to get a reputation as a good businessman, be sure to get into a good business."
11) It is better to be approximately right than precisely wrong.
12) As time goes on, I (Warren Buffet) get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence. One's knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.
13) Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics. Once they become CEOs, they face new responsibilities. They now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. (I like this point because I have seen many CEOs who are good in their field of expertise especially in technical fields such as engineering and they find themselves overwhelmed not because of their incompetence but because they loved their technical expertise so much that they are not willing to let go and run the risk of being labelled a businessman and not a good engineer, doctor, etc. Somehow, to be a good businessman implies someone with low moral values while a professional (e.g. doctor, accountant, engineer, etc.) is automatically deemed to be a person of strong ethical values. Anyway, I believe we can always be a good businessman with good ethics and social responsibility.)
14) We (Berkshire) select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.
15) Growth benefits investors only when the business in point can invest at incremental returns that are enticing-in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value.
16) An intelligent investor in common stocks will do better in the secondary market than he will do buying new issues.
17) Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.
18) If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.
19) Many investors have had experiences (in stock market) ranging from mediocre to disastrous. There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies.
20) They (investors) should try to be fearful when others are greedy and greedy when others are fearful (the famous quote by Warren Buffet. In real life, it is quite difficult to implement it unless you are confident of your research and have carried out your homework. Of course, it is also important that you are not betting your entire life savings in a particular stock. That is not investing and is gambling (stating the obvious). My approach in implementing this principle of Warren Buffet is like saving money. I put aside a small sum (comfortable sum) and invest in companies which satisfies Warren Buffet's criteria and will tends to invest more when others are fearful and "cash-out" when others are greedy).
21) In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen.
22) When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
23) Charlie and I (Warren Buffet) have not learned how to solve difficult business problems. What we have learned is to avoid them.
24) I (Warren Buffet) to go into business only with people whom I like, trust, and admire (This statement sounds simple but those who have gone through it will appreciate the wisdom behind it. I have witnessed how difficult it is if you do business with people whom you dont like, trust and admire. It will simply breaks down and the many hours which can be better spent will end up spending it on matters such as arguing, damage control, etc. I have seen partners suffering gastric and many other health problems simply because they cannot get along with another partner).
25) The most common cause of low prices is pessimism - sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.
26) A contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do."
27) In an unregulated commodity business, a company must lower its costs to competitive levels or face extinction.
28) Charlie and I (Warren Buffet) are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
29) Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
30) When a problem exists, whether in personnel or in business operations, the time to act is now.
31) For investors as a whole, returns decrease as motion increases.
32) If earnings have been unwisely retained, it is likely that managers too, have been unwisely retained.
33) A hyperactive stock market is the pick-pocket of enterprise.
34) "Fanaticism," said [Santayana], "consists of redoubling your effort when you've forgotten your aim".
35) Practice doesn't make perfect; practice makes permanent. And thereafter I revised my strategy and tried to buy good businesses at fair prices rather than fair businesses at good prices.
36) If something's not worth doing at all, it's not worth doing well.
37) Noah principle: predicting rain doesn't count, building arks does.
38) On Warren Buffet's opinion on investment bankers: Don't ask the barber whether you need a haircut.
39) The highest stock market prices relative to intrinsic business value are given to companies whose managers have demonstrated their unwillingness to issue shares at any time on terms unfavorable to the owners of the business.
40) A really good business generates far more money (at least after its early years) than it can use internally.
41) Our goal will be to acquire either part or all of businesses that we believe we understand, that have good, sustainable underlying economics, and that are run by managers whom we like, admire and trust.
42) In any case, why potential buyers even look at projections prepared by sellers baffles me. Charlie and I never give them a glance, ......
43) Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an enoromous amount of grubby detail work...dealmaking is romantic, sexy. That's why you have deals that make no sense.
44) Only in the sales presentations of investment banks do earning move forever upward.
45) And if owners behave with little regard for their business and its people, their conduct will often contaminate attitudes and practices throughout the company.
46) In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.
47) We do not think so-called EBITDA (earnings before interest, taxes, depreciation and amortization) is a meaningful measure of performance. Managements that dismiss the importance of depreciation - and emphasize "cash flow" or EBITDA - are apt to make faulty decisions, and you should keep that in mind as you make your own investment decisions.
48) A girl in a convertible is worth five in the phonebook.
49) Managers thinking about accounting issues should never forget one of Abraham Lincoln's favorite riddles: "How many legs does a dog have if you call his tail a leg?" The answer: "Four, because calling a tail a leg does not make it a leg." It behooves managers to remember that Abe's right even if an auditor is willing to certify that the tail is a leg.
50) Tax paying investors will realize a far, far greater sum from a single investment that compounds internally at a given rate than from a succession of investments compounding at the same reate.
51) In a finite world, high growth rates must self-destruct.
52) We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.
53) Fear is the foe of the faddist, but the friend of the fundamentalist.
54) Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term invesment success.
In summary:
It is a good book with valuable insights from Warren Buffet which I find sincere from his writings. He would not promise you the sky but will make sure that you are grounded in realities. However, this book is perhaps more for serious reading as it does not flow (as is expected as the content is extracted from various sources written by Warren Buffet) and for me, it requires considerable effort and discipline to finish reading the book. If you manage to do so, you will not regret it though.
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