Book Review: Warren Buffett by Robert Heller

What style of investor do you want to be? This is a fundamental question every investor should ask and answer.

One approach would be to try and emulate the style and performance of arguably the most successful investor of the 20th century, Warren Buffett. After studying and working with the legendary Professor Benjamin Graham in the 1950's, Buffett's investment career fell into two main phases. From 1956 to 1969, he ran a very successful private investment partnership. In 1965 he acquired control of Berkshire Hathaway that become the vehicle for his investment interests.

Over the next 34 years, this company earned nearly 25 per cent per annum for its investors. If you had invested $US10,000 in Berkshire Hathaway in 1965, it would now be worth more than $US50 million.

Robert Heller has written a wonderful book about the "Sage of Omaha" and his investment strategy. He sets out the key principles of Buffett's various activities in bullet-points and there are interesting vignettes on special people or acquisitions scattered throughout the book.

Buffett's investment philosophy was to use stringent criteria in searching for fundamental value that has been overlooked by the stockmarket. He has followed an apparently simple rule - never invest unless you find something worth buying - that requires an extraordinary level of discipline to apply successfully in practice.

It is hard to exaggerate the importance of Buffett's fundamental principles for action. He believes that one has to develop good investment habits early in one's career. When the investor finds things in the investment world, they should be avoided. To a large degree we get the regulators, financial advisers, brokers, etc, that we deserve. Too many investors - both retail and institutional - settle for mediocrity.

Buffett's philosophy is clearly diametrically opposed to modern portfolio theory (MPT). Broad diversification and indexation are the hallmarks of MPT. His philosophy in contrast is often called "focus investing" and often results in holding only 5-10 carefully selected stocks, sometimes none. Yet even Buffett would concede that if you do not have special information and analytical skills (or cannot identify someone with those skills and unusually high confidence) then your best strategy may well be indexation.

And what do you do if you can't be the Warren Buffett, or find the next Warren Buffett?

If you play the odds and understand the difficulties that conventional active equity managers have in beating benchmarks, then even Buffett - who does not believe in market efficiency - would suggest that you should seriously consider indexing.

Buffett also shares some other, perhaps surprising, similarities with passive investors. The first is an abhorrence of market timing, recognising that the steady accumulation of tax deferred wealth is the preferred strategy. The second is a belief that short-term investment performance measurement is worse than uselessness. A third is that conventional accounting statements are frequently misleading and sometimes deliberately deceptive. Buffett has been a bitter critic of the accounting treatment of many mergers and acquisitions and especially of the treatment of stock options that have allowed executives to conceal the fact that their compensation expense has cost shareholders a lot of money.

Buffett has often gone beyond being a mere minority equity investor and acquired complete control of businesses. As with stock investing, he has sought good businesses at fair prices. He does not interfere with the post-acquisition management of businesses other than to closely monitor capital allocation and the selection and compensation of top management.

He looks for managers that place owners' interests before management's and won't invest in management that does not tell the whole truth. Buffett knows that mistakes are inevitable - including his own - and believes that these should be acknowledged quickly and candidly.

Several pages of Heller's book deal with rational decision-making. Buffett believes many investors act impetuously, illogically, and obstinately. Buffett has always placed great emphasis on providing sound logical justification for his actions and beliefs. He sets high evidential standards, as well as high moral standards. There is some irony in the present age that the World'' Greatest Investor suggests a strong case for a good classical education. These are weighty matters for all investors to contemplate.

Acknowledgment: Asset - March 2001, Book Review

Note: Sounds logical & simply enough, but can it be achieved without focus and the right skills and advice.