Thursday, February 5, 2009

The Warren Buffett Way: Introduction

The following summary was written by Frank Voisin, who regularly writes for Frankly Speaking. Recently, Frank sold four restaurants and returned to school to complete a combined LLB/MBA.

On my quest to learn more about Value Investing, several people have recommended that I read Robert Hagstrom’s The Warren Buffett Way. I recently had an opportunity to do so, and found it to be an excellent book that takes Benjamin Graham’s The Intelligent Investor one step further in its application to Warren Buffett’s methodology. If you're interested in a chapter-by-chapter review of this book, Reyer has done so here.

How Did Warren Buffett Become So Successful?
While many of us know Warren Buffett to be the most successful investor of all time, we often have very litte understanding of how he became that way. Hagstrom points to four individuals as major influences on his financial education. Today we'll look at Ben Graham:

Benjamin Graham

Benjamin Graham was Warren Buffett’s professor at Columbia University, and the author of The Intelligent Investor, which introduced the value investing philosophy. He taught Buffett the difference between investing and speculating (Investing is an operation which, upon thorough analysis, promises safety of principal and a satisfactory return) and the importance of building a margin of safety (which is really the core idea of value investing).

The Margin of Safety is the difference between what you pay for company and its intrinsic value. The less you pay, the greater the margin of safety, and the greater the company’s ability to withstand negative events. Because of the reversion to the mean, the company’s value is likely to increase to its intrinsic value.

The Margin of Safety can be increased by looking for companies selling at low prices relative to net current assets and low prices relative to earnings.

Graham’s influence on Buffett is that he taught Buffett the essential quantitative elements of value investing.

On to the rest of the chapters!

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