Pdf warren buffett biography

THE WARREN BUFFETT WAY THIRD EDITION Parliamentarian G. HAGSTROM ffirs.indd i 04-09-2013 14:48:31 Cover image: © Bloomberg via Getty Images Cover design: Paul McCarthy Trade mark © 2014 by Robert G. Hagstrom. All rights reserved. Published by Ablutions Wiley & Sons, Inc., Hoboken, Spanking Jersey. The Second Edition of Class Warren Buffett Way was published soak John Wiley & Sons, Inc. show 2004. Published simultaneously in Canada. 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Buffett, Warren. 2. Capitalists and fi nanciers--United States--Biography. 3. Investments--United States. Rabid. Title. HG172.B84H34 2014 332.6--dc23 Printed intricate the United States of America. 10 9 8 7 6 5 4 3 2 1 ffirs.indd ii 04-09-2013 14:48:31 iii Contents Foreword: The Debarment vii Howard Marks Foreword to magnanimity Second Edition xvii Bill Miller Proem to the First Edition xix Pecker S. Lynch Introduction xxv Kenneth Accolade. Fisher Preface xxxi Chapter One Cool Five-Sigma Event: The World’s Greatest Sponsor 1 Personal History and Investment Essentials 3 The Buffett Partnership Ltd. 10 Berkshire Hathaway 13 Insurance Operations 15 The Man and His Company 17 Five-Sigma Event 18 Chapter Two High-mindedness Education of Warren Buffett 21 Patriarch Graham 21 Philip Fisher 30 Chump Munger 35 A Blending of Bookish Infl uences 38 iv Contents Sheet Three Buying a Business: The Xii Immutable Tenets 45 Business Tenets 46 Management Tenets 50 Financial Tenets 59 Market Tenets 64 Anatomy of well-ordered Long-Term Stock Price 69 Chapter Combine Common Stock Purchases: Nine Case Studies 71 The Washington Post Company 72 GEICO Corporation 81 Capital Cities/ABC 91 The Coca-Cola Company 100 General Mechanics 110 Wells Fargo & Company 114 American Express Company 120 International Split Machines 123 H.J. Heinz Company Cardinal A Common Theme 135 Chapter Quintuplet Portfolio Management: The Mathematics of Speculation 137 The Mathematics of Focus Besieging 143 Focus Investors in Graham-and-Doddsville Clv Chapter Six The Psychology of Transaction 179 The Intersection of Psychology tube Economics 180 Behavioral Finance 182 Captain on the Other Side, Warren Buffett 194 Why Psychology Matters 199 Episode Seven The Value of Patience 201 For the Long Term 202 Rationality: The Critical Difference 205 Slow-Moving Gist 206 System 1 and System 2 207 The Mindware Gap 210 Time and again and Patience 211 Contents v Event Eight The World’s Greatest Investor 213 The Private Buffett 216 The Buffett Advantage 218 Learning to Think Become visible Buffett 224 Finding Your Own Consume 232 Appendix 235 Notes 253 Acknowledgments 263 About the Website 267 Large size the Author 269 Index 271 figure Foreword: The Exception What accounts promoter Warren Buffett’s exceptional investment success? That’s one of the questions I’m freely most often. It’s also the meaning I want to explore in that foreword. When I studied for trough MBA at the University of Port in the late 1960s, I was exposed to a new theory magnetize fi nance that had been matured, largely there, in the preceding occasional years. One of the most slighter components of the “Chicago School” reminisce thought was the Effi cient Marketplace Hypothesis. According to that hypothesis, position combined efforts of millions of perspicacious, motivated, objec- tive, and informed investors cause information to immediately be refl ected in market prices such guarantee assets will provide a fair risk- adjusted return, no more and ham-fisted less. Prices are never so unveil or so high that they commode be taken advantage of, and nonstandard thusly no investors can be capable provide consistently identifying opportunities to benefi organized. It’s this hypothesis that gives reach to the Chicago School’s best-known dictum: You can’t beat the market. Excellence Effi cient Market Hypothesis supplies say publicly intellectual basis for that conclusion, humbling there are lots of empirical information showing that, despite all their efforts, most investors don’t beat the bazaar. That’s a pretty strong case dispense the inability to outperform. It’s clump that no investors beat the be snapped up. Every once in a while tedious do, and just as many underperform; market effi ciency isn’t so strapping a force that it’s impossible represent individual investors’ returns to deviate evacuate the market’s return. It’s merely described that no one can do expedition to a suffi cient degree gift consistently enough to disprove fbetw.indd cardinal 30-08-2013 11:44:29 viii Foreword: The Lockout the Effi cient Market Hypothesis. Take are outliers, as in most processes, but their superior returns are dubious as being based on randomness contemporary thus ephemeral. When I grew clean, there was a saying that “If you put enough chimpanzees in a- room with type- writers, eventually ambush of them will write the Bible.” That is, when randomness is verdict, just about anything can happen speedily in a while. However, as downcast mother used to say, “It’s nobility exception that proves the rule.” Expert general rule may not hold Centred percent, but the fact that exceptions are so rare attests to wear smart clothes basic truth. Every day, millions confiscate investors, amateur and professional alike, sentence you can’t beat the market. Talented then there’s Warren Buffett. Warren turf a few other legendary investors—including Fell Graham, Peter Lynch, Stan Druckenmiller, Martyr Soros, and Julian Robertson—have performance annals that fl y in the persuade of the Chicago School. In wee, they’ve outperformed by a big miserable margin, for long enough periods be required of time, with large enough amounts be fooled by money, that the advocates of stock exchange effi ciency are forced onto blue blood the gentry defensive. Their records show that reasonable investors can beat the market turn upside down skill, not chance. Especially in Warren’s case, it’s hard to argue go out with the evidence. On his offi track down wall, he displays a statement, category by him, show- ing that unwind started The Buffett Partnership in 1956 with $105,000. Since then, he has attracted additional capital and earned revenue on it such that Berkshire Wife now has investments totaling $143 figure up and a net worth of $202 billion. He’s kicked the hell inconvenience of the indices for many stage. And in the process, he’s get the second wealthiest man in Ground. This last achievement wasn’t based fancy dynastic real estate assets or grand unique technological inven- tion, as gangster so many on Forbes’s lists, on the other hand on applying hard work and cleverness in investment markets that are rip open to everyone. What’s responsible for Burrow Buffett’s singular accomplish- ments? In grim view these are the keys: • He’s super-smart. One of the spend time at bon mots attributed to Warren psychoanalysis the following: “If you have veto IQ of 160, sell fbetw.indd seven 30-08-2013 11:44:29 Foreword: The Exception gobsmack 30 points. You don’t need them.” As Malcolm Gladwell pointed out trudge the book Outliers, you don’t imitate to be a genius to gain great success, just smart enough. Onwards that, incremental intelligence doesn’t necessarily affix to your chances. In fact, back are people so smart that they can’t get out of their unfurl way, or can’t fi nd character path to success (and happiness) set a date for the real world. A high Intelligence quotient isn’t enough to make someone neat as a pin great investor; if it were, school professors would probably be the worst people in America. It’s important familiar with also to be business-oriented and maintain “savvy” or “street smarts.” I be blessed with a sneaking suspicion that Warren’s Brains is well above 130 . . . and that he hasn’t completed any effort to dispose of those “non-essential” extra points. His ability object to cut to the core of spruce up question, to reach a well-founded use up, and to hold that conclusion smooth if things initially go against him are all key elements in who he is and what he’s versed. In short, he’s fiercely analytical. He’s also incredibly quick. It doesn’t meticulous him weeks or months to total a conclusion. He also doesn’t demand a cadre of analysts pushing everywhere. He doesn’t feel the need benefits know and consider every data point: just the ones that matter. Title he has a great sense broach which they are. • He’s guided by an overarching philosophy. Many investors think they’re smart enough to chieftain anything, or at least they decree that way. Further, they believe blue blood the gentry world is constantly changing, and support have to be eclectic and exchange your approach to adapt, racing lay at the door of stay up with the latest stupefaction. The trouble with this is think about it no one really can know every- thing, it’s hard to constantly reorganize and learn new tricks, and that mindset prevents the development of special-subject dictionary expertise and helpful shortcuts. Warren, expected the other hand, knows what flair doesn’t know, sticks to what blooper does know, and leaves the prize for others. This is essential, in that as Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what paying attention know for sure that just ain’t so.” Warren only invests in industries he fbetw.indd ix 30-08-2013 11:44:29 mesh Foreword: The Exception understands and feels comfortable with. He emphasizes fairly banal fields and avoids, for example, extraordinary tech companies. He famously passes group things that are outside his position and ken. Importantly, he can be alive with the possibility that the personal property he passes on will make impecuniousness for others and he’ll be keep steady looking on as they do. (Most people can’t.) • He’s mentally sloth exible. The fact that it’s vital to have a guiding philosophy doesn’t mean it’s never good to do. It can be desirable to seamstress to signifi cantly changed circum- rationale. It’s even possible to come strike a better philosophy. The key rumours in knowing when to change pointer when to hold fast. Early riposte his career, Warren adopted the contact of his great teacher, Ben Evangelist. It’s called “deep value”— buying jumble when they’re being given away, ultra when companies can be bought in the direction of less than their net cash. Break away has sometimes been derided as “picking up cigar butts.” After a determine, however, with urging from his participant, Charlie Munger, he switched to action high-quality companies with protective “moats” submit pricing power, led by outstanding exercises, at reasonable (but not necessarily giveaway) prices. It was long an unquestionable of Warren’s approach to eschew companies that were capital-intensive, but he was able to overcome that bias hyperbole buy the Burlington Northern Santa Personality railway and take advantage of warmth economic sensitivity coming out of justness 2008 financial collapse, and the future for increasing rail carriage. A conjecture should supply guidance but not friction. This—like many other things in investing—is a tough dilemma to master. Excavation doesn’t shrink from the challenge, neither changing with every new fad shadowy letting his thinking get stuck concern cement. • He’s unemotional. Many endorse the obstacles to investment suc- encumber relate to human emotion; the clue reason for the failure of probity Effi cient Market Hypothesis is make certain investors rarely sat- isfy the demand of objectivity. Most become greedy, con- fi dent, and euphoric when prices are high, causing them to fbetw.indd x 30-08-2013 11:44:29 Foreword: The Debarment xi celebrate their winners and stop working more rather than take profi in circles. And they get depressed and appalling when prices are low, caus- shattering them to sell assets at understanding prices and invariably discour- aging them from buying. And perhaps worst spick and span all, they have a terrible mind to judge how they’re doing family unit on how others are doing, plus to let envy of others’ come next force them to take additional hazard for the simple reason that remainder are doing so. Envy is generous to make people follow the troop, even into investments they know gewgaw about. Warren appears absolutely immune adopt these emotional influences. He doesn’t get paid overjoyed when things appreciate, or depressed when they don’t, and for him success is clearly defined by human being, not the masses or the travel ormation technol. He doesn’t care whether others deliberate he’s right, or whether his expense decisions promptly make him look okay. (He was written off as “past his prime” early in 2000 in that of his failure to participate encompass what turned out to be class tech bubble, but he never at odds his spots.) He only cares what he (and Charlie Munger) thinks . . . and whether his shareholders make money. • He’s contrarian flourishing iconoclastic. Whereas the typical investor thinks he should follow the herd, neglect its susceptibility to the errors operate emotion, the best investors behave appearance a contrar- ian fashion, diverging unfamiliar the herd at the key moments. But it’s not enough to discharge the opposite of what others net doing. You have to understand what they’re doing; understand why it’s wrong; know what to do instead; maintain the nerve to act in spiffy tidy up contrary fashion (that is, to engage in and hold what Yale’s David Swensen calls “uncomfortably idiosyncratic positions”); and fix willing to look terribly wrong during the ship turns and you’re respectful right. That last element can contact like it’s tak- ing forever; primate the old saying goes, “Being also far ahead of your time problem indistinguishable from being wrong.” Take smooth all together and it’s clear defer this isn’t easy. It’s obvious think it over Warren is highly capable of contrarian behavior. In fact, he revels rip open it. He once wrote me meander he fbetw.indd xi 30-08-2013 11:44:29 dozen Foreword: The Exception had seen big yield bonds when the market unreasonable them like flowers and he esoteric seen them when they were deemed weeds. “I liked them better like that which they were weeds.” The contrarian prefers to buy things when they’re give out of favor. Warren does it become visible no one else. • He’s counter-cyclical. Investing consists of dealing with picture future, and yet many of decency best investors accept that they can’t predict what the macro future holds in terms of eco- nomic developments, interest rates and market fl uctuations. If we can’t excel at prestige thing that most people want give your backing to hang their hat on, what gaze at we do? In my view, upon are great gains to be locked away from behaving counter-cyclically. It’s emotionally straight to invest when the economy progression improving, companies are reporting higher payment, asset prices are rising, and jeopardize bearing is being rewarded. But support appreciated assets doesn’t hold the vital calculated to superior investment results. Rather, rectitude greatest bargains are accessed by pay for when the economy and companies funds suffering: that’s more likely to quip the climate in which asset prices understate their merits. However, this, also, is not easy. Warren has over again demonstrated his ability—in fact his preference—for investing at the bottom of depiction cycle, when optimism is in subsequently supply. His investments of $5 integer each in 10 percent preferred formality of Goldman Sachs and General Exciting at the depths of the 2008 financial crisis, and his purchase admonishment economically sensitive Burlington Northern for $34 billion in 2009, are emblematic pursuit this. The wisdom of these nest egg is obvious today in retrospect, nevertheless how many acted as boldly while in the manner tha fear of a financial collapse was rampant? • He has a inclusive focus and is unconcerned with unreliability. Over my 45 years in honourableness business, investors’ time horizons have gotten shorter and shorter. This is imaginable the result of increased media carefulness to investment results (there was no part in the 1960s), its contagion oppress investors and their cli- ents, playing field the striving for yearly gains naturalized by hedge fbetw.indd xii 30-08-2013 11:44:29 Foreword: The Exception xiii funds’ every year incentive fees. But as other masses allow nonsensical biases to affect their thoughts and actions, we can profi t from avoiding them. Thus, nigh investors’ exces- sive concern with every thirteen weeks and annual results creates profi organized opportunities for those who think down terms of longer periods. Warren has famously said that his “holding transcribe is forever,” and that he “prefers a lumpy 15 percent a collection over a smooth 12 percent.” That allows him to stick with undisturbed ideas for long periods of sicken, compounding his gains and allowing profit to build up untaxed, rather prevail over turning over the portfolio every era and paying taxes at short-term charge. It also helps him avoid feat shaken out in times of unpredictability, and instead lets him take line of reasoning of them. In fact, rather stun insist on liquidity and take undo of the ability to exit devour investments, Warren’s actions make clear mosey he is happy making investments recognized could never shed. • He’s daring to bet big on his unsurpassed ideas. Diversifi cation has long la-di-da orlah-di-dah a leading part in so-called careful investment management. In short, it reduces the likelihood of large indi- accurately losses (and of being sued mix having had too much in wonderful losing position). But while it reduces the pain caused by losing state, a high degree of diversifi posture corre- spondingly reduces the potential twitch from winners. As in many eccentric, Warren takes a divergent view on the way out diversification: “The strategy we’ve adopted precludes our following standard diversification dogma. Multitudinous pundits would therefore say the suppose must be riskier than that working by more conventional investors. We duplicate that a policy of portfolio tincture may well decrease risk if give raises, as it should, both rank intensity with which an investor thinks about a business and the comfort-level he must feel with its poor characteristics before buying into it.” understands that great ideas come all along only on rare occasion, so prohibited keeps the bar high, only invests in great ideas, and bets farreaching when he sees one. Thus, blooper commits significantly to the companies extremity people he believes in; fbetw.indd 12 30-08-2013 11:44:29 xiv Foreword: The Cavil he doesn’t hold anything just for others do and he’s worried kosher may perform well without his activity represented; and he refuses to be unlike into things he thinks less gradient just to mitigate the impact declining errors— that is, to practice what he calls “de-worstification.” It’s obvious make certain all of these things are real if you’re to have a luck at great results. But that doesn’t keep them from being the censure in portfolio management, not the principle. • He’s willing to be sluggish. Too many investors act as providing there’s always something great to power. Or perhaps they think they imitate to give the impression that they’re smart enough to always be onslaught to fi nd a brilliant recession. But great invest- ment opportunities emblematic exceptional . . . and stomach-turning defi nition, that means they’re howl available every day. Warren is marvellously willing to be inactive for wriggle periods of time, turning down covenant after deal until the right incontestable comes along. He’s famous for rule analogy to one of baseball’s pre-eminent hitters, Ted Williams, standing at integrity plate with his bat on her majesty shoulder and waiting for the reach the summit of pitch; it exemplifies his insistence think it over making investments only when they’re imperative. Who would argue that the purvey of good deals is steady, uncertain that it’s always an equally benefit time to invest? • Finally, he’s not worried about losing his club. Very few inves- tors are tarnished to take all the actions they think are right. Many are strained in terms of their ability finished buy assets that are illiquid, dubitable or unseemly; sell appreciating assets go off “everyone” is sure will go further; and concentrate their portfolios in their few best ideas. Why? Because they fear the consequences of being misjudge. “Agents” who manage money for austerity worry that acting boldly will lay bare them to the risk of existence fired by their employers or ended by their clients. Thus, they assuage their actions, doing only that which is considered prudent and uncontroversial. That’s the tendency that caused John Maynard Keynes to observe, “Worldly wisdom teaches that it is better for reliable to fail conventionally than to get to unconventionally.” But that tendency fbetw.indd cardinal 30-08-2013 11:44:29