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The Essential Buffett: Timeless Principles for the New Economy

by Robert G. Hagstrom, 2001, John Wiley & Sons, Inc., hardcover, 283 pages, list US$ 27.95

Warren Buffett is recognized by many as the world's greatest investor.  This is Robert Hagstrom's third book about "the Sage from Omaha."

I learned of this book from a course participant, who thought that some ideas contained were at odds with things we discussed in class.  Despite some minor issues, e.g., end-year discounting (corrected Excel schedule for Coca Cola Example, page 119), I found this book both useful and interesting.  I recommend it to anyone interested in stock investments.

"Investing is easier than you think but harder than it looks"—Buffett

The most interesting parts of the book, for me, were the stories about great ideas and great investors.  Buffett's thinking was especially influenced by three persons:

Of the three influences, Graham's portfolio style most closely matches my own.   I admire Fischer's and Munger's approaches.  However, I'm unable to devote the time (and perhaps lack the intelligence) to adequately analyze companies and industries.   Instead, I'm substituting time-consuming number crunching for time-consuming fact finding.

Chapter 4, "Guidelines for Buying a Business: Twelve Immutable Tenets," summarizes what Hagstrom believes to be the Buffett approach.  These tenets are good advice, to be sure.  Then, in Chapter 8, Hagstrom suggests that one might relax (mutate?) these constraints in investing in "new economy" growth stocks, international stocks, and small-cap stocks.

Buffett is at odds with most financial theorists and modern portfolio theory (MPT).  Portfolio theory strives to maximize returns for a given level of risk.   Buffet buys companies at little risk: those with superior earnings predictability when held for a long time. He also buys, usually, with a margin of safety.  A foundation of MPT is disproved by some investors being able to consistently outperform the market.

The Buffett approach to stock investing may not be for everyone.  However, I think that any investor can benefit from the ideas in this book.

—John Schuyler, December 2001.

Copyright 2001 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.