Bet on Buffett...wisely

Three books on the legendary investor try to decipher his savvy investing skills for millions of awe-struck investors. But don't try to follow his advice blindly.

Since 1965, the shares of Berkshire Hathaway, whose chairman is the legendary Warren Buffett, have given negative annual returns only twice—the first time in 2001 (-6.2%) and the second time in 2008 (-9.6%). Even then, the drop in the book value of the scrip was less than the decline in the value of the S&P 500 (including dividends). This is only one of the several reasons why Buffett is revered by small investors across the globe. Little wonder then that during these troubled and trying times they should want advice from one of the most successful investors, someone who has made money even in bear phases.

Not surprisingly, publishers have gone overboard to reprint Buffett's essays and have asked authors to analyse his investment strategies or document his life and times. The fact is that there are millions of investors globally, who want to use Buffett's experiences to cut down their losses in the short run and make money during the next bull cycle. But Lawrence A. Cunningham, who has edited The Essays of Warren Buffett, warns that investors should be careful and that they should "think about Buffett's writings and learn from them, rather than try to emulate Berkshire's portfolio".

In fact, this is what Janet Tavakoli, the author of Dear Mr. Buffett, did. Her book is about meeting Buffett, which changed the way she looked at global financial markets. "I already knew the principles, but meeting Warren encouraged me to think about all financial products in a Benjamin Graham-style (Buffett's mentor) framework. I also changed the way I invest." For example, Buffett loathes either growth or value companies. He has similar feelings for the 'diversification' theory.

The Essays of Warren Buffett The Snowball Dear Mr. Buffett
Price: Rs 759
Pages: 314
Edited by: Lawrence A. Cunningham
Publisher: John Wiley & Sons
Price: Rs 995
Pages: 960
Author: Alice Schroeder
Publisher: Bloomsbury
Price: Rs 800
Pages: 282
Author: Janet Tavakoli
Publisher: John Wiley & Sons
Target audience: All investors
More books to read: The Intelligent Investor, Buffett: The Making of an American Capitalist and The New Buffettology

His investment principle is simple: seek a stable industry with longterm competitive advantage and buy firms in these sectors which are "run by decision makers with a 'heretoday, here-forever' outlook".

Buffett believes that the principles of finance are easy to grasp and making a financial product more complicated (like derivatives) will not necessarily make it safe. "There seems to be some perverse human characteristic that likes to make easy things difficult," he once said. Therefore, the rules of investing, says Tavakoli, should be clear cut: "Don't lend money to people who cannot pay you back. If you do not understand something, do not invest."

In the 1950s, Buffett learnt his strategies from Benjamin Graham. In her biography, The Snowball, Alice Schroeder explains how Graham went "through Standard & Poor's or a Moody Manual and looked at companies selling below their working capital… These companies were what Graham called 'cigar butts': cheap and unloved stocks that had been cast aside like the sticky, mashed stub of a stogie that one might find on the sidewalk. Graham specialised in spotting these unappetising remnants that everyone else overlooked. He coaxed them alight and sucked out one last free puff."

In addition, Buffett learnt the nearly lost art of capital allocation. In most of his transactions and deal-making, Graham would place money where it was likely to earn the highest return, even if it meant that one had to use money from one business to buy a more profitable one. "Over time, it could mean the difference between bankruptcy and success," she writes.

But the idea was not merely to make money. As the smart Graham told the younger Buffett during his early years: "Money isn't making that much difference in how you and I live. We're both going to the cafeteria for lunch."

Several years later, Cunningham reveals, Buffett became a believer of the long term: "We do not have any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts, not as market analysts."

Thus, Buffett sees Mr. Market, who appears daily with a buy or sell price, as someone to take advantage of, but "it will be disastrous if you fall under his influence". The trick is in realising that if you wish to accumulate shares for years, or decades, you should be happy if prices fall. But most investors seem to "rejoice because prices have risen for the 'hamburgers' they will soon be buying".

However, even Buffett can commit blunders. As he told his shareholders early this year, "During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to reexamine my thinking and promptly take action."

So, as an investor never follow anyone's advice blindly, not even market-savvy Buffett's.