The Essential Buffett

Author : Robert G. Hagstrom

Library : 332.6 HAG-[BIZ]



  1. The Unreasonable Man
  2. The World’s Greatest Investor
  3. Lessons From The Three Wise Men of Finance
  4. Guidelines for Buying a Business : Twelve Immutable Tenets
  5. Focus Investing Theory and Mechanics
  6. Managing Your Portfolio : The Challenge of Focus Investing
  7. The Emotional Side of Money
  8. New Opportunities : Timeless Principles


Chapter 1 (Page 4 – 17)

Critical Differences in Warren Buffett Approach

Analyzes Stocks – Analyze Stocks as Business

– Look at the company’s economics, and look as intensely as if you were taking over as CEO tomorrow. Then check the price.

Manages a Portfolio – Look at the Stock as a Business

– Manage a Focussed, Low-Turnover Portfolio

  • Best way to hit a home run : Don’t swing at everything; wait for a fat pitch
  • Best way to outperform the market : Don’t load up on hundreds of stocks; wait for the few outstanding opportunities

– A Better yardstick

  • Don’t judge a company’s success by short-term change in the price of its stocks. Instead, consider the business fundamentals.
  • See yourself as owning a portfolio of businesses, not a portfolio of stocks.

Thinks about the Stock Market – Understand the Differences Between Investment and Speculation

– Always recognize the difference between investment and speculation, and develop the discipline never to cross the line.


Chapter 2 (Page 39)

Look for companies that create high return on equity with minimal debt.


Chapter 3 (Page 47 – 76)

Essential Graham

  • A true investment is that which thorough analysis shows will offer both safety of principal and a satisfactory return. Anything less is speculation.
  • When a stock is priced well below its intrinsic value, a margin of safety automatically exists.

Essential Fisher

  • Investment success depends on finding companies that can sustain above-average growth, in both sales and profits, over a period of several years. Short-term results are deceptive.
  • Superior management is the key to superior market performance.
  • Owning a few outstanding companies is better than owning a large number of average ones. Among other advantages, it simplifies your research time.

Essential Munger

  • Look for companies that generate high cash earnings and require low capital expenditures.
  • It is far better to pay a fair price for a geat company than a great price for a fair company.


Chapter 4 (Page 77 – 122)

  • To fully understand the long-term prospects of a business, first determine whether it is a franchise or a commodity.
  • The biggest test of management’s rationality is the decision on how to allocate extra cash.
  • To determine what a company is worth today, estimate the total of it’s future cash earnings, and then discount that total by the appropriate rate.
  • An Essential Buffett Strategy : Find companies with above-average returns, and buy their stock when it is priced below its intrinsic value.

Tenets of the Warren Buffett Way

Business Tenets

  • Is the business simple and understandable?
  • Does the business have a consistent operating history?
  • Does the business have favorable long-term prospects?

Management Tenets

  • Is management rational?
  • Is management candid with its shareholders?
  • Does management resist the institutional imperative?

Financial Tenets

  • Focus on return on equity, not earnings per share.
  • Calculate “owner earnings.” (Owner Earnings = Nett Income + Depreciation/Amortization – CAPEX)
  • Look for companies with high profit margins.
  • For every dollar retained, make sure the company created at least one dollar of market value.

Market Tenets

  • What is the value of the business?
  • Can the business be purchased at a significant discount to its value?


Chapter 5

(Page 129)

The Focus Investor’s Golden Rules

  1. Concentrate your investments in outstanding companies run by strong management.
  2. Limit yourself to the number of companies you can truly understand. Ten is a good number, more than 20 is asking for trouble.
  3. Pick the very best of your good companies, and put the bulk of your investment there.
  4. Think long-term: 5 to 10 years, minimum.
  5. Volatility happens. Carry on.

(Page 145)

To Succeed With The Kelly Model

  1. Learn to think in probabilities.
  2. Stay in the game long enough to achieve its rewards.
  3. Avoid using leverage, with its unfortunate consequence.
  4. Demand a margin of safety with each bet you make.

(Page 156)

On Risk

Risk does not reside in price changes, but in miscalculations of intrinsic value.


Chapter 6

  • The relationship between market value and business value strengthens with time. Those who can see the latter before the former catches up are in a good position to profit from their astuteness. (Page 185)
  • When debating whether to buy a new stock, ask yourself : How does it compare to the very best of your current holdings? (Page 188)

Warning (Page 194 – 195)

  1. Do not approach the market unless you are willing to think about stocks, first and always, as part-ownership interests in a business.
  2. Be prepared to diligently study the business you own, as well as the companies you compete against, with the idea that no one will know more about your business or industry than you do.
  3. Do not even start a focus portfolio unless you are willing to invest a minimum of five years. Longer time horizons will make for a safer ride.
  4. Never leverage your focus portfolio. An unleveraged focus portfolio will help you reach your goals fast enough. Remember, an unexpected margin call on your capital will likely wreck a well-tuned portfolio.
  5. Accept the need to acquire the right temperament and personality to drive a focus investor. Never forget : There is a difference between investment and speculation.


Chapter 7

  • Don’t be afraid to say no. Evaluate all opportunities as if you could make only 20 investment decisions in your entire life.
  • Understanding the irrationalities inherent to human nature is every bit as important as understanding how to read a balance sheet and an income statement.
  • If you join the crowd, you have a much higher risk of being trampled.

Temperament of a True Investor

  1. True investors are calm
  2. True investors are patient
  3. True investors are rational

Munger’s Two-Step Analysis

  1. Look at the facts : Rational expectations and probabilities.
  2. Carefully evaluate the psychological factors.

Who is Comfortable with Risk?

  • People who believe they have control over their lives.
  • People who set goals to guide their actions.

When a Price Drops Suddenly

  1. Don’t panic; don’t rush to sell out.
  2. Reassess the long-term economics of your business.
  3. If the economics haven’t changed, buy more.


Chapter 8

How to Compensate for Less Certainty

  1. Insist on a greater margin of safety.
  2. Buy less.

Selected Technology Companies are the Franchises of the Twenty-First Century

The Franchise Factors

  1. Network Effect – A network effect exists when the value of a godd increases as the number of people who use the network increases.
  2. Positive Feedback – Someone who has a positive experience when using a technology product will have a tendency to return to the product.
  3. Lock-in – When switching costs are high, users of a product or service are usually easy customers for an upgraded version.
  4. Increasing Returns – Little additional capital reinvestment is needed (but have to recover initial substantial development costs).

Small-Cap Companies

  • Until they have gained substantial market share, they are potentially greater economic risks.
  • They tend to be less complex, less bureaucratic.
  • Their managers are often more accessible.

The Challenge of Focussing on International Companies

  • They may have different accounting standards.
  • There is a risk that the currency will decline relative to the dollar.
  • It is more difficult to interview management.
  • Political, social, and economic turmoil can ruin companies and swallow the expected gains.

Essential to Look For – Anywhere, Any Time

Good business that generate great economics run by smart managers available at cheap prices.

Success is the Product of Rational Thinking