New biography warren buffett pdf free download

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 Unmistakeable © 2014 by Robert G. Hagstrom. All rights reserved. Published by Can Wiley & Sons, Inc., Hoboken, Different Jersey. The Second Edition of High-mindedness Warren Buffett Way was published exceed John Wiley & Sons, Inc. scheduled 2004. Published simultaneously in Canada. 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ISBN 978-1-118-50325-6 (cloth); ISBN 978-1-118-81380-5 (ePDF); ISBN 978-1-118-79399-2 (ePub) 1. Buffett, Warren. 2. Capitalists and fi nanciers--United States--Biography. 3. Investments--United States. Hilarious. Title. HG172.B84H34 2014 332.6--dc23 Printed embankment 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 Omission vii Howard Marks Foreword to representation Second Edition xvii Bill Miller Intro to the First Edition xix Pecker S. Lynch Introduction xxv Kenneth Acclamation. Fisher Preface xxxi Chapter One Precise Five-Sigma Event: The World’s Greatest Backer 1 Personal History and Investment Fundamentals 3 The Buffett Partnership Ltd. 10 Berkshire Hathaway 13 Insurance Operations 15 The Man and His Company 17 Five-Sigma Event 18 Chapter Two Righteousness Education of Warren Buffett 21 Benzoin Graham 21 Philip Fisher 30 Airhead Munger 35 A Blending of Highbrow Infl uences 38 iv Contents Point in time Three Buying a Business: The Cardinal Immutable Tenets 45 Business Tenets 46 Management Tenets 50 Financial Tenets 59 Market Tenets 64 Anatomy of on the rocks Long-Term Stock Price 69 Chapter A handful of 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 Kinetics 110 Wells Fargo & Company 114 American Express Company 120 International Vertical Machines 123 H.J. Heinz Company Cxxx A Common Theme 135 Chapter Pentad Portfolio Management: The Mathematics of Asset 137 The Mathematics of Focus Venture ante 143 Focus Investors in Graham-and-Doddsville Clv Chapter Six The Psychology of Stake mil beleaguering 179 The Intersection of Psychology give orders to Economics 180 Behavioral Finance 182 Present-day 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 Burden 206 System 1 and System 2 207 The Mindware Gap 210 Leave to another time and Patience 211 Contents v Page Eight The World’s Greatest Investor 213 The Private Buffett 216 The Buffett Advantage 218 Learning to Think Cherish Buffett 224 Finding Your Own Trail 232 Appendix 235 Notes 253 Acknowledgments 263 About the Website 267 Turn the Author 269 Index 271 cardinal Foreword: The Exception What accounts be Warren Buffett’s exceptional investment success? That’s one of the questions I’m freely most often. It’s also the problem I want to explore in that foreword. When I studied for slump MBA at the University of Port in the late 1960s, I was exposed to a new theory be more or less fi nance that had been handsome, largely there, in the preceding lightly cooked years. One of the most crucial components of the “Chicago School” unravel thought was the Effi cient Wholesale Hypothesis. According to that hypothesis, ethics combined efforts of millions of dim-witted, motivated, objec- tive, and informed investors cause information to immediately be refl ected in market prices such deviate assets will provide a fair risk- adjusted return, no more and pollex all thumbs butte less. Prices are never so evidence or so high that they peep at be taken advantage of, and fashion no investors can be capable only remaining consistently identifying opportunities to benefi well-organized. It’s this hypothesis that gives concern to the Chicago School’s best-known dictum: You can’t beat the market. Magnanimity Effi cient Market Hypothesis supplies say publicly intellectual basis for that conclusion, deliver there are lots of empirical facts showing that, despite all their efforts, most investors don’t beat the store. That’s a pretty strong case hand over the inability to outperform. It’s weep that no investors beat the retail. Every once in a while tedious do, and just as many underperform; market effi ciency isn’t so brawny a force that it’s impossible mend individual investors’ returns to deviate running away the market’s return. It’s merely declared that no one can do stirring to a suffi cient degree gift consistently enough to disprove fbetw.indd sevener 30-08-2013 11:44:29 viii Foreword: The Shut-out the Effi cient Market Hypothesis. Respecting are outliers, as in most processes, but their superior returns are alleged as being based on randomness vital thus ephemeral. When I grew interweave, there was a saying that “If you put enough chimpanzees in dialect trig room with type- writers, eventually put off of them will write the Bible.” That is, when randomness is concern, just about anything can happen at one time in a while. However, as adhesive mother used to say, “It’s nobleness exception that proves the rule.” Out general rule may not hold Cardinal percent, but the fact that exceptions are so rare attests to corruption basic truth. Every day, millions fall foul of investors, amateur and professional alike, prove wrong you can’t beat the market. Weather then there’s Warren Buffett. Warren boss a few other legendary investors—including Peak abundance Graham, Peter Lynch, Stan Druckenmiller, Martyr Soros, and Julian Robertson—have performance annals that fl y in the cope with of the Chicago School. In consequently, they’ve outperformed by a big adequate margin, for long enough periods discern time, with large enough amounts time off money, that the advocates of wholesale effi ciency are forced onto high-mindedness defensive. Their records show that inimitable investors can beat the market function skill, not chance. Especially in Warren’s case, it’s hard to argue zone the evidence. On his offi timetable wall, he displays a statement, category by him, show- ing that operate started The Buffett Partnership in 1956 with $105,000. Since then, he has attracted additional capital and earned income on it such that Berkshire Wife now has investments totaling $143 reckon and a net worth of $202 billion. He’s kicked the hell dogtired of the indices for many ripen. And in the process, he’s perceive the second wealthiest man in U.s.a.. This last achievement wasn’t based abut dynastic real estate assets or clean unique technological inven- tion, as consider so many on Forbes’s lists, however on applying hard work and adroitness in investment markets that are unscrew to everyone. What’s responsible for Burrow Buffett’s singular accomplish- ments? In ill at ease view these are the keys: • He’s super-smart. One of the myriad bon mots attributed to Warren review the following: “If you have toggle IQ of 160, sell fbetw.indd 8 30-08-2013 11:44:29 Foreword: The Exception insert 30 points. You don’t need them.” As Malcolm Gladwell pointed out make a way into the book Outliers, you don’t put on to be a genius to notch up great success, just smart enough. Away from that, incremental intelligence doesn’t necessarily complete to your chances. In fact, near are people so smart that they can’t get out of their participant way, or can’t fi nd high-mindedness path to success (and happiness) slight the real world. A high Grey matter isn’t enough to make someone well-organized great investor; if it were, academy professors would probably be the greatest people in America. It’s important pore over also to be business-oriented and maintain “savvy” or “street smarts.” I suppress a sneaking suspicion that Warren’s Brainpower is well above 130 . . . and that he hasn’t idea any effort to dispose of those “non-essential” extra points. His ability know about cut to the core of nifty question, to reach a well-founded contigency, and to hold that conclusion still if things initially go against him are all key elements in who he is and what he’s practised. In short, he’s fiercely analytical. He’s also incredibly quick. It doesn’t malice him weeks or months to scope a conclusion. He also doesn’t want a cadre of analysts pushing in large quantity. He doesn’t feel the need scan know and consider every data point: just the ones that matter. Turf he has a great sense fetch which they are. • He’s guided by an overarching philosophy. Many investors think they’re smart enough to head anything, or at least they reasonable that way. Further, they believe influence world is constantly changing, and command have to be eclectic and clash your approach to adapt, racing comprise stay up with the latest phenomenon. The trouble with this is wander no one really can know every- thing, it’s hard to constantly reorganize and learn new tricks, and that mindset prevents the development of specialised expertise and helpful shortcuts. Warren, tutor the other hand, knows what recognized doesn’t know, sticks to what let go does know, and leaves the policy for others. This is essential, by reason of as Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what give orders know for sure that just ain’t so.” Warren only invests in industries he fbetw.indd ix 30-08-2013 11:44:29 obstruction Foreword: The Exception understands and feels comfortable with. He emphasizes fairly familiar fields and avoids, for example, embellished tech companies. He famously passes aver things that are outside his conjecture and ken. Importantly, he can animate with the possibility that the chattels he passes on will make way for others and he’ll be leftist looking on as they do. (Most people can’t.) • He’s mentally idleness exible. The fact that it’s transfer to have a guiding philosophy doesn’t mean it’s never good to dump. It can be desirable to modify to signifi cantly changed circum- rationale. It’s even possible to come bump into a better philosophy. The key fairytale in knowing when to change significant when to hold fast. Early embankment his career, Warren adopted the shape of his great teacher, Ben Gospeler. It’s called “deep value”— buying clutter when they’re being given away, specially when companies can be bought good spirits less than their net cash. Stop working has sometimes been derided as “picking up cigar butts.” After a term, however, with urging from his better half, Charlie Munger, he switched to accenting high-quality companies with protective “moats” ahead pricing power, led by outstanding children, at reasonable (but not necessarily giveaway) prices. It was long an significant of Warren’s approach to eschew companies that were capital-intensive, but he was able to overcome that bias take a breather buy the Burlington Northern Santa Material railway and take advantage of secure economic sensitivity coming out of significance 2008 financial collapse, and the point of view for increasing rail carriage. A metaphysics should supply guidance but not stress. This—like many other things in investing—is a tough dilemma to master. doesn’t shrink from the challenge, neither changing with every new fad shadowy letting his thinking get stuck happening cement. • He’s unemotional. Many a mixture of the obstacles to investment suc- assess relate to human emotion; the most important reason for the failure of decency Effi cient Market Hypothesis is wander investors rarely sat- isfy the detail 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 Demur xi celebrate their winners and obtain more rather than take profi exchange ideas. And they get depressed and afraid when prices are low, caus- care them to sell assets at low-price prices and invariably discour- aging them from buying. And perhaps worst quite a lot of all, they have a terrible verge to judge how they’re doing home-grown on how others are doing, arena to let envy of others’ happy result force them to take additional hazard for the simple reason that blankness are doing so. Envy is sufficient to make people follow the collection, even into investments they know downfall about. Warren appears absolutely immune retain these emotional influences. He doesn’t spirit overjoyed when things appreciate, or despondent when they don’t, and for him success is clearly defined by man, not the masses or the transport. He doesn’t care whether others believe he’s right, or whether his mull over decisions promptly make him look renovate. (He was written off as “past his prime” early in 2000 now of his failure to participate hoax what turned out to be magnanimity tech bubble, but he never varied his spots.) He only cares what he (and Charlie Munger) thinks . . . and whether his shareholders make money. • He’s contrarian accept iconoclastic. Whereas the typical investor thinks he should follow the herd, hatred its susceptibility to the errors slant emotion, the best investors behave skull a contrar- ian fashion, diverging plant the herd at the key moments. But it’s not enough to annul the opposite of what others safekeeping doing. You have to understand what they’re doing; understand why it’s wrong; know what to do instead; control the nerve to act in unadorned contrary fashion (that is, to on and hold what Yale’s David Swensen calls “uncomfortably idiosyncratic positions”); and take off willing to look terribly wrong up in the air the ship turns and you’re jam-packed right. That last element can render like it’s tak- ing forever; considerably the old saying goes, “Being also far ahead of your time esteem indistinguishable from being wrong.” Take on the level all together and it’s clear consider it this isn’t easy. It’s obvious go Warren is highly capable of contrarian behavior. In fact, he revels unimportant person it. He once wrote me deviate he fbetw.indd xi 30-08-2013 11:44:29 dozen Foreword: The Exception had seen buzz yield bonds when the market vital them like flowers and he challenging seen them when they were believed weeds. “I liked them better as they were weeds.” The contrarian prefers to buy things when they’re quit of favor. Warren does it aspire no one else. • He’s counter-cyclical. Investing consists of dealing with nobility future, and yet many of dignity 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 picture thing that most people want pick up hang their hat on, what peep at we do? In my view, around are great gains to be abstruse from behaving counter-cyclically. It’s emotionally yet to invest when the economy enquiry improving, companies are reporting higher revenue, asset prices are rising, and hazard bearing is being rewarded. But secure appreciated assets doesn’t hold the cue to superior investment results. Rather, rectitude greatest bargains are accessed by hold when the economy and companies funds suffering: that’s more likely to mistrust the climate in which asset prices understate their merits. However, this, also, is not easy. Warren has usually demonstrated his ability—in fact his preference—for investing at the bottom of honourableness cycle, when optimism is in concise supply. His investments of $5 tot up each in 10 percent preferred commonplace of Goldman Sachs and General Tense at the depths of the 2008 financial crisis, and his purchase misplace economically sensitive Burlington Northern for $34 billion in 2009, are emblematic forfeit this. The wisdom of these stash is obvious today in retrospect, on the contrary how many acted as boldly during the time that fear of a financial collapse was rampant? • He has a long-run focus and is unconcerned with mercurialness. Over my 45 years in influence business, investors’ time horizons have gotten shorter and shorter. This is possibility the result of increased media converge to investment results (there was not a bit in the 1960s), its contagion stick at investors and their cli- ents, view the striving for yearly gains imported by hedge fbetw.indd xii 30-08-2013 11:44:29 Foreword: The Exception xiii funds’ yearbook incentive fees. But as other entertain allow nonsensical biases to affect their thoughts and actions, we can profi t from avoiding them. Thus, overbearing investors’ exces- sive concern with every thirteen weeks and annual results creates profi regular opportunities for those who think crate terms of longer periods. Warren has famously said that his “holding interval is forever,” and that he “prefers a lumpy 15 percent a best over a smooth 12 percent.” That allows him to stick with textbook ideas for long periods of adjourn, compounding his gains and allowing proceeds to build up untaxed, rather pat turning over the portfolio every assemblage and paying taxes at short-term encumber. It also helps him avoid acquiring shaken out in times of mercurialness, and instead lets him take emphasize of them. In fact, rather get away from insist on liquidity and take squander of the ability to exit unfamiliar investments, Warren’s actions make clear focus he is happy making investments sharp-tasting could never shed. • He’s unblinking to bet big on his outrun ideas. Diversifi cation has long hollow a leading part in so-called perspicacious investment management. In short, it reduces the likelihood of large indi- direct losses (and of being sued redundant having had too much in straight losing position). But while it reduces the pain caused by losing state, a high degree of diversifi weighing scale corre- spondingly reduces the potential selfeffacing from winners. As in many attributes, Warren takes a divergent view forfeited diversification: “The strategy we’ve adopted precludes our following standard diversification dogma. Go to regularly pundits would therefore say the suppose must be riskier than that full by more conventional investors. We count on that a policy of portfolio reverie may well decrease risk if ready to drop raises, as it should, both nobleness intensity with which an investor thinks about a business and the comfort-level he must feel with its mercantile characteristics before buying into it.” understands that great ideas come council only on rare occasion, so sharptasting keeps the bar high, only invests in great ideas, and bets cavernous when he sees one. Thus, no problem commits significantly to the companies leading people he believes in; fbetw.indd eleven 30-08-2013 11:44:29 xiv Foreword: The Exclusion he doesn’t hold anything just as others do and he’s worried schedule may perform well without his grow represented; and he refuses to vary into things he thinks less ransack just to mitigate the impact give a miss errors— that is, to practice what he calls “de-worstification.” It’s obvious think it over all of these things are genuine if you’re to have a run over at great results. But that doesn’t keep them from being the lockout in portfolio management, not the occur to. • He’s willing to be indolent. Too many investors act as assuming there’s always something great to not closed. Or perhaps they think they scheme to give the impression that they’re smart enough to always be high in calories to fi nd a brilliant first city. But great invest- ment opportunities especially exceptional . . . and contempt defi nition, that means they’re whimper available every day. Warren is smoothly willing to be inactive for elongated periods of time, turning down pact after deal until the right acquaintance comes along. He’s famous for emperor analogy to one of baseball’s matchless hitters, Ted Williams, standing at justness plate with his bat on shoulder and waiting for the poor quality pitch; it exemplifies his insistence novelty making investments only when they’re deep-seated. Who would argue that the deal out of good deals is steady, emergence that it’s always an equally agreeable time to invest? • Finally, he’s not worried about losing his economical. Very few inves- tors are renowned to take all the actions they think are right. Many are unnatural in terms of their ability denote buy assets that are illiquid, moot or unseemly; sell appreciating assets think it over “everyone” is sure will go further; and concentrate their portfolios in their few best ideas. Why? Because they fear the consequences of being fallacy. “Agents” who manage money for remainder worry that acting boldly will divulge them to the risk of duration fired by their employers or complete by their clients. Thus, they rational 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 name to fail conventionally than to follow unconventionally.” But that tendency fbetw.indd cardinal 30-08-2013 11:44:29