The Book The Warren Buffett Way: A Summary Guide

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[00:00:14] Today we will unlock the Book The Warren Buffet Way.

[00:00:18] We believe that almost everyone has heard of the famous sage of Omaha Warren Buffet.

[00:00:23] He was once named as the richest man on the Forbes World's Billionaires list in 2008

[00:00:28] and has been included as one of the top three for several consecutive years.

[00:00:33] It is said that if you want to have lunch with him and listen to the teachings of the sage of Omaha,

[00:00:38] you have to pay millions of dollars.

[00:00:40] Even so, there are still people who spare no expense.

[00:00:44] Berkshire Hathaway, the company he manages ranks among the top 500 companies in the world.

[00:00:50] Its stock price has skyrocketed and has at times exceeded $300,000 per share.

[00:00:56] When the company convenes a shareholders meeting, thousands of investors rush to Omaha to attend

[00:01:01] just to see their idol in person. Why has Buffet continually been at the top of the world's

[00:01:07] billionaire's list and become an idol in the investment world? You might think the answer is obvious.

[00:01:13] It's because Buffet is good at investing and his investment performance has outperformed

[00:01:18] the Dow Jones industrial average for decades. Buffet has used his time to prove his value in

[00:01:24] investment philosophy. Listening to his teachings is like standing on the shoulders of a giant.

[00:01:31] However, have you ever wondered why Buffet is so good at investing?

[00:01:35] Is it because of his inherent investment talent? In fact, Buffet was not as legendary

[00:01:41] when he started out as he is now. He was merely a small shareholder in the stock market just like us.

[00:01:47] He would get depressed when stock prices decreased and happy when they increased.

[00:01:52] After many years in the stock market, he formed a methodology, and he has used this methodology to

[00:01:58] gain the numerous achievements that we have previously mentioned.

[00:02:02] Today's bookie The Warren Buffet Way will unlock Buffet's methodology for us and help

[00:02:07] improve our investment skills. This book starts with Buffet's education experience,

[00:02:12] reviews how his investment philosophy was formed, and comprehensively summarizes his investment ideas.

[00:02:19] The book uses these concepts to analyze Buffet's famous investment cases, allowing us to

[00:02:25] better understand his investment concepts. The writer of this book Robert G. Hogstrom, Chief

[00:02:31] Investment Strategist and Managing Director of a well-known American company is known for writing

[00:02:37] about Buffet and Munger's ideas. Besides this book, he also wrote the Warren Buffet portfolio

[00:02:43] and latticework the new investing. This book sold over a million copies and spent 21 weeks on the New

[00:02:49] York Times bestseller list. Next, we will share with you the essence of this book in the following four parts.

[00:02:58] Part 1. Three people that influenced Buffet's investment theories.

[00:03:02] Part 2. Buffet's first investment theory, the tenets of choosing stocks.

[00:03:08] Part 3. Buffet's second investment theory, portfolio management methods.

[00:03:14] Part 4. Buffet's third investment theory, how to avoid psychological traps when investing.

[00:03:21] First, let's take a look at Part 1, three people that influenced Buffet's investment theories.

[00:03:27] Earlier, we said that Buffet was once a small shareholder in the stock market just like us.

[00:03:33] So, how did he become the sage of Omaha? Other than relying on his own intelligence, Buffet also

[00:03:39] had three great mentors, Benjamin Graham, Phila B. Fisher and Charlie Thomas Munger.

[00:03:46] Let's talk about Graham first. Graham was the first investor to prove that stock selection can

[00:03:52] be based on theoretical methods. Before he did so, stock investment was considered a pseudo-science

[00:03:58] like gambling. His status in the field of investment is equivalent to Einstein in the field of physics

[00:04:04] and Darwin in biology. Buffet and Graham's connection arises from Graham's book The Intelligent

[00:04:11] Investor. Buffet later described reading the book as experiencing enlightenment.

[00:04:16] Under the spell of this book, Buffet traveled thousands of miles from his hometown to the university

[00:04:22] that Graham was teaching at. At the university, Graham not only taught Buffet the difference between

[00:04:27] investment and speculation, but also taught Buffet an important investment saying, don't lose.

[00:04:34] Graham believes that an investment operation is one which upon thorough analysis promises safety

[00:04:40] of principle and an adequate return. Operations not meeting these requirements are speculative.

[00:04:47] For example, people generally think that buying a bond is an investment. However, in Graham's view,

[00:04:53] if you buy a junk bond, you can neither guarantee the safety of the principle nor have a satisfactory

[00:04:59] rate of return. So, it is speculation. Another meaning of keeping the principle safe and

[00:05:06] ensuring a reasonable rate of return is to not lose money. It is not easy to do this.

[00:05:12] All investments will have risks. In this case, Graham proposed the margin of safety theory to deal

[00:05:18] with this problem. The margin of safety theory means establishing a margin of safety before investing,

[00:05:25] and then investing within this margin to ensure the principle's safety.

[00:05:30] Graham provided two ways to establish the margin of safety, buying stocks during an economic

[00:05:35] slowdown or choosing stocks that have prices lower than their intrinsic values.

[00:05:40] The first method is difficult to carry out. It depends on opportunity. Therefore, instead of focusing

[00:05:47] on waiting for the economic slowdown, Graham said it is better to spend time on finding cheap stocks.

[00:05:54] To use the second method well, the first thing we need to do is understand what an enterprise

[00:05:59] is intrinsic value is. Graham believes that the intrinsic value depends on the company's assets,

[00:06:05] profits to dividends and future profitability. He also derived a formula to calculate a

[00:06:11] company's intrinsic value, which is to multiply future expected profits by a suitable capitalization

[00:06:18] factor. Since the company's future sales, prices and costs are difficult to predict. The

[00:06:24] intrinsic value is not an accurate number but a rough estimate. Graham believes that if after a

[00:06:29] rational analysis, it is found that the stock price of a company is much lower than its intrinsic

[00:06:35] value, then holding this stock will definitely bring in money in the long run.

[00:06:39] Graham's theories had an important influence on Buffett in the early days of his career.

[00:06:45] He made Buffett understand that stocks are not just about trading papers. There is true corporate

[00:06:51] value behind them. By following Graham's investment theories, Buffett made a lot of money in

[00:06:57] the early stages of his career. But at the same time, Buffett also found that when he invested based

[00:07:03] on Graham's theory, it was often difficult for him to cash out. For example, let's say that you

[00:07:09] buy an enterprise worth $10 million for $8 million. If you cash out successfully, you will profit

[00:07:16] $2 million. You can only gain a considerable profit if you sell the company at $10 million.

[00:07:23] However, in reality, you may have to wait 10 years to benefit from this deal.

[00:07:28] In this case, your average annual return is very low. In this regard, Buffett concluded,

[00:07:35] time is the friend of the wonderful company, the enemy of the mediocre.

[00:07:40] How can this problem be solved? To learn how, we need to talk about Fisher, the second person who

[00:07:46] had an important influence on Buffett. Like Graham, this teacher of Buffet was also a master investor.

[00:07:52] He was one of the pioneers in the field of growth investing and is known as the father of growth

[00:07:57] investment strategy. He is highly respected and praised on Wall Street.

[00:08:03] Fisher's investment philosophy can be seen as being completely opposite to Graham's.

[00:08:08] He believes that as long as a company has great prospects, it is worthwhile to invest a large

[00:08:13] amount of capital in them. In other words, Graham is willing to spend $1 to hold onto something

[00:08:19] that is currently worth $2. Fisher is willing to spend $5 to hold onto something that will be

[00:08:25] worth $50 in the future. The problem in Fisher's investment method is how to judge whether a

[00:08:32] company will continue to develop well in the future. In this regard, Fisher proposed two methods,

[00:08:38] buying a good company and working with good management. Buying a good company means investing

[00:08:44] in companies whose sales and profit growth rates have consistently been higher than others in

[00:08:48] the same industry. Choosing to cooperate with good management is beneficial because management

[00:08:54] with foresight can anticipate the market prospects of products early, deploy strategies in

[00:08:59] advance when the industry trends change and prepare for transformation. Such management not only

[00:09:05] allows the company to survive, but also allows the company to be sustainable, bringing long-term

[00:09:11] benefits to shareholders. For example, the aluminum company of America was able to grow and develop

[00:09:18] because its leaders foresaw the rapid development of the air transport market and prepared an

[00:09:23] advance to promote the sale of aluminum products in that field. Although Buffett was exposed to

[00:09:29] Fisher's theory very early on, the real executor of Fisher's theory was monger. In Munger's view,

[00:09:36] paying a reasonable price for a great company is far better than paying a cheap price for a

[00:09:41] mediocre company. Under his influence, Buffett went beyond Graham's theory. The acquisition

[00:09:47] of Seas Candies was the first good quality company that he bought. Seas Candies has always adhered

[00:09:54] to the concept of never sacrificing quality. After decades of development, in the 1970s it became

[00:10:00] the most important candy shop chain on the west coast of the United States. At that time,

[00:10:06] the company had $10 million in cash. However, the purchase price suggested by Buffett consultants

[00:10:13] was as high as $40 million, which meant that its net price was $30 million. The purchase price

[00:10:20] was three times the company's net assets and completely disobey Graham's investment theory.

[00:10:26] Surprisingly, Munger believed that this seemingly high-priced acquisition was a good deal.

[00:10:31] Under Munger's persuasion, Buffett bought the company for $25 million.

[00:10:36] 10 years later, they received a bit of $125 million for Seas Candies, which reaped huge profits

[00:10:43] for Buffett. So far, we have learned about the three people who most influenced Buffett's

[00:10:49] investment philosophy. In the beginning, Buffett was influenced by Graham and liked to look

[00:10:55] for companies whose stock prices were below their intrinsic values. As the market changed in Buffett

[00:11:01] grew, he found that while this method was good, it was difficult to follow completely. To solve

[00:11:07] this problem, he took the advice of Fisher and Munger. He learned to pay for good companies

[00:11:12] and was willing to buy companies with great potential for a fair price. Under the influence of these

[00:11:18] three masters, Buffett continued to improve his investment skills. Today we are just sharing

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