Summary of The Warren Buffett Way (Robert G. Hagstrom)
1. WARREN BUFFETT
In the 1993 Forbes list of Americaâs richest people, Warren Buffett had an estimated net worth of $8.3 billion. Of all 69 people listed, Buffett is the only one who obtained his wealth from the stock market.
Buffett graduated from the University of Nebraska. While there, he read a book The Intelligent Investor by Benjamin Graham. This book so impressed Buffett that he went to New York to study with Ben Graham at the Columbia Graduate Business School.
At the age of 25 in 1956, Buffett started an investment partnership. He had seven limited partners who contributed $105,000 and Buffett as general partner put in $100. The limited partners received 6-percent interest per year and 75-percent of the profits generated above this level. Buffett was paid the other 25-percent. Over the next 13 years, this partnership compounded investments at an annual rate of 29.5-percent. In 1965, Buffett closed the partnership and cashed out with a personal stake of $25 million.
Warren Buffett used his capital to purchase a controlling interest in Berkshire Cotton Manufacturing, a well established but struggling textile company. This company merged with Hathaway Manufacturing, and also bought interests in two insurance companies in 1967. The combined company was renamed Berkshire Hathaway.
The insurance companies generated steady cash flow, which was invested in stocks and bonds to have the funds available for payment of claims. The companyâs stock portfolio in 1967 was $7.2 million, so Buffett assumed control of this. Within two years, the stock portfolio had grown to $42 million, and the insurance company profits far outweighed the return generated by the textile side of the company.
During the 1970s, Bershire bought three more insurance companies and started another five. Buffett also closed the textile side of the company and converted Berkshire Hathaway into a holding company. Berkshire owns a number of other varied companies which generate good returns on equity without using debt. By 1993, the noninsurance side of Berkshire-Hathaway group had a sales turnover of $2.0 billion and earned $176 million after tax â about 37-percent of the gorupâs operating earnings.
Warren Buffett and his wife now own around 40-percent of the stock of Berkshire-Hathaway. He works as Chief Executive of the company for an annual salary of $100,000 per year. Many of his employees who manage different parts of the company earn much more.
Berkshire-Hathway had a corporate net worth of $22 million when Warren Buffett assumed control. Today, it is worth more than $10.2 billion. Buffettâs goal is to increase the companyâs worth by a 15-percent compound rate each year.
Berkshire pays no dividends but reinvests all money earnt. Therefore, shareholders look to a capital gain in the value of their stock. Since 1964, Berkshire shares have grown from $19 each to more than $22,000 per share today. Over the past 25-years, Berkshire has grown at an compound rate of 23.2-percent per year â well above Buffettâs target of 15-percent per year.
2. TWO MENTORS
Main Idea
Warren Buffetâs investment methodology is a hybrid mix of the strategies put forward by two 1930s style investment advisers, Ben Graham and Philip Fisher.
From Graham, Buffett learned the margin of safety approach â that is, use strict quantative guidelines to buy shares in companies that are selling for less than their net working capital. Graham also emphasized that following the short-term fluctuations of the stock market is pointless, and that stoc...