Friday, July 13, 2012

Book Review: The Essential Buffett

The Essential Buffett (2001) by Robert G. Hagstrom

The author discusses an approach called "focus investing" that draws on the thinking and investing style of well-known investor Warren Buffett. He starts the book with three lessons about investing in Chapter 1, which are: (1) analyze stocks as businesses; (2) manage a focused, low-turnover portfolio; and (3) differentiate between investment and speculation. He goes on to give some background on Buffett and the history of Berkshire Hathaway in Chapter 2, followed by a discussion in Chapter 3 of how Buffett was influenced by Benjamin Graham, Philip Fisher, and Charlie Munger.

The middle chapters in the book deal with focus investing. Chapter 4 presents 12 "Tenets of the Warren Buffett Way" that address business, management, financial, and market aspects of investing. Chapter 5 provides some "golden rules" for focus investing, such as having a concentrated portfolio with only the very best companies that you intend to hold for the long term amid market volatility. (The preceding sentence covers all the golden rules.) Chapter 6 reviews the records of some well-known focus investors and Chapter 7 has a brief discussion of the emotional side of investing. The book concludes with speculation in Chapter 8 about how focus investing can be applied to tech, small-cap, and international stocks. Unfortunately, the arguments are not compelling and the examples fall flat (e.g., America Online is touted as a strong company consistent with the Buffett tenets).

Overall, I thought the book was interesting and the focus investing approach seems reasonable for the most part. However, I would argue that focus investing is more closely related to the approach of Philip Fisher than that of Buffett.

Note: I read this book in June 2012.

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