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Friday, October 8, 2010

The Warren Buffett Way

Everyone in the investing world knows the name Warren Buffett – arguably the most successful investor of all time. His personal net worth of over $45 billion began with an investment partnership he started in 1956 with $100 in capital.

Warren Buffett built his fortune not on the financial battle grounds of Wall Street, but rather from his hometown of Omaha, Nebraska. He did it without computers or even investing in technology stocks.

Many labeled him a “value” investor – finding overlooked gems, buying them a below intrinsic value and holding the stock for long periods. However, while value is important to Buffett, quality is more important.

Warren Buffett has a gift for spotting situations that others seemed to not see. Is this the insight of genius, lucky guesses or something else?

Ten years ago Robert Hagstrom published “The Warren Buffett Way” and it was a best seller with over a million copies sold and 21 weeks on the New York Times bestseller list.

Hagstrom believed the average investor could learn from Buffett even if duplicating his fantastic results might be out of most people’s reach. Buffett often said that nothing he did was beyond the reach of any investor. Hagstrom, who is a senior vice president with Legg Mason Capital Management and portfolio manager of the Legg Mason growth fund, has updated and revised the book in a second edition.

The first part of the book describes Buffett’s remarkable beginnings from a small investment partnership to the acquisition of an ailing textile company, Berkshire Hathaway, in the mid-1960s. It then traces how Buffett turned this small company with a net worth of $22 million into a diversified powerhouse which has grown its worth to $69 billion.

The early biographical information serves as background to illustrate how Buffett developed his investing philosophy.

Hagstrom breaks Buffett’s process down into 12 tenets, which he says forms the basis for how Buffett approaches any investment whether it is stocks or, as has been the more recent case, whole companies.

These tenets are easily understood, however not necessarily, so easily executed – and that may be one of the main reasons for Buffett’s success. He is obviously very intelligent, but also patient and willing to do all the necessary “spade work” before making an investment decision.

There are too many investors who want a computer program or some other quick way to make investment decisions. Buffett was willing to do the hard work to know his investments before he made them, so there were few surprises.

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