According to Hagstrom, his second book, "The Warren Buffett Portfolio," is meant to be a companion, not a sequel, to "The Warren Buffett Way." He claimed he unwittingly passed lightly over two important areas: portfolio management and intellectual fortitude in The Warren Buffett Way. The Warren Buffett Way gives the reader tools to pick common stocks wisely, and The Warren Buffett Portfolio shows you how to organize them into a focus portfolio and provides the intellectual framework for managing it.
I introduce readers to Hagstrom's second book The Warren Buffett Portfolio.
Takeaways from The Warren Buffett Portfolio
- Focus Investing: Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks and have the fortitude to hold steady during any short-term market gyrations.
- Phil Fisher was known for his focus portfolios; he always said he preferred owning a small number of outstanding companies that he understood well to owning a large number of average ones, many of which he understood poorly.
- Using the tenets of the Warren Buffett Way, choose a few (10 to 15) outstanding companies that have achieved above-average returns in the past and that you believe have a high probability of continuing their past strong performance into the future. Allocate your investment funds proportionately, placing the biggest bets on the highest-probability events. As long as things don't deteriorate, leave the portfolio largely intact for at least five years (longer is better), and teach yourself to ride through the bumps of price volatility with equanimity.
- Buffett has a different definition of risk: the possibility of harm or injury. And that is a factor of the "intrinsic value risk" of the business, not the price behavior of the stock. The real risk, Buffett says, is whether after-tax returns from an investment "will give him [an investor] at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake."
- The optimal portfolio is a focus portfolio that stresses big bets on high-probability events, as opposed to equally weighted bets on a mixed bag of probabilities.
- Measure management this way: 1) Review annual reports from a few years back, paying special attention to what management said then about strategies for the future. 2) Compare those plans to today's results: How fully were they realized? 3) Compare the strategies of a few years ago to this year's strategies and ideas: How has the thinking changed? 4) Compare the annual reports of the company you are interested in with reports from similar companies in the same industry. It is not always easy to find exact duplicates, but even relative performance comparison can yield insights.
- Stock prices disengage from the intrinsic value of a business for various reasons, including psychological overreaction as well as economic misjudgment. Focus investors are perfectly positioned to take advantage of this mispricing. But, to the degree they incorporate macroeconomic or stock market predictions inside their model, focus investors will diminish their competitive advantage.
- For Buffett, investing is a series of "business" pitches and, to achieve above-average performance, he must wait until a business comes across the strike zone in the "best" cell. Buffett believes investors too often swing at bad pitches, and their performance suffers. Perhaps it is not that investors are unable to recognize a good pitch — a good business — when they see one; maybe the difficulty lies in the fact that investors can't resist swinging the bat.