Rationality Is Buffett's 'Secret Sauce' According to Author Hagstrom
Robert Hagstrom, chief investment strategist at Legg Mason Investment Counsel, has always exhibited a keen interest in understanding what lies behind the scenes. His first book, The Warren Buffett Way, spent 21 weeks on The New York Times bestseller list and sold over 1 million copies. Outside the United States, The Warren Buffett Way still continues to be the book most commonly mentioned by young investors as the source from which they initially learnt about Buffett’s methodology. Hagstrom’s latest book, his eighth, is titled Investing: The Last Liberal Art
In the spring of 1998, Carol Loomis wrote an article for Fortune, titled “The Inside Story of Warren Buffett”. It was the first full profile of Buffett and Loomis was the perfect writer for the story. Up until then, the only inside look of Buffett came from his Chairman’s Letters and his once-a-year appearance at Berkshire’s annual meeting at Omaha. But those who were aware that Loomis was a close friend of Buffett and had been editing the Berkshire Hathaway Annual Reports since 1977 knew if anyone could write an “inside” story on Buffett, it would be she.
Loomis said she wanted to write a different story, one that emphasised Buffett not just as an investor but also as an “extraordinary businessman”. She did not disappoint. It was a beautifully written 7,000-word article that indeed gave the Buffett faithful a more intimate look at the man now dubbed the Wizard of Omaha. Loomis gave us many insights, but none were more ground-shaking for me than three little sentences tucked neatly inside the article. “What we do is not beyond anybody else’s competence,” said Buffett. “I feel the same way about managing that I do about investing: It’s just not necessary to do extraordinary things to get extraordinary results.”
Now, I am sure many who read this chalked it up to Buffett’s Midwestern humility. Buffett is not a braggart. But nor does he mislead. I was sure he would have not made this statement if he did not believe it to be true. And if it were true, as I believed it was, it meant there was the possibility of uncovering a roadmap, or better yet, a treasure map, which would describe how Buffett thinks about investing in general and stock selection specifically. This was my motivation for writing The Warren Buffett Way.
Reading Berkshire Hathaway annual reports for two decades, the annual reports of the companies Berkshire purchased, and the many articles written about Buffett helped me gain an understanding of how Buffett thought about common stock investing. The single most important insight I gained was the knowledge that Buffett, whether he was purchasing common stocks or wholly owned businesses, approached each transaction in the same way. Whether he is buying a public or private company, Buffett goes through the same process, in more or less the same sequence. He thinks about the business, the people who run the business, the economics of the business and then the value of the business, and in each case he lays what he has learned against his own benchmarks. I label them the investment tenets and divide them into four categories: business tenets, management tenets, financial tenets and market tenets. The goal of the book was to take the major companies that Buffett had purchased for Berkshire Hathaway and discover if they were, in fact, aligned with the tenets reflected in his writings and speeches. What would be valuable, in my opinion, and would be valuable to investors was a thorough examination of his thoughts and strategies aligned with the purchases that Berkshire made over the years, all compiled into one source. To that end, I believe we were successful.
The principle challenge I faced in writing the book was to prove or disprove Buffett’s confession that “what do is not beyond anybody else’s competence”. Some critics argue that, despite his success, Buffett’s idiosyncrasies prevent his investment approach from being widely adopted. I disagreed. Buffett is idiosyncratic — it is the source of his success — but I have argued that his methodology, once understood, is applicable to both individual and institutional investors alike. It is the goal of the book to help investors employ the strategies that I believe made Warren Buffett successful.
Still, there were sceptics. The major pushback we have received over the years is that reading a book about Warren Buffett will not ensure you will be able to generate the same investment returns that Buffett achieved. One, I never insinuated that by reading the book an individual could achieve the same investment returns as Buffett. Two, I was puzzled why anyone would think so. It seemed to me that if you bought a book about how to play golf like Tiger Woods, you shouldn’t expect to become Tiger’s equal on the golf course. You read the book because you believe there are some tips in the book that will help improve your game. The same is true of [i]The Warren Buffett Way. If by reading the book, you pick up some lessons that help improve your investment results, then the book is a success. Considering how poorly most people perform in the stock market, achieving some improvement will not be a herculean task.
It has been 20 years since the first edition of The Warren Buffett Way was published. The success of the book is first and foremost a testament to Warren Buffett. His wit, integrity and intellectual spirit have charmed millions of investors worldwide. It is an unparalleled combination that makes Buffett the single most popular model in investing today and the greatest investor in history.