The Discretionary Dollar

Short Synopsis
This book is about Warren Buffett’s life as an investor and citizen. It details his large deals with background and insight. The book’s focus is mainly on his road to wealth but also gives good insight on Buffett’s character and personal relations.

Purchase on Amazon: Buffett: The Making of an American Capitalist

After reading this well written book I feel to I have a good idea of Warren Buffett’s investment strategy and character. Here are the main points I gleaned from the 400+ pages.

Develop Creative Ways of Generating Income
As a boy Warren developed many small business ideas and ventures. These ventures were essential to allow Warren to save up his bankroll. In 1945 (at age 15) Warren was making $175 per month (about $2,100 in 2009 dollars). Some of his ideas/jobs included:

• Golf ball Collection and Resale
• Paper Route/Magazine Subscriptions
• Pinball/Vending Business
• Rental Income (from 40 Acres of farmland purchased for $1,200)

Use Frugality to Preserve Capital
Every dollar you spend brings you one dollar away from tomorrow’s profit. Warren saved nearly every penny for his investments. By 1950 (age 20) Warren had saved $9,800 from his ventures (about $87,000 in 2009 dollars). He was very frugal, even in his later years. As a Billionaire he drives his same American car, and lives in the same house he did when he was starting out.

Be Your Own Light
It is clear that Warren valued his own personal judgement more than anyone elses. He followed his own morals with unwavering determination. Stop listening for stock tips, and find them on your own. Use your own tools to determine a clear picture of things. Warren was fearless when others were fearful and was skeptical when others were fearless. Warren reads hundreds of annual reports a year to get corporate insight. In some cases he’d talk with executives, company employees or others with detailed knowledge. He would always come to his own conclusion with the data he dug up.

You Don’t Need Money to Make Money
Every penny Buffett earned and saved was without any financial help from family or friends. He used his head to leverage other’s financial means, but never used guilt or charity looking for handouts. Early on he made it clear he wanted to be able to say he did it alone, without financial help. He did however have strong family connections that enabled him to find partners in the beginning. These partners were in it for the money, not because they wanted to help Warren.

Search for Value
Most stocks have no real potential. The skill comes in sifting out all the unimportant stocks. There were times Buffett could not find good stocks to invest in.

Warren’s general strategy was to invest in stocks below value. A stock is below value when it is selling below it’s assets. For example a company is selling for $15 per share, but has $20 per share in assets. There would be value in this stock. Earnings per share is also taken into consideration. Value is not market moods or trend analysis. Beating the market is a fools game if you are using volatility or price fluctuations to do it. Look at the source of the price changes, not the changes themselves.

He was a devoted Benjamin Graham fundamentalist. Grahams book, The Intelligent Investor is a must read for those wanting to learn more about this type of security analysis.

Develop Your Opinion of Value
Once you determine a stock price has value, you then need to determine roughly how much value is there. But it’s just an estimate. Warren once said “But one needn’t value a business too precisely. A basketball coach doesn’t check to see if a prospect is 6’1” or 6’2″, he looks for seven footers.”

Keep Your Ideas for Yourself
Once you find value or have an idea, keep it a secret and don’t advertise it. Many times listening to other’s ideas may be too late. Buffet would hatch his own ideas and guard them. He would even protect them from his wife! In fact he protected them from his investors too. During his first partnership he wouldn’t tell any investors where their money was invested. His ideas were top secret.

Don’t Diversify (in a traditional sense)
As Mark Twain once said “Put all your eggs in one basket and watch it closely”. If Buffet were a poker player, and his hand was a winner, he’d go all in. When he found a prospect he liked, he bought a ton of it. Diversification, as the common investor understands it, was not one of his primary strategies. If you determine there is value in a stock then why just buy a little?

Buy for the Long Hold
Warren’s strategy of picking winners and letting the market eventually bring them to the correct value takes time. This investment strategy usually means long term holding. Many of Buffet’s best investments he never sold. Buffet held onto losers when others would have sold and given up.

Invest with Like Minded Partners
Look for companies that value shareholders, not squander their return. It is crucial to invest with those that have your same outlook. At one point an investor came to Buffet’s office demanding to know where his money was invested (clearly against their partnership agreement). Warren of course said no and promptly cashed him out of partnership. Be picky on who you invest with.

Understand Your Investments (Core Business and Profitability)
Learn about what you invest in. Invest in what you understand. If you don’t understand the business, you won’t be able to understand the company’s value. Study prospects (companies that may have unrealized value). Look at their competitors and at the raw data. Don’t base your decisions on analyst summaries. “Trust your own eyes” as Buffett insisted. Warren had already read hundreds of books by the time he graduated college.

Simply Your Financials
Warren learned the hard way that complication is fruitless. Having a complicated web of companies lead Buffett into a major SEC investigation. Immediately after, he consolidated and merged the companies to simplify things.

Speak Softly And Don’t Make Enemies
Buffett had huge influence in all aspects of his dealings. But he had influence not because he demanded it. It is no doubt that Warren’s charisma and homespun nature got him where he is today. He was direct but not bossy. Others listen more the less he would say.

Should You Read it?
If you have any interest in investing in stocks this book is a must read. Much of conventional stock and investment teachings are challenged by Buffett. You won’t get specific tips and methods on investing, but you will get a broad brushed overview of the methods and strategies of the most successful modern investor. The books is long but is packed full of details and quotes aimed to give you a well rounded picture of Warren Buffet.

Purchase on Amazon: Buffett: The Making of an American Capitalist

This entry was posted on Friday, January 1st, 2010 at 9:34 PM and is filed under Book Reviews. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.