Book SummaryThe Warren Buffett Way, by Robert G. Hagstrom

1-Page Summary1-Page Book Summary of The Warren Buffett Way

To the uninitiated, investing can seem daunting and inaccessible, leading many to either hire professionals to manage their investments or forswear investing altogether. But according to investment professional Robert G. Hagstrom, this mindset can cause you to leave millions on the table. Hagstrom argues that novice investors should emulate the greatest investor in history—Warren Buffett—so that they too can earn above-market returns.

In his 2013 book The Warren Buffett Way, Hagstrom outlines and explains Buffett’s approach to stock market investing. Hagstrom argues that, rather than simply deferring to financial analysts, investors should follow suit with Buffett and assess companies along four dimensions—their financial prospects, their market...

The Warren Buffett Way Summary How Buffett Quantitatively Assesses Companies

According to Hagstrom, Buffett recognizes the importance of rigorous quantitative analysis of the companies he considers investing in. In this section, we’ll first outline how Buffett learned to do so from investing legend Benjamin Graham, and then discuss the metrics that Buffett uses to assess a company’s market value and its financial prospects.

The Influence of Benjamin Graham

As Hagstrom relates, Buffett was persuaded by the key arguments of Graham’s investing classic, The Intelligent Investor, when studying under Graham at Columbia Business School. In particular, Hagstrom argues that Graham showed Buffett the merits of value investing, which involves purchasing companies’ stock for less than its true value. Because Graham developed value investing in the wake of the stock market crash of 1929, its key tenets are diametrically opposed to the reckless speculation that drove the stock market crash–a crash that occurred because investors assumed the stock market could only rise,...

The Warren Buffett Way Summary How Buffett Qualitatively Assesses Companies

While Buffett embraced Graham’s numbers-driven approach to evaluating companies, he was also sensitive to the qualitative factors that underlie promising companies. In this section, we’ll first examine how Buffett learned the importance of certain qualitative factors from Phil Fisher before moving on to discuss the metrics that Buffett uses to evaluate companies’ business models and management teams in particular.

The Influence of Phil Fisher

While Graham placed little emphasis on a company’s qualitative aspects, Phil Fisher held that the more subjective aspects of a company could provide valuable investing guidance. According to Hagstrom, Buffett embraced Fisher’s views on the importance of assessing a company’s potential and management when deciding whether to invest.

Hagstrom points out that Buffett was persuaded to embrace Fisher’s views by Charlie Munger, the current vice chairman of Buffett’s company, Berkshire Hathaway, and a longstanding friend.

(Shortform note: Fisher is best known for his seminal work Common Stocks and Uncommon Profits, in which he...

The Warren Buffett Way Summary How to Manage Your Portfolio

Having seen how Buffett chooses which individual companies to invest in, we’ll now discuss how he manages his broader investing portfolio. First, we’ll examine the key tenets of focus investing, Buffett’s approach that emphasizes focusing on a select group of stocks. Then, we’ll discuss the psychological pitfalls associated with focus investing and how to avoid them.

The Superiority of Focus Investing

According to Hagstrom, Buffett departs significantly from the mainstream when it comes to portfolio management. He writes that, while most investors diversify their portfolios broadly to minimize volatility, Buffett focuses on a select handful of stocks to maximize his chances of above-market returns.

To see the merits of focus investing, it’ll help to first discuss the main alternative: diversification. Hagstrom notes that investors traditionally prefer diversified portfolios because they supposedly minimize risk—after all, if you have 1,000 stocks represented in your portfolio and one lone stock takes a nosedive, it’s unlikely to cause a catastrophic loss. By contrast, if you only have five stocks in your portfolio, one plummeting stock could cause an outsized loss....

Shortform Exercise: Evaluate Your Investing Habits

Buffett’s preferred approach—focus investing—runs counter to traditional investing advice, which emphasizes diversification and discourages investors from analyzing companies themselves. In this exercise, reflect on your investing practices to find areas where you could implement Buffett’s advice.

Buffett’s preferred portfolio includes around 10 stocks. How many stocks have you invested in, and what was your rationale for choosing these stocks?