The Essays of Warren Buffet – Warren Buffet and Lawrence A Cunningham

The definitive guide on how to invest in stocks. Warren Buffett is probably the greatest of all time, with $82.5B to show for it. In this post, I will decipher his investment strategies by summarizing the top 5 takeaways of The Essays of Warren Buffett.

Buy Outstanding Businesses at Sensible Prices

  • “We are looking for outstanding businesses at a sensible price, not a mediocre business at a bargain price”
  • Buying great businesses that reinvested their profits and compounded the returns to shareholders was a better strategy than buying cigar butt (value) companies
  • 3 requirements for stock market investment: 1) superior economic prospect, 2) reasonable price/valuation, 3) extraordinary people in charge

Look for a High Return on Capital

  • High return on high return on net tangible assets ([Net profit + amortization] / [Total assets -Intangible Liabilities]
  • Want a company that can keep adding more capital and keep earning an above average return
  • High returns attract high competition
  • Need a company that have a moat: characteristics of a business where it makes the competition extremely difficult to compete

The Intelligent Investors Welcomes Volatility

  • Short-term fluctuations in the market are meaningless, except it provides a great buying opportunity
  • Hope for market crashes because you can buy great companies at a discount price
  • “Be fearful when others are greedy and greedy when others are fearful”
  • Looking for stocks is like looking for a spouse; pays to be active, interested and open-minded, does not pay to be in a hurry

Identifying Extraordinary Management

  • He or she thinks like an owner
  • Run like they are its sole owner
  • It’s the only asset they own
  • They cannot sell or merger for a century
  • Avoid financials where footnotes are impossible to decipher
  • Traits of great managers: independent, business-savvy, interested, shareholder oriented

Stay Focused

  • Invest in the top picks vs. diversification of too many companies
  • Problem with too much diversification: There aren’t that many great deals that goes around + don’t have enough time to analyze all the companies
  • “In an investment lifetime, it’s too hard to make hundreds of smart decisions”