What Investment’s editor Nick Britton reviews the fourth edition of The Essays of Warren Buffett: Lessons for Investors and Managers.
Buffett is the subject of dozens of biographies, hagiographies and analyses of his investment style. Some of them are of the self-help variety, claiming that you, too, can invest like Warren Buffett.
There is only one Buffett book you really need to read, however, and that’s the one that uses Buffett’s own words – specifically, his letters to shareholders in his company, Berkshire Hathaway – to elucidate and explain his approach to business and investment.
Now its fourth edition, The Essays of Warren Buffett: Lessons for Investors and Managers is arranged by Lawrence A Cunningham into a series of chapters covering themes like valuation and accounting, mergers and acquisitions and investment alternatives. Though the letters were written over a period of more than 30 years, Buffett’s thinking has been remarkably consistent over this time: the first letters were, after all, written after his philosophy was fully formed.
Buffett is a thoughtful and entertaining writer, though he doesn’t quite have the brilliance of his mentor, Benjamin Graham. There’s also a certain amount of repetition in the book, due to the fact that Buffett has reiterated various points in different contexts over the years. What his letters do have, however, is clarity of purpose, self-effacing humour, and a strong vein of human decency that runs right the way through them. It’s a refreshing combination, especially in the world of finance. If your image of a big-time investor is Gordon Gekko from the film Wall Street, Buffett is about as different as you could possibly imagine.
There’s no quibbling with Buffett’s investment record: compounded annual returns of 20 per cent plus going back several decades. But inevitably, there have been errors along the way, and Buffett happily admits to them.
The most well known blunder was of course the original acquisition of Berkshire Hathaway, a business operating in the doomed US textile industry that was selling for what appeared to be far less than its intrinsic value. Having been misled by his eye for a bargain, Buffett allowed his affection for the business and his belief in its dedicated management and staff to drive his decision making, and he kept it running far longer than could be justified on strictly financial grounds. Shutting it down was clearly a painful process, but it lives on in the name of Buffett’s investment company. There’s something particularly apt about this: a reminder of Buffett’s fallibility, as well as his humility and dislike of ostentation.
Buffett’s principles can be summed up quite simply: he treats shareholders and managers in his acquired businesses as he would wish to be treated if the positions were reversed. While simple to state, this principle has not been easy for many companies to live up to, and Buffett is scathing about the flawed acquisition strategies and creative accounting that for him, amount to an abuse of a company’s shareholders.
Occasionally Buffett’s principled stance can seem almost quixotic. Long after a share in Berkshire Hathaway was worth more than $10,000 (they’re now over $100,000), Buffett refused to order a share split to allow investors to trade lower amounts. His logic was that such a move would create unnecessary expense and attract short-term traders at the expense of longer-term shareholders.
However justified Buffett was in his decision, he was eventually forced into going back on it by the proliferation of Berkshire ‘clones’ that promised to allow small investors to participate in the market performance of Berkshire without directly owning the stock. This was anathema to Buffett, but he recognised the clones were serving a legitimate demand among small-time investors. He still declined to split the stock: instead, he created a new class of ‘B’ shares worth 1/30 of the ‘A’ shares. (The B shares have since been split and are now worth approximately 1/1,500 of the A stock.)
Investors looking to this book for a blueprint for success – such as that provided by Ben Graham in The Intelligent Investor – will be disappointed. Buffett’s letters are written to justify and explain his own actions in managing Berkshire, a company now worth over $300 billion, and much of this has no direct application for the man in the street.
The value of the book is that by spending a few hours in Buffett’s company, you start to absorb something of the way he thinks about investing. It’s long-term, it’s principled, and it’s steeped in common sense.
The letters don’t just explain Buffett’s philosophy – they are an illustration of it. By providing to his shareholders (and the wider world) such a candid and transparent explanation of his actions, he has given us a model of how the relationship between companies and their shareholders ought to work. That can’t fail to be of value to anyone with the remotest interest in business, finance or investing.
The fourth edition of The Essays of Warren Buffett: Lessons for Investors and Managers, edited by Lawrence A Cunningham, is published by Wiley.