Best Investment Books

The Essays of Warren Buffett by Lawrence A. Cunningham

In this book, The Essays of Warren Buffett, the author has selected and arranged material from Berkshire Hathaway annual reports.

Warren Buffett commented on Cunningham's book by saying: “His book is far better than any of the biographies written to date. If I were to pick one book to read, this would be the one.”

Many of the comments in the book have direct applicability to investors as well as to business managers.

I have included below some quotes from the book that have struck a chord for me that have relevance to individual (value) investors who are interested in investing like Warren Buffett. The quotes may stimulate you to read the entire book.

Notable quotes from the book followed by my comment in bold

"We would prefer to buy an outstanding company at a fair price rather than an ordinary company at a cheap price.”

This is a guiding principle of Warren Buffett that suggests that if I want to invest in a particular quality business, I can’t always expect to buy its stock cheaply, otherwise I may have to wait forever.

"When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomic analysts and not even as security analysts."

What I get from this comment is that if I am thinking of investing in a company, I should be concentrating on the quality of the company, rather than on more global events that are not possible to predict.

"We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it."

This flies in the face of conventional wisdom of diversifying to minimise risk. Most investors would no doubt have far less opportunity to match the intensity that Warren Buffett can muster when thinking about businesses to invest in.

"I cannot understand why a (know-something) investor elects to put money into a business that is his 20th favourite rather than simply adding that money to his top choices – the businesses he understands best and that present the least risk, along with the greatest profit potential."

I love this comment and now think of it every time I am considering expanding my portfolio. It makes me ask myself why I am not ranking the companies in my portfolio from 1st choice to nth choice. It makes me think: “Where will the latest candidate rank? Will it become my (n+1)th choice? Or maybe it should replace a previous choice?”

"Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient."

This comment reflects Buffett’s self–confessed slothful investing behaviour. History has certainly demonstrated that a massive amount of money has been relocated to Buffett's companies.

“We want the business to be one (a) that we can understand; (b) with favourable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.”

This comment encapsulates the Buffett approach to investing, whether when buying a whole, or part of a business. One might call them the four commandments of successful investing.

“ … we think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid?”

Warren E. Buffett also sees growth as an integral component of investing and the calculation of value. He argues that the impact of growth is not always positive. Separating 'growth investing' and 'value investing' from 'investing' is not something that Buffett would agree to.

" … we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying."

This insistence on a margin of safety is one way Buffett minimises or eliminates risk in investment decisions and allows for a portfolio concentration on outstanding businesses.

“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of the circle is not very important; knowing its boundaries, however, is vital.”

I have sometimes wondered why I have not invested in particular stock-market sectors and whether I should. This comment by Buffett helps me to understand why.

I hope you gain benefit from the above quotes by Warren Buffett from the book. I certainly have!

Book mark this page and refer back to it. It encapsulates the essentials of investing.

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