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CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page i J.K. LASSER’S™ PICK STOCKS LIKE WARREN BUFFETT CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page ii Look for these and other titles from J.K. Lasser™—Practical Guides for All Your Financial Needs J.K. Lasser’s Pick Winning Stocks by Edward F. Mrkvicka, Jr. J.K. Lasser’s Invest Online by Laura Maery Gold and Dan Post J.K. Lasser’s Year-Round Tax Strategies by David S. DeJong and Ann Gray Jakabcin J.K. Lasser’s Taxes Made Easy for Your Home-Based Business by Gary W. Carter J.K. Lasser’s Pick Winning Mutual Funds by Jerry Tweddell with Jack Pierce J.K. Lasser’s Your Winning Retirement Plan by Henry K. Hebeler J.K. Lasser’s Winning with Your 401(k) by Grace Weinstein J.K. Lasser’s Winning with Your 403(b) by Pam Horowitz J.K. Lasser’s Strategic Investing After 40 by Julie Jason J.K. Lasser’s Winning Financial Strategies for Women by Rhonda Ecker and Denise Gustin-Piazza J.K. Lasser’s Pick Stocks Like Warren Buffett by Warren Boroson CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page iii J.K. LASSER’S™ PICK STOCKS LIKE WARREN BUFFETT Warren Boroson John Wiley & Sons, Inc. New York • Chichester • Weinheim • Brisbane • Singapore • Toronto fcopyebk.qxd 10/10/01 5:00 PM Page iv Copyright © 2001 by Warren Boroson. All rights reserved. Published by John Wiley & Sons, Inc. Quotations from Philip Fisher are from Common Stocks and Uncommon Profits, by Philip A. Fisher. Copyright© 1996. Reprinted by permission of John Wiley & Sons, Inc. Brief quotations from Ben Graham are from pp. 94, 96, 100, 101, 106, 109, 110, 284, of the The Intelligent Investor Fourth Revised Edition, by Benjamin Graham. Copyright© 1973 by Harper & Row, Publishers, Inc. Reprinted by permission of HarperCollins Publishers, Inc. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: [email protected]. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional person should be sought. This title is also available in print as 0-471-39774-1. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com 7700++ DDVVDD’’ss FFOORR SSAALLEE && EEXXCCHHAANNGGEE www.traders-software.com www.forex-warez.com www.trading-software-collection.com www.tradestation-download-free.com Contacts [email protected] [email protected] Skype: andreybbrv CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page v Contents Introduction: What Investors Can Learn from Warren Buffett vii 1 It’s Easy to Invest like Warren Buffett 1 2 The Achievement of Warren Buffett 9 3 Buffett: A Life in the Stock Market 17 4 The Influence of Benjamin Graham 23 5 The Influence of Philip Fisher 33 6 How Value and Growth Investing Differ 45 7 Buffett’s 12 Investing Principles 53 8 Don’t Gamble 55 9 Buy Screaming Bargains 61 10 Buy What You Know 69 11 Do Your Homework 73 12 Be a Contrarian 77 13 Buy Wonderful Companies 83 v CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page vi vi CONTENTS 14 Hire Good People 91 15 Be an Investor, Not a Gunslinger 97 16 Be Businesslike 115 17 Admit Your Mistakes and Learn from Them 121 18 Avoid Common Mistakes 127 19 Don’t Overdiversify 135 20 Quick Ways to Find Stocks That Buffett Might Buy 141 21 William J. Ruane of Sequoia 145 22 Robert Hagstrom of Legg Mason Focus Trust 153 23 Louis A. Simpson of GEICO 157 24 Christopher Browne of Tweedy, Browne 161 25 Martin J. Whitman of the Third Avenue Funds 171 26 Walter Schloss of Walter & Edwin Schloss Associates 177 27 Robert Torray of the Torray Fund 185 28 Edwin D. Walczak of Vontobel U.S. Value 197 29 James Gipson of the Clipper Fund 205 30 Michael Price of the Mutual Series Fund 209 31 A Variety of Other Value Investors 221 32 Putting Everything Together 237 Appendix 1 Wanted: Cheap, Good Companies 243 Appendix 2 Berkshire Hathaway’s Subsidiaries (2000) 245 Appendix 3 Quotations from the Chairman 246 Appendix 4 “65 Years on Wall Street” 255 Appendix 5 Martin Whitman on Value Versus Growth 265 Appendix 6 A Weekend with the Wizard of Omaha: April 2001 268 Appendix 7 “If You Own a Good Stock, Sit on It.”—Phil Carret 274 Glossary 279 Index 283 CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page vii Introduction: What Investors Can Learn from Warren Buffett erkshire Hathaway’s stock has risen nearly 27 percent a year for Bthe past 36 years. For its consistency and profitability, this com- pany, managed by Warren E. Buffett of Omaha, has been amazing. If you asked Buffett how you, as an individual investor, could go about imitating his spectacularly successful investment strategy, his answer would be: buy shares of Berkshire Hathaway. He happens to be an unusually sensible person, and that is clearly the best answer. But if you buy or intend to buy other stocks on your own, either one-at-a-time or through a managed mutual fund, there is much that you can learn by studying Buffett’s tactics. Why not just do the obvious and put all your money into Berkshire Hathaway stock? One reason: It’s mainly an insurance holding com- pany—Buffett is an authority on insurance. Because of this, the stock has virtually no exposure to many areas of the stock market, such as technology and health care. A second reason: Berkshire has become so enormous that its future performance is handicapped, much like the odds-on favorite in a horse race being forced to carry extra weights. In short, you might do better on your own. First, because you have a smaller, more nimble portfolio. And, second, because you might shoot out the lights by overweighting stocks in whatever field you’re vii CCC-Boroson FM (i-x) 8/28/01 1:25 PM Page viii viii INTRODUCTION particularly knowledgeable about—health care, technology, bank- ing, whatever. Buffett refers to this as staying within your “circle of competence.” (There’s nothing wrong, of course, with your also buy- ing Berkshire stock. I have. The Sequoia Fund, run by friends of Buf- fett’s, has one-third of its assets in Berkshire.) While the average investor can learn a thing or two from the mas- ter, he or she simply cannot duplicate Buffett’s future or past invest- ment performance. One obvious reason: Buffett has the money to buy entire companies outright, not just a small piece of a company. He also buys preferred stocks, engages in arbitrage (when two com- panies are merging, Buffett may buy the shares of one, sell the shares of the other), and buys bonds and precious metals. He’s also on the board of directors of a few companies Berkshire has invested in. Perhaps the most difficult thing for individuals to duplicate is Buffett’s small army of sophisticated investors around the country who fall all over themselves to provide him with “scuttlebutt” about any company he’s thinking of buying. Also, Buffett has the word out to family-owned businesses: “I’ll buy your company and let you keep running it” (another thing individuals can’t duplicate). Let’s not forget, too, that Buffett also happens to be extraordinar- ily bright, a whiz at math, and to have spent his life almost monoma- niacally studying businesses and balance sheets. What’s more, he has learned from some of the most original and audacious invest- ment minds of our time, most notably Benjamin Graham. Still, while it’s true that trying to emulate Pete Sampras or the Williams sisters does not guarantee that you will wind up in Wimble- don, you could very likely benefit from any of the pointers they might give—or from studying what it is they do to win tennis matches. Buffett has often said that it’s easy to emulate what he does, and that what he does is very straightforward. He buys wonderful busi- nesses run by capable, shareholder-friendly people, especially when these businesses are in temporary trouble and the price is right. And then he just hangs on. There is, in fact, a whole library of books out there about Buffett and his investment strategies. There are Berkshire web sites, Inter- net discussion groups, and annual meetings that are beginning to re- semble revival meetings. There is also a Buffett “workbook” that helps people invest like Warren Buffett.