Review of The Essential Buffett: Timeless Principles for the New Economy (Hardcover)

The definitive book on Warren Buffett has yet to be written.Perhaps only Mr. Buffett can do so, and he has no incentive in this direction.Interestingly, the more Mr. Buffett's performance weakens versus the market, the more books come out focusing on his methods.Mr. Buffett writes about his thinking in his annual reports of Berkshire Hathaway, speaks about it at his annual meetings, and occasionally shares ideas with reporters.Conclusions about his methods then are a distillation of these sources, much like the CIA used to interpret what the Soviet's thought by reviewing Pravda.The results are probably about as accurate.My main complaint about this book is that Mr. Buffett does not and probably will not invest in the new economy.And for good reasons.It doesn't fit his investing standards.So a book that takes the principles and applies them in that direction is misleading at best, and I suggest you decide what you want to call it at worst.

If you want to read a good book about Mr. Buffett, I suggest that you read How to Think Like Benjamin Grapham and Invest Like Warren Buffett.That volume covers much of the same ground as here, but does so better.It also is more accurate in characterizing Mr. Buffett's philosophy, as I understand it.You can read my review of that book.

If you have read Mr. Hagstrom's book, The Warren Buffett Way, you probably don't need to read this one as well.Let me summarize some of the key points so you can decide.Here are the principles in the book, as I have paraphrased them:

(1)Think about a stock investment like you are buying the whole business.

(2)Give yourself a large margin of safety when you buy, picking a time when a stock is depressed well below its economic value.

(3)Hold few stocks and think about their current and future fundamentals constantly to see if your assumptions are holding.

(4)Avoid speculation at all costs.

The tenets of The Warren Buffett Way are repeated here:

Business Tenets

(a)"Is the business simple and understandable?"

(b)"Does the business have a consistent operating history?"

(c)"Does the business have favorable long-term prospects?"

Management Tenets

(a)"Is the management rational?"

(b)"Is management candid with shareholders?"

(c)"Does management resist the institutional imperative?"

Financial Tenets

(a)"Focus on return on equity, not earnings per share."

(b)"Calculate owner earnings."This is essentially free cash flow.

(c)"Look for companies with high profit margins."

The reported reason Mr. Buffett does not buy technology stocks is because he feels the long-term prospects are too murky.He is probably right in most circumstances.Technology companies are usually about as successful as their new products.How can you know how good they will be versus the competition 10 years from now?

The fundamental premise of a book like this is also questionable in another way.If you want to get Warren Buffett's results, you can simply own Berkshire Hathaway stock while Mr. Buffett is alive.

For most people, indexed mutual funds are a better choice.I suggest that you read John Bogle's Common Sense on Mutual Funds to learn the argument for that approach.If 90 percent of the pros cannot beat the market, can you expect to do better?

After you read this book, also think about where modeling of a famous person's behavior might not capture what you want to learn.For example, can an actor distill her or his approach into a few principles and tenets?Yes, but that distillation wouldn't allow you to duplicate the results.

Take your money seriously, and keep focusing on how to keep it safe as your first investment priority.Avoiding losses is a key Buffett principle that has served him and his investors well.

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