The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor

ByChad Carson

Coach's Notes- The Warren Buffett Way, by Robert Hagstrom

( Print | Ebook | Audiobook)

What I Like About the Book

Warren Buffett is one of the richest individuals in the world with a net worth of approximately 62 billion in 2016. But unlike many of the wealthiest individuals, Buffett acquired his wealth almost exclusively from investing and not by starting and growing an operating business. This means his investing principles are something special. It pays to learn from them.

I have read several books about Buffett, including his HUGE biography (The Snowball, by Alice Schroeder). But if you want to learn and apply Buffett’s investing and business lessons, The Warren Buffett Way is the best choice.

You may think of Warren Buffett primarily as a stock market investor.  But you can apply his investment and business principles  in wide variety of situations.  Businesses, like people, all have different personalities, quirks, and nuances.  But they also have many similarities.  Buffett understands those common traits better than almost anyone, and he’s used that knowledge to profitably purchase all or part of a wide variety of businesses, including:

  • GEICO (insurance)
  • Coca-Cola (soft drink)
  • Wells Fargo (bank)
  • American Express (credit card)
  • Dairy Queen (food services)
  • BNSF (railroad)
  • Clayton Homes (manufactured homes)
  • Benjamin Moore & Co (paint)
  • Helzberg Diamonds (jewelry)
  • Mars Inc. (candy)
  • Shaw Industries (carpet)

Most importantly, these businesses and others have consistently grown and produce enormous profits that Buffett has used to reinvest in more companies.  The end result is his enormous fortune (i.e. his “snowball”) that accumulated over 60+ years as an investor.

The ideas you will read below are just the tip of the iceberg.  The book itself covers many more interesting strategies, stories, and principles. If you’re like me, this book will whet your appetite to make Warren Buffett’s investing a life-long study.

My Favorite Big Ideas From the Book

**Follow the links to read past articles I have written on each big idea.

1. The Danger of Being Popular (aka Don’t Be an Investment Lemming) 

We all learned back in middle school not to do something just because “everyone else is doing it.”  But apparently, the lesson never stuck.  With fashion, house purchases, business, and yes – investments, we tend to follow the herd.  Warren Buffett calls this being a lemming, like those odd rodents that apparently kills themselves by following a herd of lemmings right off of a cliff into the ocean. If you want to avoid lemming-like investing, you must study and apply principles that will guide you away from dangerous, herd-induced behaviors.

2. How Warren Buffett Values An Investment

I can’t sugar coat the truth. Good investing does require detailed, intense study of potential investments. It can be a lot of work.  But once you have the correct information, Warren Buffett says the math is fairly simple to value any investment.  You take all the future cash flows (i.e. in real estate the net rental income, resale profits, etc), and then you discount them back to the present.  For a discount rate (aka capitalization rate) Buffett simply uses the 30-year US treasury bond rate (this is considered a safe, risk-free investment).  The resulting present value is your investment’s value. But Buffett doesn’t stop there. He always buys with a margin of safety, as you’ll see in the next big idea.

**For an easy explanation of the math behind discounting cash flows, see a free, helpful series of tutorial videos at KhanAcademy.org.

3. How to Use a Margin of Safety to Avoid Financial Disaster

Benjamin Graham, Warren Buffett’s investing mentor, said that “margin of safety” was the distillation of sound investment into a three-word motto (paraphrased from The Intelligent Investor).  The term reminds us as investors not to forget the uncertainty of the future. We may have the best spreadsheets and formulas, but we can still lose if something big changes in the economy or in our business. The only way to counter future uncertainty is a margin of safety, or buying below the intrinsic value of your investment.

4. 3 Business Tenets Necessary for Intelligent Real Estate Investing

Wouldn’t it be helpful to know the 3 core criteria a billionaire investor uses for his purchases?  Well, you can.  These three business tenets are what Warren Buffett uses to filter investment opportunities into actual investments he wants to buy.  In the article linked above, I explain these three tenets and show how I apply them to real estate investing.

5. Low Overhead is Just Good Business

Warren Buffett says that keeping costs low is a way of life in business.  It’s like breathing.  You can’t wake up one day and decide to cut costs any more than you can wake up and decide to start breathing. Buffett uses this principle when he examines businesses to purchase. Wasteful spenders won’t be in business long. And while efficient business spending does not guarantee success, it is an excellent foundation to build everything else upon.

6. Good Reputation – More Valuable Than Money in the Bank

“It takes 20 years to build a reputation and five minutes to ruin it.  If you think about that, you’ll do things differently.”  Warren Buffett tells his managers often that he will be understanding if they lose him money, but he will be ruthless if they lose him one shred of reputation.  This is because Buffett knows how valuable a good reputation can be.  A good reputation, also called trust, is what people need before they’ll buy or invest with us.  The cost of a bad reputation is ENORMOUS; therefore it pays to guard yours like it is your most valuable bank account (because it is!).

7. Tap Dancing to Work

Warren Buffett loves what he does as the CEO of Berkshire Hathaway. In fact, he says he “tap dances to work” every day. Can’t you just imagine the 85-year-old billionaire with thick glasses tap dancing into his office every day! Ha, Ha. I laugh every time I read it. This also reminds me of my purpose at Coach Carson, LLC.  I want to help people do what matters. I want us all to tap dance into our day because we’re doing the activities we love with the people we love.  Money can’t buy that directly, but success with money can free up the time and flexibility to do activities in an authentic way that leaves your feet tapping! Let’s make that our goal!

My Favorite Quotes From the Book

The size of an investor’s brain is less important than his ability to detach the brain from the emotions.”

Robert G. Hagstrom, The Warren Buffett Way

If the price of a particular stock is going up, we assume good things are happening; if the price starts to go down, we assume something bad is happening, and we act accordingly. It’s a poor mental habit, and it is exacerbated by another: evaluating price performance over very short periods of time. Not only are we depending solely on the wrong thing (price), Buffett would say, but we’re looking at it too often and we’re too quick to jump when we don’t like what we see. This double-barreled foolishness—this price-based, short-term mentality—is a flawed way of thinking, and it shows up at every level in our business. It is what prompts some people to check stock quotes every day, sometimes every hour.”

Robert G. Hagstrom, The Warren Buffett Way

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What do you think?

Have you read The Warren Buffett Way? Did you like it? What were your favorite ideas? What investment principles or strategies are most important to you? I’d love to hear from you in the comments section below!