In the essay, The Warren Buffett Way by Robert Hagstrom, posted on Moodle, the a
ID: 2596515 • Letter: I
Question
In the essay, The Warren Buffett Way by Robert Hagstrom, posted on Moodle, the author outlines Buffett’s approach to investing. Hagstrom discuses the foundations of Buffett’s approach, the Warren Buffett Way, which include the numerous tennets.
Answer the following questions (at least 5 pages and no more than 7 pages long):
In your own words, what are the key elements Buffett utilizes to make his investment decisions?
Why are these tennets important in business decision making?
Based on your major how would you use the tennets to make better decisions inyyour own business or as your role as business manager?
Pick one of the stocks you choose for the Trading Assignment and discuss how they are or not following The Warren Buffett Way.
Explanation / Answer
INTRODUCTION OF BUFFETT
Each edition of The Warren Buffett Way has been widely regarded as the authoritative guide to how Warren Buffett selects the businesses he buys.
It starts with a chapter on the people who taught Buffett how to think about investments, Benjamin Graham, Philip Fisher and Buffett’s business partner, Charlie Munger.
Hagstrom then outlines 12 immutable tenets for buying a business and gives examples from Berkshire Hathaway’s portfolio.
The remainder of the book explores the psychology of investing. Many people who seek to model Buffett’s strategies miss this critical part: when he buys a business or shares – the two are the same in his mind – he never plans to sell.
Part of the reason why the book is authoritative is that it’s comprehensive. Similar books I’ve read have skimmed over the ideas they present, leaving you feel like you’ve snacked rather than digested a full meal. Because you’ve eaten well, you put the book down knowing what actions you can take.
He tells readers that they won’t be Buffett, but they can use his investing approach to improve the performance of their investments. Hagstrom’s website reinforces your education.
Warren Buffet is an American hero in my opinion. Humble, down-home, ethical, charming and intensely brilliant. The book is part biographical; part descriptive of the Buffet investment philosophies. Since Warren Buffet invests in simple, easy-to-understand businesses, the description of the companies in his portfolios are pure "Americana". Robert Hagstrom did a fantastic job writing the book....well-written and totally engaging. I was not bored for a minute. I enthusiastically recommend, particularly if you are Warren Buffet fan.
The Buffett Style
Q1 ANS- KEY ELEMENT OF BUFFETT
When deciding on a possible investment, he recommends, “If you need a computer or a calculator to decide whether to invest, then don’t do it – invest in something that shouts at you – if it is not obvious, walk away . . . If you don’t know the business, the financials won’t help at all.”
Avoid the Traps of Thinking Fast
Master investors like Buffett simplify their decisions by relying upon System 1, and it serves them well in most cases. However, they recognize that their emotional decision-making system is also prone to biases and errors, including:
Mental Framing
Our brains, equipped with millions of sensory inputs, create interpretive mental “frames” or filters to make sense of data. These mental filters help us understand and respond to the events around us. Framing is a heuristic – a mental shortcut – that provides a quick, easy way to process information. Unfortunately, framing can also provide a limited, simplistic view of reality that can lead to flawed decisions.
The choices we make depend on our perspective, or the frames surrounding the problem. For example, research shows that people are likely to proceed with a decision if the outcome is presented with a 50% chance of success and decline if the consequence is expressed with a 50% chance of failure, even though the probability is the same in either case.
Most investors incorrectly frame stock investments by thinking of the stock market as a stream of electronic bits of data independent of the underlying businesses the data represents. The constant flow of information about prices, economies, and expert opinions triggers our emotional brains and stimulates quick decisions to reap profits (pleasure) or prevent loss (pain).
Buffett recommends investors not think of an investment in stock as “a piece of paper whose price wiggles around daily” and is a candidate for sale whenever you get nervous.
Q2 ANSWER
ROLE OF BUSINESS MANAGER IN DECISION POWER
We have seen that organizational creativity is vital to organizations. Here are some guidelines for enhancing organizational creativity within teams. [14]
Team Composition (Organizing/Leading)
Team Process (Leading)
Leadership (Leading)
Culture (Organizing)
Q3 ANSWER
Warren Buffett has always believed that the time to buy stocks is when nobody else wants them. As we enter the fifth year of what many economists are calling the Great Recession, we find that some of the most amazing businesses—those with a durable competitive advantage—are trading at prices and price-to-earnings ratios that offer investors serious long-term moneymaking opportunities. Pessimism about the banking situation in Europe and unemployment in America have created the perfect storm to bring stock prices down and present value-oriented investors some great possibilities.
In Warren Buffett’s world, as stock prices decrease, the prospects for investment increase. Putting a number on those prospects tells Warren whether or not the stock is an attractive buy. The Warren Buffett Stock Portfolio explains how to do just that—how to value companies and conservatively estimate the kind of future return that an investment is offering at its current market price. Mary Buffett and David Clark look at stocks in Warren’s portfolio as the basis for their analysis.
After a brief history of Warren’s investment strategy, Buffett and Clark explain how to interpret a company’s per-share earnings and per-share book-value histories to quickly identify which companies have a durable competitive advantage and to project the compounding annual rate of return that an investment offers
When deciding whether or not to invest in a company, he and his partners follow a few simple guidelines. One of those is trying to determine the company's longevity.
. "It would tend to be a business that for one reason or another we can look out five or 10 or 20 years, and decide that the competitive advantage that it had at the present would last over that period."
Simply put, Buffett decides a business is worth investing in because it will last. He purchased See's Candies with longtime business partner Charlie Munger in 1972 and spent more than $1 billion on Coca-Cola stock in 1988 — both of which turned out to be good bets and both of which he still owns today. .
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"It's not the not selling that makes these so good, it's that discipline to buy things only when he really, really likes them,"
While not everyone will garner the same results as Buffett on the stock market, his core principle can be applied to almost every purchase we make: Invest for the long-term.
When deciding whether or not to buy a home, one of the first questions to ask yourself is: How long do I plan on staying here? The longer you live there, usually, the more valuable an investment real estate becomes.
"As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started — owning nothing,"." "Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your own home free and clear