The biography ‘Buffet: The Making Of An American Capitalist,’ written by writer Roger Lowenstein, is based on the life of legendary investor Warren Buffet. Buffett’s life journey from rags to riches is depicted in this book. Warren Buffet amassed enormous riches by pure investing, becoming one of the world’s wealthiest individuals. This book dives deeper into his investment strategies and viewpoints.
We’ve compiled a list of the book’s most important passages. I hope you find it useful.
Important Excerpts From ‘BUFFET: The Making Of An American Capitalist’
His talent originated from his unrivalled mental independence and ability to concentrate on his work while shutting out the rest of the world.
The great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.
Security Analysis offered an escape from such a trap. Graham and Dudd urged that investors pay attention not to the tape, but to the businesses beneath the stock certificates. By focusing on the earnings, assets, future prospects, and so forth, one could arrive at a nation of a company’s “intrinsic value” that was independent of its market price.
The market, they argued, was not a “weighing machine” that determined value precisely, Rather, it was a “voting machine”, in which countless people registered choices that were the product partly of reason and partly of emotion.
It is an almost unbelievable fact that wall street never asks, “How much is the business selling for?”
An investor who become unduly discouraged by a market drop and who allowed himself to be stampeded into selling at a poor price was ” perversely transforming his basic advantage into a basic disadvantage.”
Every stock picker worth his salt eventually comes to such a crossroads. It is extremely difficult to commit one’s capital in the face of ridicule – and this is why Graham was invaluable. He liked to say ,”You are neither right nor wrong because the crowd disagrees with you.” Picking a stock depended not on the whim of the crowd, but an the facts.
This is the cornerstone of our investment philosophy: Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.
When Buffett looked at a stock, he was beginning to see not just a frozen snapshot of assets, but a live, ongoing business with a unique set of dynamics and potential.
His serious point was that even trifling sums should be invested with the utmost care. To Buffett, blowing $30000 represented the loss not of $30000 but of the potential for $2 trillion.
A portfolio with scores of securities would be relatively unaffected if any one stock fell , but similarly unaffected should an issue rise. Indeed, as the number of the number of stocks grew, the portfolio would come to mimic the market averages.
Buffett avoided trying to forecast the stock market and must assuredly avoided buying or selling stocks based on people’s opinions of it. Rather , he tried to analyze the long- term business prospects of individual companies, this owed to his bias for logical reasoning. One could ” predict” the market trend, as one could predict which way a bird would fly when it left the tree.
For Buffett, the right sound was a matter not just of making money, but of superior reasoning. Being right on a stock had some thing of the purity of a perfect move in chess. It had an intellectual resonance.
It might have been supposed that competition between expert, professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these people are, in fact, largely concerned, not with making superior long term forecast of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man value it at, under the influence of mass psychology, three months or a year hence.
The stock market is a crowd, consisting of whoever is following prices at any given moment. This amorphous assemblage revalues prices every day, even every hour. Yet the outlook for a given business- say , a Walt Disney- changes far more slowly. The public’s ardor for Mary Poppins is unlikely to change from Tuesday to a Wednesday, or even over a month or two, Most of the fluctuations in Disney’s shares, therefore, derive from changes not in the business but in the way that the business is perceived. And the pros were preoccupied merely with outwitting the crowd.
It’s a lot different going out to Kalamazoo and telling whoever owns the television station out there that because the Dow is down 20 points that he ought to sell the station to you a lot cheaper. You get into the real world when you deal with a business. But in the stocks every one is thinking about relative price. When we bought 8 percent or 9 percent of the Washington Post in one month not one person who was selling to us was thinking that he was selling us $400 million worth for $80 million. They were selling to us because communication stocks were going down, or other people were selling, or whatever reason.
This was the acid test of an investor. When a stock drops by 25 percent, it is only human to wonder if one has made a mistake. Buffett, though, truly believed that he knew better than the crowd.
Buffet chose to stay “the realm of his specially.” He could not size up how the country’s problems would influence the shares of the Washington Post. His genius was in not trying. Civilization is too variegated, its dynamics far too rich, far one to foreseen its tides, let alone the waves and wavelets that affect securities prices. Wars would be won and lost; prosperity would be hailed as everlasting and be moaned as never recurring, as would politics, hemlines, and the weather enjoy their seasons. Analyzing them was Wall Street’s great game – and its great distraction.
None of these would substitute for critically evaluating an individual stock. When you purchased a share of Washington Post stock, ultimately you would not be rewarded on the basis of whether war broke out in the Middle East. You were buying nothing more, nothing less, than a share of the business- a claim on the future profits of its publishing and television assets. Yet if you know what the post, or any one business, was worth, it rang with the clarity of a single note. That was the second Buffett strained for. Nothing else mattered, least of all the thousand cacophonous voices debating the future. Stein was searching for a glimpsed of “more stable and anticipatable times,” but Buffett was unwilling to wait. As he had once told his partners, the future was never clear. What was very clear to him was that certain securities were available for less- far less- than the value of their assets. Every thing else- his son’s strained back, the cries of Chicken Little – he cleared away.
“I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! US steels at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
Investors often assume that book value approximates, or at least is suggestive of, what a company is “worth”. In fact, the two express quite different concepts. Book value is equal to the capital that has gone into a business, plus whatever profits have been retained. An investor is concerned with how much can be taken out in the future ; that is what determines a company’s “worth”( or its “intrinsic value).
Suppose, for a moment, that a new company invested in candy- making equipment, stores and inventory identical to those of See’s. Its book value would be the same, but the name on its candy box would be unknown. And this upstart, having far less earning power, would be worth far less. Since book value is blind to intangibles such as brand name, for a company such as see’s it is meaningless as an indicator of value.
Buffett said an investor should approach the stock market as if he had a lifetime punch card. Every time he bought the stock he punched a hole. When the card had twenty holes he was done- no more investing for life. Obviously, the investor would filter out every idea but the best.
Buffett explained that he evaluated stocks exactly as he would an entire business: he looked for companies he understood, run by honest and competent managers, with favorable long- term prospects and available at a decent price. He made no attempt to anticipate the short-term price action.
The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long- term values.
He looked at the dog a little tentatively and he said, “Does your dog bite? ” The old- timer said,” nope”. So the stranger reached down to pet him and lunged at him and practically took off his arm, and the stranger as he was repairing his shredded coat turned to the old- timer and said,” I thought you said your dog doesn’t bite. “The guy says,” Ain’t my dog.” The moral: It’s important to ask the right question.
Buffett’s view, of companies and of human behavior, was more circumspect. In the first place, value was not so precise. More to the point, investors were not always rational. At times, and especially under the influence of crowd psychology, investors might pay $160 for IBM – or agree to sell it for only $80.
If you buy a bond, you know exactly what’s going to happen, assuming it’s a good bond, a U.S. Government bond. If it says 9 percent, you know what the coupons are going to be for maybe thirty years. Now, when you buy a business, you’re buying something with coupons on it, too, except, the only problem is , they don’t print in the amount. And it’s my job to print in the amount on this coupon.
Buffett tried to find stocks whose “value” was significantly greater- than their price.
Pay no attention to macroeconomic trends or forecasts, or to people’s predictions about the future course of stock prices. Focus on long- term business value- on the size of the coupons down the road.
Stick to stocks within one’s “circle of competence.” For Buffett, that was often a company with a consumer franchise. But the general rule was true for all : If you didn’t understand the business – be it a newspaper or a software firm – you couldn’t value the stock.
Look for managers who treated the shareholders capital with owner like care and thoughtfulness.
Study prospect – and their competitors – in great detail. Look at raw data, not analysts’ summaries. Trust your own eyes, Buffett said. But one needn’t value a business too precisely, A basketball coach doesn’t check to see if a prospect is six foot one or six foot one or six foot two; he looks for seven- footers.
The vast majority of stocks would not be compelling either way – so ignore them. Merrill Lynch had an opinion on every stock ; Buffett did not. But when an investor had conviction about a stock, he or she should also show courage and buy a ton of it.
What mattered most was confidence in one’s own judgment, from which would flow the kiplingesque cool to keep one’s head “when all about you are losing theirs”. In market terms, if you knew what a stock was worth- what a business was worth- then a falling quote was no cause for alarm. Indeed, before he invested in a stock, Buffett wanted to feel sufficiently comfortable so that if the market were to close for a period of years and leave him with no quoted price at all, he would still be happy owning it. This sounds extraordinary, but one’s house is not quoted day-by-day, and most people do not lose sleep over its value.
Graham-and-Dodd did not claim to know the proper price for a stock. Theirs was a rough science, at best. What they said was that on occasion a stock was so out of line that one could leap in without any claim to precision. Such instances might be rate. But those few could make one rich.
What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value-in the hope that it can be sold for a still-higher price-should be labeled speculation.