Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor [Paperback]

This fundamental fascination has been increased recently by the rise of day trading, and stories of people making millions from their dens. The current craze in "stock investing" books also responds to the bull market frenzy in technology stocks that we have experienced continuously for years until earlier in 2000.

The appeal of all this is an emotional one, not unlike betting on a horse and cheering it on at the track.

Buffettology takes the opposite approach. The book is an attempt to model, qualitatively and quantitatively, the stock investing methods of Warren Buffett. Mr. Buffett is well known as having one of the very best long-term investing records ever. Mr. Buffett is the chairman and chief executive of Berkshire Hathaway, a public holding company, that serves as his investment vehicle.

That raises a fundamental question for you to consider. If you want to take the risk of trying to outperform the market averages by being an active stock investor (rather than owning an indexed mutual fund), why would you do the work yourself rather than just owning shares in Berkshire Hathaway? Do you seriously believe that you can outperform Warren Buffett? If you do have such a belief, then you are making a serious mistake. The odds against your success are very long indeed. You would probably do better with an indexed mutual fund instead.

So I recommend against your reading this book if you plan to use it to invest for yourself. You will probably just cost yourself money and time if you do.

So, should you read this book as a general interest book about investing? I also vote against that. The reason I do is because Mr. Buffett spells out his basic principles in the chairman's letter each year to his shareholders. This book adds nothing qualitatively to those letters. And those letters are much more interesting and entertaining than this book is. Also, the shareholder letters are free while you have to purchase this book.

If I am so negative on this book's concept and usefulness to you, why did I rate it at three stars rather than one? Well, I found that the quantitative section contained several useful perspectives that I seldom see in personal stock investing books. First, it gives you a basic methodology to take an estimate of your potential risk and reward from buying shares. Most investing books focus on potential reward and discuss risk in terms of volatility, without giving the investor a way to make that volatility risk tangible. Second, it also shows you how to calculate potential returns. As strange as it may sound, most investment books overlook that point. In my experience, most investors don't know how to do that. Third, the book contained three detailed examples (Gannett in 1994, Freddie Mac in 1992, and McDonald's in 1996) of the methodology outlined here. This will make the average person better able to understand the key concepts for evaluating a company and when to buy its stock. After understanding these points, a rational person will be more likely to either buy Berkshire Hathaway shares or to purchase an indexed mutual fund. It's not that easy, folks!

I thought that the book had a major weakness as an investigation of Buffett's methodology. It failed to consider his major blunders and connect those to weaknesses in the methodology or Mr. Buffett's use of the methodology (such as in purchasing such losers as Salomon Brothers and U.S. Air).

A strength of the book was to connect Mr. Buffett's current methodology to the various intellectual influences on it. Most people incorrectly believe that Mr. Buffett is a pure Ben Graham value investor. He mostly left that discipline behind many decades ago, after experiencing many setbacks connected to the methdology's weaknesses.

I found the occasional personal references to family scenes with Mr. Buffett in the book to be in bad taste, coming from a former daughter-in-law. If you like to read about the personal quirks of a famous person, though, you may enjoy these. If you want to better understand Mr. Buffett as a man, though, I suggest Roger Lowenstein's excellent biography.

One final caution: Mr. Buffett's approach is to buy and hold, and hold, and hold. Those who want a quick buck will hate this book and everything it stands for. He also advocates avoiding technology stocks in most cases (he doesn't understand them and wonders if anyone else really does) on the grounds that future performance is too hard to estimate and is often unreliable. So you won't get your emotional charge from reading about what Mr. Buffett does. It's more like watching the grass grow . . . and grow . . . and grow . . . very profitably.

Let your potential gains vastly exceed your potential losses!

Mary Buffet explains the type of companies that Warren looks for and at what price to buy the stock. She makes it sound very simple but I felt I knew no more about the subleties that has made Warren so successful. There was little or no mention about when to sell (apart from "never"!) and all the case studies involved stock that Warren bought... how about a few that he didn't buy and an explaination why or a few explainations of Warrens mistake and what he/we could learn from them. The key points were repeated frequently - maybe because there weren't that many points being made !

It was however clearly written with simple language and an was actually quite an entertaining read.