The Essential Buffett

Hagstrom, who wrote The Warren Buffett Way, presents Buffett's approach organised into four sets of tenets: business tenets, meaning the business should be simple and understandable with consistent operating history and favourable long-term prospects; management tenets, meaning management should be rational, candid with shareholders and resistant to institutional imitation; financial tenets, meaning focus on return on equity, owner earnings, profit margins and the dollar of market value created per dollar retained; and market tenets, meaning determine intrinsic value and buy at a significant discount.

The distinctive material in this book relative to Hagstrom's earlier one is the emphasis on focus investing, meaning concentrated portfolios of a small number of holdings held for long periods. Hagstrom argues from the mathematics of portfolio concentration and from simulations that a concentrated portfolio has a higher probability of substantially outperforming and also of substantially underperforming, and that the approach requires an investor able to tolerate the volatility. He connects this to Kelly criterion reasoning about bet sizing and to Munger's arguments for concentration.

He also covers the behavioural material on why most investors cannot execute the approach and the psychology of holding through drawdowns.

The book is a secondary account and readers should note that Buffett's own writings, collected in the Berkshire letters and in Cunningham's edited Essays, state the position directly. Hagstrom's contribution is organisation and the focus investing argument, which is his own extension rather than Buffett's stated method. The empirical support for concentration is thin.

American portfolio manager who ran Legg Mason's Focus Trust and later served as chief investment strategist at EquityCompass.

The Warren Buffett Way was the first book to reconstruct Buffett's purchases as a repeatable set of business, management, financial and valuation tests, and it set the template later Buffett books follow. Latticework and Investing: The Last Liberal Art carry the same argument into physics, biology and psychology as sources of investment models.

Legg Mason, EquityCompass