Hagstrom organises Buffett's investing method into a set of tenets grouped under four headings: business, management, financial and market. The business tenets require that a company be simple and understandable, have a consistent operating history and favourable long-term prospects. The management tenets ask whether managers are rational in allocating capital, candid with shareholders, and resistant to what Buffett calls the institutional imperative. The financial tenets focus on return on equity rather than earnings per share, on owner earnings rather than reported profit, on high profit margins and on the requirement that each dollar retained create at least a dollar of market value. The market tenets ask what the business is worth and whether it can be bought at a significant discount.
The second edition adds material on Buffett's later acquisitions and on the arithmetic of focus investing, which Hagstrom supports with simulations showing that concentrated portfolios have higher variance in outcomes but a greater probability of beating the index over long periods. He also covers the psychological requirements, drawing on behavioural finance.
The worked examples are the strength: Coca-Cola, The Washington Post, GEICO, Gillette and others are analysed against the tenets using figures available at the time of purchase.
The method is reverse-engineered from outcomes, which is the standard objection. Hagstrom identifies what Buffett bought and constructs the criteria that select those purchases, and it is not clear that the criteria would have identified them in advance. The book also gives limited attention to the structural advantages Buffett had, particularly insurance float, permanent capital and the ability to negotiate private terms, which no outside investor can replicate.
Investors who want Buffett's criteria stated as a checklist with worked historical examples, while remembering that the criteria were derived after the fact.
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.
Chosen by shared topics, the entries that hold them, and the people who recommended both.