A friend of mine, who shares my weakness for making ill-fated investments, recently bought a share of Berkshire Hathaway. That's the flagship company of Warren Buffett, who recently surpassed Bill Gates as the nation's richest human. Like many of us, Buffett started with a modest bankroll, only he managed to turn his into $13 billion-plus. We've seen oil magnates, real estate moguls, shippers and robber barons at the top of the money heap, but Buffett is the first person to get there just by picking stocks.
While we've all been puttering around with our own portfolios, buying what Mario Gabelli likes, or last year's laggards in the Dow, we could have been sitting on a few shares of Berkshire Hathaway and turned $1,000 into $1 million. That's the return since 1969. I actually owned Berkshire for a stretch in the 1980s but sold it too soon. Buffett himself rarely sells too soon. A key element of his strategy is to buy companies at favorable prices and sit on them. It's the sitting part that Robert Hagstrom says most of us overlook.
Hagstrom is a Philadelphia investment adviser and longtime fan of Buffett's. While other Buffett buffs were waiting for their hero to write a book that explains how he does it, Hagstrom came out of nowhere as a replacement author. The publication last November of his book, The Warren Buffett Way, helped spark a sudden rise in the stock price of Berkshire Hathaway from $16,000 to a record $25,000 a share (this is no penny stock). Since Buffett owns 42% of Berkshire Hathaway, Hagstrom's effort made Buffett $2 billion richer, at least temporarily. This is the biggest favor ever done to a subject by a writer, and Hagstrom has never even met Buffett.
True to his instincts, the investor friend I mentioned earlier naturally waited for Hagstrom's readers to bid up Buffett's stock to an extravagant level before buying his first share. Had he read Hagstrom's book beforehand, he might have thought better of it because another of Buffett's rules is that you should pay sensible prices for things.
Hagstrom's detailed description of Buffett's modus operandi has caused a bit of confusion among Buffett followers. Inspired by the book, a number cruncher at Standard & Poor's took all the attributes of a Buffett-type investment (consistent profitability, high return on equity, etc.) and programmed a computer to spit out the names of the companies that qualified. Thirty did, but only two of those stocks are actually found in Buffett's portfolio at Berkshire Hathaway. As the Standard & Poor's computer sees it, most of Buffett's biggest holdings, with the exception of U.S. Tobacco and Coca-Cola, shouldn't be there. This poses a problem: If you want to invest like Buffett, do you buy the stocks he owns--or the stocks a computer says he ought to own?