This is MoneyClub

Reviewed by HZP 

Here are some of his principles that you may find useful/inspirational/totally useless:

Investment
- Buy shares of monopolies
- Buy them at really low prices, and hold them
- When prices are high, it’s ok to hold cash
- Understand the business
- Whether the business is capital intensive or not is not an issue. As long as it’s a solid stable business, it’s fine.
- Buy well-managed companies
- Be fearful when others are greedy, and vice versa.
- When deciding whether to invest, ask yourself: would you dare to set up a company to compete against it?
- Study your prospects, and their competitors, in detail.
- Ignore most stocks because they are not going to be worth your time.
- Stick to your conclusions; if they are well researched, you will be right in the long term.

General finance
- Treat $5 as if it were $5 million
- All that matters is the rate of return. It’s better to earn 10% on a $5000 investment, than 5% on a $1 million investment. His reasoning being that he can earn the 10% on $5000, and find better investments for the remaining $995,000.
- Be very stingy. He loaned money to his children.

He made his first profits in the early part of his career by buying companies that were trading less than their net assets. That is to say, the price of all the stock in the market is less than the net realisable value of the company’s assets (net realisable value = funds collected when total assets are sold – total value of liabilities eg taxes, debt).

Apart from this, there’s an interesting conflict, maybe you want to think about it:

Value investing vs Random Walk Theory
Many modern financial economists eg Paul Samuelson believe, based on observations of the stock market, that prices of stock fluctuate randomly over time, based on the overall market sentiment and the judgement of investors.

Apart from that, it is assumed that all investors are rational and well-informed and purchase shares at the price they deem reasonable, based on their perception of the circumstances at the moment. So prices are always ‘right’, even though they fluctuate all the time.

On the other hand, value investors like Buffett believe that the market can be wrong, and seriously wrong at times, which causes stocks to be very cheap.

How can there be such a contradiction? If Buffett is right, then strictly speaking everyone should emulate his methods and be as rich as him, and then no one will be rich – because the act of mass buying would cause the price to rise immediately.

If the random walk theorists are right, then Buffett is rich simply because he has been lucky for decades – all (if not most of) the bets have worked out favorably. Is this even a believable hypothesis?

Is it possible to reconcile both approaches?

A second conflict is between technical analysis and fundamental analysis. Technical analysis ignores whether prices are ‘always’ right, but rather, by observing the trends in the market, allows us to make certain generalisations about prices. Once we have deduced these patterns, we can use it to identify opportunities to make money.

To understand the book you must understand where Roger Lowenstein is coming from. He is a former journalist and a director of the Sequoia Fund (SEQUX). His approval of Buffett methods can be seen by the fact, I think, that Sequoia Fund has a large chunk (last check from Wiki: 1/3) of stock in Berkshire Hathaway. Also, Lowenstein has always had little respect for Random Walk theorists/mathematics-based finance, citing meltdowns (because if prices are always right, how can there be so much change in prices within a few hours? Can the overall economic outlook change so drastically in so short a time?), and the debacle that was Long Term Capital Management (advised by Robert Merton and Myron Scholes. Search ” “Nobel Prize” +economics” on Google.) He believes that these theories are false because although prices may fit in a bell curve, the distribution is not that of a Normal Distribution, with “fat tails” (ie higher probability of freak incidents).

Lowenstein’s portrayal of Buffett is not particularly flattering. In this biography Buffett is an eccentric but an intensely focused, rational individual, caring more about growing his wealth than his family (hinted as a probable reason why Susie, his wife, left him to stay elsewhere). But this obsession about wealth is not a miserly desire to hoard, but rather a passion, an idee-fixe that drives him (part of the eccentric personality that prompts him to drink Pepsi, and later Coke).

Buffett’s career did not start with Berkshire Hathaway. He started off small by running a few partnerships where he was the managing partner (late 1950s IIRC), where he got people to put in $50,000, $10,000.. His research involved mostly sitting at home and poring through stacks of annual reports, and picking out stocks that met the Graham and Dodd criteria for value investing (ie market value < book value). So there were lots of dowdy stocks like map makers, factories etc (companies with large capital outlays are easier buys since they have quantifiable assets).

One problem unique to value investing, is that while you buy cheap, you may have problems selling it at its ‘right’ ‘intrinsic’ price. Benjamin Graham’s take was that the market will sort it out themselves, but Buffett took on a more aggressive method; he decided that he would play the role of the market if the market didn’t behave “properly” – so he would buy enough stock to get himself on the board of directors to lobby effectively (eg asking for dividend payouts, stock buybacks).

Buffett also modified Graham’s philosophy of value investing, to consider purchasing companies with relatively little capital investment, eg advertising, merchandising. This is considerably more difficult since it’s a lot more subjective.

Buffett actually tended to stay away from active roles in management, preferring to collect excess cash while the management did their jobs, eg he signed away his director’s voting rights of the Washington Post to Catherine Graham and her son (the owners). The only two times he really stepped in were during the takeover of Berkshire Hathaway (and he ousted the old management and put a trusted person in place to generate the cash) and when Salomon Brothers got embroiled in a US treasuries trading scandal, and the management brought him in to steady the boat (but he wasn’t very popular because he slashed salaries and bonuses; Buffett is seriously tight-fisted until recently; according to the book his newborn daughter slept in a drawer.)

But private equity he always had an interest, as long as it met his criteria, which is – generate lots of cash, large market share (easier to tweak prices), sound management. As his reputation and experience grew, he naturally had a lot of advantage over retail investors, eg inside information, access to top management, ability to negotiate better deals – eg preference shares. Not surprisingly, really – as a buyer he has considerable market power.