How to Invest on the JSE like Warren Buffett: South African Guide on Applying Wisdom of the World's Greatest Wealth Creator to Investing in Shares, by Alec Hogg
Do not be frightened off by the title. This is not yet another “How to become as rich as Buffett by following his investment secrets” guide.
This is a mature and thought-provoking book that highlights some important practices of the best investor on planet earth. These are practices that can be easily followed by any investor and that will at best improve your returns, and at least highlight the difference between being a speculator and an investor.
The book opens with a description of Buffett’s early life, education and career, as well as his capitalist tendencies that started at age six.
The impression many have of Buffett as a great stock-picker overlooks the fact that his wealth is not based on stock-picking, and that he doesn’t spend his days watching the boards to see movements from which he can take a quick advantage. His is the “get rich slow” scheme, which requires work – Buffett works seven days a week.
Early in his career Buffett learned a powerful, clarifying insight from his mentor, Benjamin Graham - that of the erratic Mr Market. The stock market is like a manic-depressive partner who will offer to buy your 50% share of the business for more than it is worth when he is manic, and sell his 50% for less than it is worth when he is depressed. Buffett’s method is to ignore Mr Market and focus only on the business itself.
No business gets percentage points better in a day or percentage points worse in a day. Those are the ravings of the manic-depressive Mr Market.
A well-run business with its solid business model and high quality management will go through rough periods, but those will pass and not affect the value the business will achieve – over time. “Over time” is five years; anything less is not investing, it is speculating.
Buffett works hard at finding out how good a company really is, and flees from companies that mask their problems or mislead their shareholders. Recently he dumped his holdings in Tesco, the British supermarket chain, when it was revealed the management had lied about their financial state.
Buffett lost $440m, but would not leave his money with a company that cannot be trusted to tell the truth to their shareholders.
Buffett reads company reports insatiably, and places great value on those that have a chairperson’s report written by the chairperson himself, and not the PR department. However, Buffett also listens to “the Scuttlebut” – the bucket on the old sailing ship that the sailors would gather around to drink water and gossip, much like the modern coffee machine.
What are the people in the company saying about the company and the management? What are the competitors and customers saying about the company?
Buffett has a share portfolio of $117bn (larger than South Africa's national budget), but just four listed companies make up 60% of that value. They are Wells Fargo, Coca-Cola, American Express and IBM. The rest of his portfolio are unlisted companies, eight of which are big enough to qualify for the Fortune 500.
Many talk of “diversification” of a portfolio, and their rationale is that where some companies fail to perform, the others will compensate. Buffett’s view is to “put all your eggs in one basket, but watch that basket very carefully, and know what it is that you are buying”.
In this short and very readable book, the trusted Alec Hogg has pulled together some of the most important lessons that can be gleaned from Warren Buffett. Hogg has followed Buffett for years and has had personal exposure to the great man.
Complemented by Hogg’s knowledge of the South African context, he has produced a ‘must read’ - whether you invest directly in the market, or through advisers.
Readability: Light +---- Serious
Insights: High -+--- Low
Practical: High -+--- Low
The book is only available in digital format from BizNews.