The essential Warren Buffett library

January 21st, 2009

The top 5 Buffett books

Some of our subscribers have asked us to nominate the best five books about the investment strategies of Warren Buffett. There is a large field but, here goes, in order of preference.

1. The Intelligent Investor, by Benjamin Graham

It is significant that so many top investors, including Buffett, pay homage to the man considered the father of security analysis. Benjamin Graham has written prolifically but he tried to encapsulate it all in this book which he wrote for the lay investor. It is easy to read and easy to understand and nobody even thinking of value investing should be without it.

The book introduces the reader to Graham’s two overriding principles of successful investment – Mr Market and the Margin of Safety. What is perhaps even more relevant is Graham’s explanation of the difference between investment and speculation.

The latest edition is a revised edition with chapter commentaries and footnotes that place Graham’s tenets into the context of today’s markets and company operations. These have been written by Jason Zweig, senior editor of Money.

We would adapt the teachings of Benjamin Graham and say that anyone who puts money into the market without seriously understanding The Intelligent Investor must be a speculator, not an investor. ESSENTIAL

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The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

2. The Essays of Warren Buffett, by Lawrence A Cunningham

If you want to know about Warren Buffett and his investment secrets, you need to read and understand what he has said about investment strategies.

The absolute way to do this is to read his public announcements on the Berkshire Hathaway, but this can be heavy going. You have to wade though pages of purely company stuff and, when you come to the gems, you have to relate them to something that he may have said years before or years later.

Cunningham’s book makes this task a whole lot easier. He has collected what he believes to be the relevant thoughts of Buffett and put them together in topics. Thus, you can select your topic, for example Economic Goodwill, and read together Warren’s various sayings over the years. The author helps the reader understand these comments with a well written and easy to follow Introduction.

A wise investor does not rely totally on what others believe Buffett does. They should read his own words and make their own informed judgment. ESSENTIAL

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The Essays of Warren Buffett: Lessons for Corporate America, Second Edition

3. The Interpretation of Financial Statements, by Benjamin Graham and Spencer Meredith

There are thousands of companies on the New York Stock Exchange alone and no individual investor can analyse every company for investment. The way to intelligent stock selection is to cull listed stocks into a much smaller group. Having done this, the investor must then analyse in detail potential investment targets, using publicly available information about company operations and financial statements.

Not many of us, however, are accountants or financial analysts, and if we want to look at a balance sheet, we need to understand financial terms and the role they play in company analysis. Short of doing a course in company accounting, the best way to srart is to read and understand Benjamin Graham’s classic work The Interpretation of Financial Statements, co-written with Spencer Meredith.

In this book, Graham in his inimitable way takes us through a company’s balance sheet, explaining the terms used (with real examples) and the importance that they have in finding out the true financial position of a company. He clears away the mystique from such concepts as ‘liquidating value’, ‘maintenance and depreciation’ and ‘net tangible assets’.

This book also acts as a primer for his more extensive work Security Analysis, co-written with David Dodd. ESSENTIAL.

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The Interpretation of Financial Statements

4. The New Buffettology, by Mary Buffett and David Clark

This book attempts to explain in very easy to understand terms the methods that Warren Buffett uses in selecting companies for investigation, analysis of fundamentals, stock selection and price calculations.

The book does not carry the authority of the Sage of Omaha nor does it pretend to do so. One of the authors is his former daughter in law and we have to assume that some of the book’s contents relate to things that she learned from the master investor.

That aside, the investment principles set out in the book all make good investment common sense from any perspective and are rules that any intending investor would be wise to consider.

The book contains case studies of past Buffett investments, looks back at why they may have been chosen, and traces their path to increased profitability after selection.

The authors conclude the book with a set of tests for selecting appropriate stocks, finding their intrinsic value and calculating a price that could be paid with a suitable Margin of Error.

The authors have also compiled a companion publication that contains all their recommended formulas and worksheets: Buffettology Workbook. HIGHLY DESIRABLE

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The New Buffettology: The Proven Techniques for Investing Successfully in Changing Markets That Have Made Warren Buffett the World’s Most Famous Investor

5. Buffett by Roger Lowenstein

This is not a book that concentrates solely on Buffett’s investment methods or style. It is mixture of biography and method analysis.

Neither a hagiography nor a hatchet job, the book tells us that Warren Buffett is much more complex than the simple homespun figure that he often appears to be.

If all the reader wants from a book is something to help them discover Buffett’s investment secrets, there are other and better books available. Where this book has investment value is in the way it shows that Buffett has been able to combine the conservative margin of safety approach of Benjamin Graham with the unorthodox approach of a contrarian investor.

Well written and well indexed, this book does not necessarily require the close attention that other Buffett books do. Read it for relaxation and interest, not as an investment tool. HIGHLY RECOMMENDED.

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Buffett: The Making of an American Capitalist

Posted by Julian Livy on January 21st, 2009 | Posted in Book reviews |