{"id":9897,"date":"2020-03-17T12:30:00","date_gmt":"2020-03-17T16:30:00","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=9897"},"modified":"2022-06-01T15:47:51","modified_gmt":"2022-06-01T19:47:51","slug":"essays-of-warren-buffett-ashul","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/essays-of-warren-buffett-ashul\/","title":{"rendered":"The Essays of Warren Buffett: A Complete Book Summary"},"content":{"rendered":"\n

I feel like I\u2019ve been reading the Essays of Warren Buffett<\/a> for literally a lifetime, and although it hasn\u2019t nearly need that long, it does feel like I\u2019ve obtained a lifetime of information from his book.  <\/p>\n\n\n\n

\"essays<\/figure><\/div>\n\n\n\n

Looking back at some of the previous summaries that I have\nwritten, Buffett does an amazing job of making sure that he starts off with a\ngreat foundation for the new investor and then by the end of the book, things\nare moving along at 70MPH on the highway so you better buckle up!<\/p>\n\n\n\n

That might seem intimidating, but it shouldn\u2019t.  It should actually make you happier that you\nmight not understand it all because the that just means that it will be able to\nprovide value to you now, and in the future, as your investing career\ncontinues.<\/p>\n\n\n\n

Like I said \u2013 I\u2019ve written quite a few different summaries on a lot of these chapters, and I\u2019ve even skipped some really good ones so I wasn\u2019t essentially rewriting the book, but I\u2019ve narrowed my list down to my Top 5 chapters in The Essays of Warren Buffett for our beginner investor: <\/p>\n\n\n\n\n\n\n\n

Defining Intelligent Investing According to Warren Buffett<\/a> <\/strong><\/p>\n\n\n\n

Buffett\u2019s big investment philosophy is that we should be\nlooking for companies that can drastically change their value for the\nlong-term, not just looking for some sort of short-term gain.  Don\u2019t buy a company and then sell it when it\ngoes up 10% – look for that stock that\u2019s going to become a tenbagger!  <\/p>\n\n\n\n

This is the exact reason why they don\u2019t usually invest in\ntech companies because the future is so uncertain in terms of what will be a\ncompetitive advantage for those tech companies, and he lives by the saying \u201cif\nyou aren\u2019t willing to own a stock for 10 years, don\u2019t even think about owning\nit for 10 minutes.\u201d<\/p>\n\n\n\n

In summary, Buffett said that if you want to be a\nsuccessful, average investor, you need to focus on two things:<\/p>\n\n\n\n

  1. Find out how to value a business<\/li>
  2. Understand how to think about market prices<\/li><\/ol>\n\n\n\n

    If you can successfully do both of these then you\u2019re going\nto be poised for long-term success during your time investing in the stock\nmarket.  It\u2019s very important for you to\nunderstand first and foremost what you think a company is worth, and while this\nmight seem hard to do, you can do so by understanding the financial ratios of\nthe company and their potential path forward. \n<\/p>\n\n\n\n

    I know that many people will likely get stressed or overwhelmed by me saying you need to \u201cunderstand the financial ratios of the company\u201d and I totally understand that, but that\u2019s exactly why Andrew created the Value Trap Indicator<\/a> to help get you the information that you need without having to be as in the weeds as other investors.  I mean, work smart, not hard, right?<\/p>\n\n\n\n

    The VTI also takes into account the market price of the\ncompany you\u2019re evaluating, but this is another thing that\u2019s very beneficial for\nyou to understand on your own.  The\nmarket price of the company is quite simply the price that other investors are\nwilling to pay for the company, not what the company is actually worth.  <\/p>\n\n\n\n

    Now, when I first started investing, I told myself that\nwhatever the company is selling for is what the company is worth because\n\u2018perception is reality\u2019 so if people are willing to pay for it, then that\u2019s\nwhat it is worth.  While that might sound\ngreat in a bull market, when things really get tough, that company that still\nhas negative earnings is likely going to get hit extremely hard and that share\nprice is going to drop faster than a hot potato.<\/p>\n\n\n\n

    Don\u2019t believe me? \nWell, during this coronavirus scare, the S&P 500 has dropped 14%\nover a 3-week span and Tesla has dropped 33%. \n<\/p>\n\n\n\n

    In other words, there\u2019s really two pieces you need to know as an investor \u2013 what is the intrinsic value of the company and what is the current price of the company.  <\/p>\n\n\n\n

    When you can identify those, your job as an investor is to find the companies that are being sold for well under their intrinsic value, buy some shares, and then sit back and reap the rewards.<\/p>\n\n\n\n

    Thoughts on the High Yield Bond Market from Warren Buffett<\/strong><\/a><\/p>\n\n\n\n

    This article essentially says that Bonds have a place in the\ninvesting world, but it has to be for a very specific person in a very specific\nsituation.  The average bond earns 2-4%\nwhile the Stock Market average CAGR is 11%, so if you\u2019re investing in bonds\nwaiting for the downturn in the market, you probably are missing out on much\nlarger gains just to buy low in the years despite missing all of that uptick.<\/p>\n\n\n\n

    Buffett explains that Bonds are good for the investor that\nneeds to have access to short-term cash because that is very liquid and easy to\naccess as compared to investing in company stocks for a major company like\nBerkshire. <\/p>\n\n\n\n

    So, how does that impact the average investor?<\/p>\n\n\n\n

    Well, you should follow the same advice \u2013 only invest in bonds if it\u2019s for the short-term.  Personally, I invest in a high-yield savings account for my emergency fund<\/a> but bonds can work well, especially if you use a bond ladder.  The only issue is that it\u2019s not as liquid as a savings account, so it\u2019s a bit of risk vs. reward.  <\/p>\n\n\n\n

    Like I said, bonds are usually a good thing if you\u2019re simply just looking for some security that is going to perform right around, or maybe a bit above, the inflation rate, but I wouldn\u2019t expect much more as an investor.  I have bonds in my HSA<\/a> because the last thing that I would want to have happen is for me to invest in stocks, the market crashes and my portfolio is cut in half, and then I need that money for a health related issue and now I might not even be working since it is a health issue.<\/p>\n\n\n\n

    If it\u2019s not something that you could see yourself needing in\nthe immediate future, avoid bonds! \nRegarding my retirement accounts \u2013 I have 0% invested in any of them\nbecause I am young.  If you\u2019re going to\nneed the money in 5 years or less, I am ok with you investing in bonds.  Any time frame that is greater than 5 years,\nput it into the market, baby!<\/p>\n\n\n\n

    Let the entire investing history be your \u201cproof in the\npudding\u201d and trust that even if a downturn arises, like the coronavirus fears\nthat we are currently in, then trust that the market will rebound.  <\/p>\n\n\n\n

    You might be asking why you should have that trust and the\nanswer is simple \u2013 because it has rebounded in the past and it\u2019s more than\nlikely going to rebound in the future as well.<\/p>\n\n\n\n

    Every. <\/p>\n\n\n\n

    Single. <\/p>\n\n\n\n

    Time.<\/p>\n\n\n\n

    Here’s the Optimal Dividend Policy According to Warren Buffett<\/strong><\/a><\/p>\n\n\n\n

    DIVIDENDS!  Andy loves\nhim some dividends, and so does Buffett! \nI mean, I\u2019d even go to a dividend buffet if one existed\u2026. Get it?  Buffett? \nBuffet?  Bad joke, I know\u2026<\/p>\n\n\n\n

    While Buffett does love dividends, he is more so focused on\nthe company employing their capital correctly. \nThis doesn\u2019t mean always paying a dividend or never paying one \u2013 it\nmeans that the company should do what is will be the most useful for continued\nsuccess of the company. <\/p>\n\n\n\n

    \u201cFor every dollar of retained earnings by the\ncorporation, at least one dollar of market value will be created for owners.\u201d<\/strong><\/p>\n\n\n\n

    For the company to decide to not pay out that $1 in\ndividends, they should make sure that they\u2019re able to use that $1 of earnings\nto generate a future value of something that is $1, at a minimum, or likely\nmuch more.<\/p>\n\n\n\n

    In other words, if the company only paid out a $1 dividend\nand kept the remaining $3, then that $3 that they retained better generate at\nleast that much in the future and if it doesn\u2019t, then the company is quite\nsimply underutilizing their capital, and that can be a major red flag for\ninvestors.<\/p>\n\n\n\n

    The Real Benefits of Share Buybacks as Explained by Warren Buffett<\/strong><\/a><\/p>\n\n\n\n

    In general, share buybacks are perceived as a good\nthing!  Buying back shares of the company\nhas a couple major benefits that Buffett goes into that should help you as an\ninvestor of the company:<\/p>\n\n\n\n

    1 – The Straight Cash Reason<\/strong><\/p>\n\n\n\n

    When\na company buys backs shares, the total amount of outstanding shares is\nshrinking, so this should help you as an investor when looking at the total EPS\nfor the company.  It\u2019s important to\nunderstand when your companies are buying back shares, however, so that you\u2019re\nnot tricked into thinking that the earnings of the company are growing when in\nfact they might be shrinking, but since the total outstanding shares are\nshrinking at a greater speed, the total EPS looks higher.<\/p>\n\n\n\n

    I\u2019ve written before about how important it is to understand this because you could very easily get tricked, but if the earnings are continuing to increase and the total outstanding shares are decreasing, then your investments are just becoming more and more valuable by the second<\/p>\n\n\n\n

    2 – The Breath of Confidence Reason<\/strong><\/p>\n\n\n\n

    This\nis more of a qualtitative factor than a quantitative one, but if the company is\nbuying back shares, then they hopefully think that the stock is undervalued,\notherwise it would be foolish to buy back shares.  Now, while a management team of ANY company\nis likely the most bullish opinion of their company, and rightfully so, it\nshould still be a breadth of confidence that they\u2019re saying that their stock is\nundervalued and willing to put their money where their mouth is and buy back\nthose shares.<\/p>\n\n\n\n

    Of\ncourse, you still need to do your homework and make sure that you agree with\ntheir analysis of their stock value, but this is definitely a good sign and the\nmarket will likely view it as a positive as well!<\/p>\n\n\n\n

    An Example of Accounting Fraud as told by Warren Buffett<\/strong><\/a><\/p>\n\n\n\n

    In summary, the main goal of this chapter is to make sure\nthat the management team of your investments have the same goals that you\ndo.  Some management teams are only\nfocused on the short-term, some on the long-term, some are only focused on\ngetting the company to IPO and then cashing out and moving on.  <\/p>\n\n\n\n

    Regardless of what their goal is, you need to understand it\nBEFORE you invest in that company, because if you don\u2019t, you could very well\nfind yourself with a \u2018bad\u2019 investment simply because the management is steering\nthe company in a different way than you were hoping the company was going to\ngo.<\/p>\n\n\n\n

    In short, just like almost every other chapter, do your homework!<\/p>\n\n\n\n

    If you purchase the book, you\u2019re going to be able to learn many, many more lessons from Buffett about his investing journey and things that he thinks are incredibly important.  In a sense, I think some of these chapters are just Buffett getting some things off his chest.  He goes on these rants at times about things that he thinks are just completely ludicrous, such as how Owner Earnings are reported<\/a> or even talking about the difference in economic goodwill and accounting goodwill<\/a>.  <\/p>\n\n\n\n

    I\u2019ve included my top 5 chapters for the new investor above in this article, but I\u2019ve also written some other summaries including one on arbitrage trading and how it can have an impact on Buffett\u2019s business as well as in your own personal portfolio<\/a>.<\/p>\n\n\n\n

    To buy the essays of Warren Buffett will set you back about $30<\/a> but I guarantee you will get much, much greater rewards than $30 by learning directly from the value investing GOAT, Warren Buffett.  <\/p>\n\n\n\n