The Warren Buffett Portfolio by Robert Hagstrom (Book Review)

October 7th, 2015

One of my fairly recent passions has been investing. Having a father who worked in finance, I’ve always been somewhat aware of the way that the markets work, but only recently have I gotten a better grasp of many of the core concepts of visionary investors – chief among them Warren Buffett. I’ve had “The Warren Buffett Portfolio” (TWBP) sitting on my bookshelf gathering dust for a couple of years now – a gift that unfortunately I hadn’t gotten to – and finally read it (quite quickly I’d add, it’s fairly brief) this summer.

TWBP has really been a foundational book in my investing approach due to a couple of core concepts that, while logical, never quite meshed with my previous understanding of pragmatic investing. Key amongst these is the idea of diversification. One of the core tenets that everyone learns about investing is “buy lots of different companies so you are diversified in case one fails.” TWBP raises a poignant idea in regards to the latter idea. Why should you diversify? Isn’t it in fact smarter to have your money invested in the ten best companies/opportunities that you can find, then in the 100 best? This was a real eye opener to me. I’d honestly never considered how foolish it was to be investing money that could be going into my strongest opinion/hypothesis into my 11th best or 99th best idea. TWBP also has a deep dive into analysis that shows that while less diversification increases risk, that increased risk is outweighed by the outsized gains that a less diversified portfolio returns. Essentially – yes, you will have more volatility, but the volatility will trend stronger and more dramatically in the positive direction due to the increased concentration of your investment.

The second principle is something I have become more and more familiar with through The Motley Fool (TMF). It’s the idea of buying to own forever. This runs in stark contrast to another of the core investing tenets, “buy low, sell high.” What Warren Buffett (and TMF) advocate is more like, “buy good companies, hold them forever.” My main takeaway from this lesson is that the best performing companies continue to perform the best. Imagine a company goes up 10x in value while you own it. “Buy low, sell high” would suggest you might want to sell (and you might, if you have a reason to believe that the company will be less successful going forward) – but “buy good companies, hold them forever” would suggest that this company is winning, and you would be well served to hold it and to continue to reap the rewards. A quick review of many of Buffett’s long term holdings – Wells Fargo for example – show gains of 5000% – a number that would cause anyone who sold at double or quadruple or even 10x their initial investment would cringe at. The snowball effect is huge in investing, and selling off your best performers can be extremely costly going forward. I personally buy stocks that I plan on holding for 5 to 10 years, companies that I can’t imagine not being a part of my life as I get older (and hopefully richer). I find that this approach also can be cathartic in that the day to day or even quarter to quarter fluctuations in the market do not affect or worry me much. Perhaps the greatest part of having a long term approach is that it prevents you from doing something stupid that could retard the momentum of the stock market.

This is quick read – shouldn’t take more than 3-4 hours – and provides some great foundational ideas for the reader to take with them going forward. It’s made a real impact in my own approach to investing and I’d highly recommend it to anyone looking to take better control of their personal finances. What have you learned about investing this year? Leave a tip for the rest of us in the comments!

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