More Praise for The Warren Buffett Way, First Edition

Washington Post
stock since the original purchase in 1973. In 2004, the Class B stock was
selling for more than $900 a share, making it the second most expensive
stock on the New York Stock Exchange. Berkshire’s holdings are now
worth more than $1 billion, and Buffett’s original investment has in-
creased in value more than fiftyfold.
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Wells Fargo & Company
In October 1990, Berkshire Hathaway announced it had purchased 5
million shares of Wells Fargo & Company at an average price of $57.88
per share, a total investment of $289 million. With this purchase, Berk-
shire became the largest shareholder of the bank, owning 10 percent of
the shares outstanding.
It was a controversial move. Earlier in the year, the share price
traded as high as $86, then dropped sharply as investors abandoned

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T H E W A R R E N B U F F E T T W AY
California banks in droves. At the time, the West Coast was in the
throes of a severe recession and some speculated that banks, with their
loan portfolios stocked full of commercial and residential mortgages,
were in trouble. Wells Fargo, with the most commercial real estate of
any California bank, was thought to be particularly vulnerable.
In the months following Berkshire’s announcement, the battle for
Wells Fargo resembled a heavyweight fight. Buffett, in one corner, was
the bull, betting $289 million that Wells Fargo would increase in value.
In the other corner, short sellers were the bears, betting that Wells Fargo,
already down 49 percent for the year, was destined to fall further. The
rest of the investment world decided to sit back and watch.
Twice in 1992, Berkshire acquired more shares, bringing the total
to 63 million by year-end. The price crept over $100 per share, but
short sellers were still betting the stock would lose half its value. Buffett
has continued to add to his position, and by year-end 2003, Berkshire
owned more than 56 million shares, with a market value of $4.6 billion
and a total accumulated purchase cost of $2.8 billion. In 2003, Moody’s
gave Wells Fargo a AAA credit rating, the only bank in the country
with that distinction.
T H E I N T E L L I G E N T I N V E S T O R
The most distinguishing trait of Buffett’s investment philosophy is the
clear understanding that by owning shares of stocks he owns businesses,
not pieces of paper. The idea of buying stocks without understanding
the company’s operating functions—its products and services, labor re-
lations, raw material expenses, plant and equipment, capital reinvest-
ment requirements, inventories, receivables, and needs for working
capital—is unconscionable, says Buffett. This mentality ref lects the at-
titude of a business owner as opposed to a stock owner, and is the only
mentality an investor should have. In the summation of 
The Intelligent
Investor,
Benjamin Graham wrote, “Investing is most intelligent when
it is most businesslike.” Those are, says Buffett, “the nine most impor-
tant words ever written about investing.”
A person who holds stocks has the choice to become the owner of a
business or the bearer of tradable securities. Owners of common stocks
who perceive that they merely own a piece of paper are far removed

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B u y i n g a B u s i n e s s
5 9
from the company’s f inancial statements. They behave as if the market’s
ever-changing price is a more accurate ref lection of their stock’s value
than the business’s balance sheet and income statement. They draw or
discard stocks like playing cards. For Buffett, the activities of a common
stock holder and a business owner are intimately connected. Both
should look at ownership of a business in the same way. “I am a better
investor because I am a businessman,” Buffett says, “and a better busi-
nessman because I am an investor.”
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THE WARREN BUFFETT WAY
Business Tenets
1. Is the business simple and understandable?
2. Does the business have a consistent operating history?
3. Does the business have favorable long-term prospects?
Management Tenets
4. Is management rational?
5. Is management candid with its shareholders?
6. Does management resist the institutional imperative?
Financial Tenets
7. What is the return on equity?
8. What are the company’s “owner earnings”?
9. What are the prof it margins?
10. Has the company created at least one dollar of market
value for every dollar retained?
Value Tenets
11. What is the value of the company?
12. Can it be purchased at a signif icant discount to its value?

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Investing Guidelines
Business Tenets
W
e come now to the heart of the matter—the essence of Warren
Buffett’s way of thinking about investing. Warren Buffett is so
thoroughly identif ied with the stock market that even people
who have no interest in the market know his name and reputation.
Others, those who read the f inancial pages of the newspaper only casu-
ally, may know him as the head of an unusual company whose stock
sells for upward of $90,000 per share. And even the many new investors
who enthusiastically devote careful attention to market news think of
him primarily as a brilliant stock picker.
Few would deny that the world’s most famous and most successful
investor is indeed a brilliant stock picker. But that seriously understates
the case. His real gift is picking