More Praise for The Warren Buffett Way, First Edition

decrease
risk if it raises, as it should,
both the intensity with which an investor thinks about a business and
the comfort level he must feel with its economic characteristics before
buying into it.”
10
By purposely focusing on just a few select companies,
you are better able to study them closely and understand their intrinsic

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T H E W A R R E N B U F F E T T W AY
value. The more knowledge you have about your company, the less risk
you are likely taking.
“Diversification serves as protection against ignorance,” explains
Buffett. “If you want to make sure that nothing bad happens to you rel-
ative to the market, you should own everything. There is nothing wrong
with that. It’s a perfectly sound approach for somebody who doesn’t
know how to analyze businesses.”
11
Buffett’s View of the Efficient Market Theory
Buffett’s problem with the EMT rests on a central point: It makes no
provision for investors who analyze all the available information, as
Buffett urges them to do, which gives them a competitive advantage.
Nonetheless, EMT is still religiously taught in business schools, a
fact that gives Warren Buffett no end of satisfaction. “Naturally the
disservice done students and gullible investment professionals who
have swallowed EMT has been an extraordinary service to us and
other followers of Graham,” Buffett wryly observed. “From a self ish
standpoint, we should probably endow chairs to ensure the perpetual
teaching of EMT.”
12
In many ways, modern portfolio theory protects investors who have
limited knowledge and understanding on how to value a business. But
that protection comes with a price. According to Buffett, “Modern
portfolio theory tells you how to be average. But I think almost any-
body can f igure out how to do average in the f ifth grade.”
13
T H E S U P E R I N V E S T O R S O F B U F F E T T V I L L E
One of the greatest investment books of all time came out in 1934, dur-
ing the height of the Great Depression. 
Security Analysis,
by Benjamin
Graham and David Dodd, is universally acclaimed a classic, and is still
in print after f ive editions and sixty-f ive years. It is impossible to over-
state its inf luence on the modern world of investing.

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M a n a g i n g Yo u r P o r t f o l i o
1 6 7
Fifty years after its original publication, the Columbia Business
School sponsored a seminar marking the anniversary of this seminal text.
Warren Buffett, one of the school’s best-known alumni and the most fa-
mous modern-day proponent of Graham’s value approach, addressed the
gathering. He titled his speech “The Superinvestors of Graham-and-
Doddsville,” and in its own way, it has become as much a classic as the
book it honored.
14
He began by recapping the central argument of modern portfolio
theory—that the stock market is efficient, all stocks are priced correctly,
and therefore anyone who beats the market year after year is simply
lucky. Maybe so, he said, but I know some folks who have done it, and
their success can’t be explained away as simply random chance.
And he proceeded to lay out the evidence. The examples he pre-
sented that day were all people who had managed to beat the market
consistently over time, not because of luck, but because they followed
principles learned from the same source: Ben Graham. They all reside,
he said, in the “intellectual village” of Graham-and-Doddsville.
Nearly two decades later, I thought it might be interesting to take
an updated look at a few people who exemplify the approach def ined
by Graham and who also share Buffett’s belief in the value of a focused
portfolio with a small number of stocks. I think of them as the Super-
investors of Buffettville: Charlie Munger, Bill Ruane, Lou Simpson,
and of course Buffett. From their performance records, there is much
we can learn.
Charlie Munger
Although Berkshire Hathaway’s investment performance is usually tied
to its chairman, we should never forget that vice chairman Charlie
Munger is an outstanding investor. Shareholders who have attended
Berkshire’s annual meeting or read Charlie’s thoughts in 
Outstanding
Investor Digest
realize what a f ine intellect he has.
“I ran into him in about 1960,” said Buffett, “and I told him law was
fine as a hobby but he could better.”
15
As you may recall, Munger at the
time had a thriving law practice in Los Angeles, but gradually shifted his
energies to a new investment partnership bearing his name. The results
of his talents can be found in Table 10.1.

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T H E W A R R E N B U F F E T T W AY
“His portfolio was concentrated in very few securities and there-
fore, his record was much more volatile,” Buffett explained, “but it
was based on the same discount-from-value approach.” In making in-
vestment decisions for his partnership, Charlie followed the Graham
methodology and would look only at companies that were selling
below their intrinsic value. “He was willing to accept greater peaks
and valleys in performance, and he happens to be a fellow whose psy-
che goes toward concentration.”
16
Notice that Buffett does not use the word 
risk
in describing
Charlie’s performance. Using the conventional def inition of risk
(price volatility), we would have to say that over its thirteen-year his-
tory Charlie’s partnership was extremely risky, with a standard devia-
tion almost twice that of the market. But beating the average annual
return of the market by 18 points over those same thirteen years was
not the act of a risky man, but of an astute investor.
Table 10.1
Charles Munger Partnership
Annual Percentage Change
Overall
Dow Jones
Year