More Praise for The Warren Buffett Way, First Edition

margin of safety.
“Forty-two years after reading that,” Buffett noted,
“I still think those are the three right words.”
21
The key lesson that
Buffett took from Graham was that successful investing involved pur-
chasing stocks when their market price was at a signif icant discount to
the underlying business value.
In addition to the margin-of-safety theory, which became the
intellectual framework of Buffett’s thinking, Graham helped Buffett
appreciate the folly of following stock market f luctuations. Stocks have
an investment characteristic and a speculative characteristic, Graham

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T H E W A R R E N B U F F E T T W AY
taught, and the speculative characteristics are a consequence of people’s
fear and greed. These emotions, present in most investors, cause stock
prices to gyrate far above and, more important, far below a company’s
intrinsic value, thus presenting a margin of safety. Graham taught Buf-
fett that if he could insulate himself from the emotional whirlwinds of
the stock market, he had an opportunity to exploit the irrational behav-
ior of other investors, who purchased stocks based on emotion, not logic.
From Graham, Buffett learned how to think independently. If he
reached a logical conclusion based on sound judgment, Graham coun-
seled Buffett, he should not be dissuaded just because others disagree.
“You are neither right or wrong because the crowd disagrees with you,”
he wrote. “You are right because your data and reasoning are right.”
22
Phil Fisher in many ways was the exact opposite of Ben Graham.
Fisher believed that to make sound decisions, investors needed to become
fully informed about a business. That meant they needed to investigate
all aspects of the company. They needed to look beyond the numbers and
learn about the business itself because that information mattered a great
deal. They also needed to study the attributes of the company’s manage-
ment, for management’s abilities could affect the value of the underlying
business. They should learn as much as they could about the industry in
which the company operated, and about its competitors. Every source of
information should be exploited.
From Fisher, Buffett learned the value of scuttlebutt. Throughout
the years, Buffett has developed an extensive network of contacts who
assist him in evaluating businesses.
Appearing on the PBS show 
Money World
in 1993, Buffett
was asked what investment advice he would give a money
manager just starting out. “I’d tell him to do exactly what I did
40-odd years ago, which is to learn about every company in
the United States that has publicly traded securities.”
Moderator Adam Smith protested, “But there’s 27,000
public companies.”
“Well,” said Buffett, “start with the A’s.”
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T h e E d u c a t i o n o f W a r r e n B u f f e t t
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Finally, Fisher taught Buffett the benefits of focusing on just a few
investments. He believed that it was a mistake to teach investors that put-
ting their eggs in several baskets reduces risk. The danger in purchasing
too many stocks, he felt, is that it becomes impossible to watch all the
eggs in all the baskets. In his view, buying shares in a company without
taking the time to develop a thorough understanding of the business was
far more risky than having limited diversification.
John Burr Williams provided Buffett with a methodology for cal-
culating the intrinsic value of a business, which is a cornerstone of his
investing approach.
The differences between Graham and Fisher are apparent. Graham,
the quantitative analyst, emphasized only those factors that could be mea-
sured: fixed assets, current earnings, and dividends. His investigative re-
search was limited to corporate filings and annual reports. He spent no
time interviewing customers, competitors, or managers.
Fisher’s approach was the antithesis of Graham. Fisher, the qualita-
tive analyst, emphasized those factors that he believed increased the value
of a company: principally, future prospects and management capability.
Whereas Graham was interested in purchasing only cheap stocks, Fisher
was interested in purchasing companies that had the potential to increase
their intrinsic value over the long term. He would go to great lengths,
including conducting extensive interviews, to uncover bits of informa-
tion that might improve his selection process.
Although Graham’s and Fisher’s investment approach differ, notes
Buffett, they “parallel in the investment world.”
24
Taking the liberty of
rephrasing, I would say that instead of paralleling, in Warren Buffett
they dovetail: His investment approach combines qualitative under-
standing of the business and its management (as taught by Fisher) and a
quantitative understanding of price and value (as taught by Graham).
Warren Buffett once said, “I’m 15 percent Fisher and 85 percent
Benjamin Graham.”
25
That remark has been widely quoted, but it is im-
portant to remember that it was made in 1969. In the intervening years,
Buffett has made a gradual but def inite shift toward Fisher’s philosophy
of buying a select few good businesses and owning those businesses for
several years. My hunch is that if he were to make a similar statement
today, the balance would come pretty close to 50/50.
Without question, it was Charlie Munger who was most responsi-
ble for moving Buffett toward Fisher’s thinking.

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T H E W A R R E N B U F F E T T W AY
In a real sense, Munger is the active embodiment of Fisher’s quali-
tative theories. From the start, Charlie had a keen appreciation of the
value of a better business, and the wisdom of paying a reasonable price
for it. Through their years together, Charlie has continued to preach
the wisdom of paying up for a good business.
In one important respect, however, Munger is also the present-day
echo of Ben Graham. Years earlier, Graham had taught Buffett the two-
fold significance of emotion in investing—the mistakes it triggers for
those who base irrational decisions on it, and the opportunities it thus
creates for those who can avoid falling into the same traps. Munger,
through his readings in psychology, has continued to develop that theme.
He calls it the “psychology of misjudgment,” a notion we look at more
fully in Chapter 11; and through persistent emphasis, he keeps it an inte-
gral part of Berkshire’s decision making. It is one of his most important
contributions.
Buffett’s dedication to Ben Graham, Phil Fisher, John Burr Williams,
and Charlie Munger is understandable. Graham gave Buffett the intel-
lectual basis for investing, the margin of safety, and helped Buffett learn
how to master his emotions to take advantage of market f luctuations.
Fisher gave Buffett an updated, workable methodology that enabled him
to identify good long-term investments and manage a portfolio over the
long term, and taught the value of focusing on just a few good com-
panies. Williams gave him a mathematical model for calculating true
value. Munger helped Buffett appreciate the economic returns that come
from buying and owning great businesses. The frequent confusion sur-
rounding Buffett’s investment actions is easily understood when we ac-
knowledge that Buffett is the synthesis of all four men.
“It is not enough to have good intelligence,” Descartes wrote; “the
principal thing is to apply it well.” It is the application that separates
Buffett from other investment managers. Many of his peers are highly
intelligent, disciplined, and dedicated. Buffett stands above them all be-
cause of his formidable ability to integrate the strategies of the four
wise men into a single cohesive approach.

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2 9
3
“Our Main Business
Is Insurance”
The Early Days of
Berkshire Hathaway
W
hen the Buffett Partnership took control of Berkshire Hathaway
in 1965, stockholders’ equity had dropped by half and loss from
operations exceeded $10 million. Buffett and Ken Chace, who
managed the textile group, labored intensely to turn the textile mills
around. Results were disappointing; returns on equity struggled to reach
double digits.
Amid the gloom, there was one bright spot, a sign of things to
come: Buffett’s deft handling of the company’s common stock portfo-
lio. When Buffett took over, the corporation had $2.9 million in mar-
ketable securities. By the end of the f irst year, Buffett had enlarged the
securities account to $5.4 million. In 1967, the dollar return from in-
vesting was three times the return of the entire textile division, which
had ten times the equity base.
Nonetheless, over the next decade Buffett had to come to grips
with certain realities. First, the very nature of the textile business
made high returns on equity improbable. Textiles are commodities

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T H E W A R R E N B U F F E T T W AY
and commodities by def inition have a diff icult time differentiating
their products from those of competitors. Foreign competition, which
employed a cheaper labor force, was squeezing prof it margins. Second,
to stay competitive, the textile mills would require signif icant capital
improvements—a prospect that is frightening in an inf lationary envi-
ronment and disastrous if the business returns are anemic.
Buffett made no attempt to hide the diff iculties, but on several
occasions he explained his thinking: The textile mills were the largest
employer in the area; the work force was an older age group with rela-
tively nontransferable skills; management had shown a high degree of
enthusiasm; the unions were being reasonable; and lastly, he believed
that the textile business could attain some prof its.
However, Buffett made it clear that he expected the textile group
to earn positive returns on modest capital expenditures. “I won’t close
down a business of subnormal prof itability merely to add a fraction of a
point to our corporate returns,” said Buffett. “I also feel it inappropri-
ate for even an exceptionally prof itable company to fund an operation
once it appears to have unending losses in prospect. Adam Smith would
disagree with my f irst proposition and Karl Marx would disagree with
my second; the middle ground,” he explained “is the only position that
leaves me comfortable.”
1
In 1980, the annual report revealed ominous clues for the future
of the textile group. That year, the group lost its prestigious lead-off
position in the Chairman’s Letter. By the next year, textiles were not
discussed in the letter at all. Then, the inevitable: In July 1985, Buffett
closed the books on the textile group, thus ending a business that had
started some one hundred years earlier.
The experience was not a complete failure. First, Buffett learned a
valuable lesson about corporate turnarounds: They seldom succeed. Sec-
ond, the textile group generated enough capital in the earlier years to
buy an insurance company and that is a much brighter story.
T H E I N S U R A N C E B U S I N E S S
In March 1967, Berkshire Hathaway purchased, for $8.6 million, the
outstanding stock of two insurance companies headquartered in Omaha:

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“ O u r M a i n B u s i n e s s I s I n s u r a n c e ”
3 1
National Indemnity Company and National Fire & Marine Insurance
Company. It was the beginning of a phenomenal success story. Berkshire
Hathaway the textile company would not long survive, but Berkshire
Hathaway the investment company that encompassed it was about to
take off.
To appreciate the phenomenon, we must recognize the true value of
owning an insurance company. Sometimes insurance companies are good
investments, sometimes not. They are, however, always terrific invest-
ment