Afterword from "Warren Buffett Way" 2nd Edition

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ผมไ้ด้อ่าน edition แรก แต่ยังไม่ได้อ่าน edition ที่2 บังเอิญผ่านไปเว็บไซต์หนึ่งที่ลงบท afterword ไว้จึงคัดลอกมาให้ได้อ่านกัน จุดที่ผมชอบในตัวผู้เขียนคือการยอมรับความผิดพลาดที่เกิดขึ้น เมื่อยอมรับแล้วจึงนำไปปรึกษากับผู้รู้เพื่อให้ผู้รู้ชี้แนะให้
มีเพื่อนๆท่านใดได้อ่านแล้วบ้างครับ แตกต่างจาก edition แรกยังไงบ้าง ไม่ทราบว่าที่เมืองไทยมีหนังสือเล่มนี้วางจำหน่ายรึยัง

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I began my money management career at Legg Mason in the summer of 1984. It was a typical hot and humid day in Baltimore. Fourteen newly minted investment brokers, including myself, walked into an open-windowed conference room to begin our training. Sitting down at our desks, we all received a copy of The Intelligent Investor by Benjamin Graham (a book I had never heard of) and a photocopy of the 1983 Berkshire Hathaway annual report (a company I had never heard of) written by Warren Buffett (a man I had never heard of).

The first day of class included introductions and welcomes from top management, including some of the firm's most successful brokers. One after another, they proudly explained that Legg Mason's investment philosophy was 100% value-based. Clutching The Intelligent Investor, each took a turn at reciting chapter and verse from this holy text. Buy stocks with low price-to-earnings (P/E), low price-to-book value, and high dividends, they said. Don't pay attention to the stock market's daily gyrations, they said; its siren song would almost certainly pull you in the wrong direction. Seek to become a contrarian, they said. Buy stocks that are down in price and unpopular so you can later sell them at higher prices when they again become popular.

The message we received throughout the first day was both consistent and logical. We spent the afternoon analyzing Value Line research reports and learning to distinguish between stocks that were down in price and appeared to be cheap and stocks that were up in price and appeared to be expensive. By the end of our first training session, we all believed we were in possession of the Holy Grail of investing. As we packed up our belongings, our instructor reminded us to take the Berkshire Hathaway annual report with us and read it before tomorrow's class. 'Warren Buffett,' she cheerily remined us, 'was Benjamin Graham's most famous student, you know.'
Back in my hotel room that night, I was wrung out with exhaustion. My eyes were blurry and tired, and my head was swimming with balance sheets, income statements, and accounting ratios. Quite honestly, the last thing I wanted to do was to spend another hour or so reading an annual report. I was sure if one more investing factoid reached my inner skull, it would certainly explode. Reluctantly and very tiredly, I picked up the Berkshire Hathaway report.
It began with a salutation To the Shareholders of Berkshire Hathaway, Inc. Here Buffett outlined the company's major business principles: 'Our long-term economic goal is to maximize the average annual rate of gain in intrinsic value on a per share basis,' he wrote. 'Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and a consistently earn above-average returns on capital.' He promised, 'We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. Our guideline is to tell you the business facts that we would want to know if our positions were reversed.'

The next fourteen pages outlined Berkshire's major business holdings including Nebraska Furniture Mart, Buffalo Evening News, See's Candy Shops, and the Government Employees Insurance Company. And true to his word, Buffett proceeded to tell me everything I would want to know about the economics of these businesses, and more. He listed the common stocks held in Berkshire's insurance portfolio, including Affiliated Publications, General Foods, Ogilvy & Mather, R.J. Reynolds Industries, and the Washington Post. I was immediately struck by how seamlessly Buffett moved back and forth between describing the stocks in the portfolio and the business attributes of Berkshire's major holdings. It was as if the analyses of stocks and of businesses were one and the same.

Granted, I had spent the entire day in class analyzing stocks, which I knew were partially ownership interests in businesses, but I had not made this most important analytical connection. When I studied Value Line reports I saw accounting numbers and financial ratios. When I read the Berkshire Hathaway report I saw businesses, with products and customers. I saw economics and cash earnings. I saw competitors and capital expenditures. Perhaps I should have seen all that when I analyzed the Value Line reports, but for whatever reason, it did not resonate in the same way. As I continued to read the Berkshire report, the entire world of investing, which was still somewhat mysterious to me, began to open. That night, in one epiphanic moment, Warren Buffett revealed the inner nature of investing.

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The next morning, I was bursting with a newly discovered passion for investing, and when the training class was completed, I quickly returned to Philadelphia with a single-minded purpose: I was going to invest my clients' money in the same fashion as did Warren Buffett.
I knew I needed to know more, so I started building a file of background information. First I obtained all the back copies of Berkshire Hathaway annual reports. Then I ordered the annual reports of all the publicly traded companies Buffett had invested in. Then I collected all the magazine and newspaper articles on Warren Buffett I could find.

When the file was as complete as I could get it, I dove in. My goal was to first become an expert on Warren Buffett and then share those insights with my clients.

Over the ensuing years, I built a respectable investment business. By following Buffett's teachings and stock picks, I achieved for my clients more investment success than failure. Most of my clients intellectually bought into the approach of thinking about stocks as businesses and trying to buy the best businesses at a discount. The few clients who did not stick around left not because the Buffett approach was unsound, but because being contrarian was too much of an emotional challenge. And a few left simply because they did not have enough patience to see the process succeed. They were impatient for activity, and the constant itch to do something-- anything-- drove them off the track. Looking back, I don't believe I dealt with anyone who openly disagreed with the logic of Buffett's investment approach, yet there were several who could not get the psychology right.
All the while, I continued to collect Buffett data. Annual reports, magazine articles, interviews-- anything having to do with Warren Buffett and Berkshire Hathaway, I read, analyzed, and filed. I was like a kid following a ballplayer. He was my hero, and each day I tried to swing the bat like Warren... It was here that I began to put my thoughts about Buffett down on paper, to share with our clients the wisdom of his investment approach. After all, Buffett, who had been investing for forty years, had built up a pretty nice nest egg; learning more about how he did it certainly couldn't hurt. These collected writings ultimately became the basis for The Warren Buffett Way.
The decision to start an equity mutual fund based on the principles described in The Warren Buffett Way came from two directions. First, our investment counseling firm needed an instrument to manage those accounts that were not large enough to warrant a separately managed portfolio. Second, I wanted to establish a discretionary performance record that was based on the teachings of the book. I wanted to demonstrate that what Buffett had taught and what I had written, if followed, would allow an investor to generate market-beating returns. The proof would be in the performance.

The new fund was established on April 17, 1995. Armed with the knowledge gained by having studied Warren Buffett for over ten years, coupled with the experience of managing portfolios for seven of those years, I felt we were in a great position to help our clients achieve above-average results. Instead, what we got was two very mediocre years of investment performance. What happened?
As I analyzed the portfolio and the stock market during this period, I discovered two important but separate explanations. First, when I started the fund, I populated the portfolio mostly with Berkshire Hathaway-type stocks: newspapers, beverage companies, other consumer nondurable businesses, and selected financial service companies. I even bought shares of Berkshire Hathaway.

Because my fund was a laboratory example of Buffett's teachings, perhaps it was not surprising that many of the stocks in the portfolio were stocks Buffett himself had purchased. But the difference between Buffett's stocks in the 1980s and those same stocks in 1997 was striking. Many of the companies that had consistently grown owner earnings at a double-digit rate in the 1980s were slowing to a high single-digit rate in the late 1990s. In addition, the stock prices of these companies had steadily risen over the decade and so the discount to intrinsic value was smaller compared with the earlier period. When the economics of your business slow and the discount to intrinsic value narrows, the future opportunity for outsized investment returns diminishes.

If the first factor was lack of high growth level inside the portfolio, the second factor was what was happening outside the portfolio. At the same time that the economics of the businesses in the fund were slowing, the economics of certain technology companies-- telecommunications, software, and Internet service providers-- were sharply accelerating. Because these new industries were taking a larger share of the market capitalization of the Standard & Poor's 500 Index, the stock market itself was rising at a faster clip. What I soon discovered was that the economics of what I owned in the fund were no match for the newer, more powerful technology-based companies then revving up in the stock market.

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In 1997, my fund was at a crossroads. If I continued to invest in the traditional Buffett-like stocks, it was likely I would continue to generate just average results. Even Buffett was telling Berkshire Hathaway shareholders they could no longer expect to earn the above-average investment gains the company had achieved in the past. I knew if I continued to own the same stocks Buffett owned in his portfolio at these elevated prices, coupled with moderating economics, I was unlikely to generate above-average investment results for my shareholders. And in that case, what was the purpose? If a mutual fund cannot generate, over time, investment results better than the broad market index, then its shareholders would be better off in an index mutual fund.

Standing at the investment crossroads during this period was dramatic. There were questions about whether the fund should continue. There were questions about whether the fund should continue. There were questions about whether Buffett could compete against the newer industries and still provide above-average results. And there was the meta-question of whether the whole philosophy of thinking about stocks as businesses was a relevant approach when analyzing the newer technology-oriented industries.

I knew in my heart that the Buffett approach to investing was still valid. I knew without question that this business-analytical approach would still provide the opportunity for investors to spot mispricing and thus profit from the market's narrower veiw. I knew all these things and more, yet I momentarily hesitated at the shoreline, unable to cross into the new economic landscape.

I was fortunate to become friends with Bill Miller when I first began my career at Legg Mason. At the time, Bill was comanaging a value fund with Ernie Kiehne. Bill periodically spent time with the newer investment brokers sharing his thoughts about the stock market, about companies, and ideas from the countless books he had read. After I left Legg Mason to become a portfolio manager, Bill and I remained friends. After The Warren Buffett Way, was published, we circled back for more intense discussions about investing and the challenges of navigating the economic landscape.

In the book, I pointed out that Buffett did not rely solely on low P/E ratios to select stocks. The driving force in value creation was owner earnings and a company's ability to generate above-average returns on capital. Sometimes a stock with a low P/E ratio did generate cash and achieve high returns on capital and subsequently became a great investment. Other times, a stock with a low P/E ratio consumed cash and generated below-average returns on capital and so became a poor investment. Stocks with low P/E ratios might be a nice pond to fish in for ideas, Buffett said, but what makes them go up is the cash and high returns on invested capital.

Bill had figured this out a few years earlier, and he was already steering his value fund in this direction. He had already chalked up four consecutive years of outperformance and was turning heads in the investment industry.

With my fund struggling to gain a footing, I met with Bill to discuss strategies and opportunities. I told him Buffett's investment approach was solid. He agreed. I told him the only way to outwit the stock market was to analyze stocks as businesses in order to discover the deep-rooted fundamental changes that occur in a business before the market's pricing mechanism picks it up. He agreed. I told him I was certain Buffett's approach could be applied to the new industries but I was unsure how to proceed. He said, 'Come work with us at Legg Mason and I'll show you how it works.'

Bill, using a value approach that focused not on P/E ratios but on cash earnings and return on capital, had already been pursuing the newer companies in the technology space. He purchased Dell Computer in 1996 at six times earnings with a 40% return on capital. Other value managers also bought Dell but then they sold at 12 times earnings because the conventional wisdom dictated you always bought PC manufacturers at 6 times earnings and sold them at 12 times. Bill instead studied the business model and soon discovered that Dell's return on capital was quickly rising to an astonishing triple-digit rate of return. So while other value managers sold their Dell Computer at 12 times earnings, Bill held on at 20 times, 30 times, and 40 times earnings, believing that the company was still deeply undervalued relative to its rapidly gorwing intrinsic value. And he was right. His investment in Dell produced a 3,000% return for his fund's shareholders.

At the heart of Bill's investment decisions is the requirement of understanding a company's business model. What are the value creators? How does the company generate cash? What level of cash can a company produce and what rate of growth can it expect to achieve? What is the company's return on capital? If it achieves a return above the cost of capital, the comapny is creating value. If it achieves a rate of return below the cost of capital, the company is destroying value.

In the end, Bill's analysis gives him a sense of what the business is worth, based largely on the discounted present value of a company's future cash earnings. Although Bill's fund owns companies that are different from those in Buffett's Berkshire Hathaway portfolio, no one can deny that they are approaching the investment process in the same way. The only difference is that Bill has decided to take the investment philosophy and apply it to the New Economy franchises that are rapidly dominating the global economic landscape.

It has been twenty years since I read my first Berkshire Hathaway annual report. Even now, when I think about Warren Buffett and his philosophy, it fills me with excitement and passion for the world of investing. There is no doubt in my mind that the process is sound and, if consistently applied, will generate above-average long-term results. We have only to observe today's best-in-class money managers to see that they are all using varied forms of Buffett's investment approach. Although companies, industries, markets, and economies will always evolve over time, the value of Buffett's investment philosophy lies in its timelessness.