The Real Warren Buffett Summary: James O’Loughlin

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The Real Warren Buffett Summary

The Real Warren Buffett Summary provides a free book summary, key takeaways, review, quotes and author biography of James O’Loughlin’s book regarding Warren Buffett.

James O’Loughlin is a sentence crafter at work. He offers literacy with clarity. There’re rare cases when his research doesn’t quote Munger or Buffett. He often uses their famous quotes from life and sports. This is incredible writing which falls short just on vision. Buffett should give Berkshire to an heir in the coming decade. But, the author doesn’t give much thought to who may be his heir. How this unknown magician may deal with Munger is also carefully avoided. The book The Real Warren Buffett was started before 9/11. This tragedy led to an insurance mess. But, O’Loughlin doesn’t expand on it. He suggests that chaos is good for Buffett. Because Buffett’s major high comes from super disastrous insurance and reinsurance. This book The Real Warren Buffett is a must-read. Besides knowing the Real Buffett, you’ll also learn a lot about economics.

“Standing alone holds no fear for him: it never has. This is why he has the resolve to step away when prices deteriorate, why he glories in the loneliness of being logical.”

This Summary Will Help You Learn

  • Warren Buffett’s unique way of thinking about investment and management;
  • Why he thinks like this;
  • How he made his wealth;
  • Why is he a maverick; and
  • How was he so consistent and confident when betting millions?

Take-Aways

  • Warren Buffett didn’t start as a genius of business.
  • He learned the basics of trading early because his father was an equities trader. Hence, he also built a natural skill to analyze financial information.
  • When he started choosing stocks, many undervalued stocks went begging.
  • Buffett worked for Benjamin Graham.
  • He followed Graham’s stock selection ways. This also covered analyzing the fundamentals.
  • His bargains soon increased his value. Hence, his partnership had many takers.
  • The real Buffett came out as others also matched his stock-selection style. Also, his partner Munger encouraged him to rethink his previous practices.
  • Buffett was into manufacturing. Later he moved to pure capital allocation.
  • Buffett only buys those companies which are industry stars.
  • Buffett looks for owners who’re excellent managers too. Plus, the ones who’ll sell their companies at his terms and conditions. There’s no other business plan.

Suggested Reading: The Warren Buffett Way Summary

Suggested Reading: The Intelligent Investor Summary

The Real Warren Buffett Summary

Short Division

Buffett groups business into four boxes. The first one has things which are uncertain and not significant. The second box has elements that may be known and is worth remembering. The third box has things which are essential but not possible to understand. But, Buffett ignores all these three boxes. Instead, he invests his time in looking through only the 4th one. This box is both knowable and vital.

Buffett believes that the 4th box decides his safety margin. That is the limits of his “strike zone” and the circle of his competence. Through the 4th box, Buffett meets his shareholders/partners’ expectations. Plus, the functions as per the facts he holds self-evident.

One of the facts is the most important here. That is, over-time the market might be efficient. But, it’s not always like this. Plus, you can depend on it to offer a share-price same as firm’s intrinsic value. This shows growth in Buffett’s mindset. It wasn’t always like this.

Early Buffett

Buffett spent nearly 20 years following the path of his mentor Benjamin Graham. Graham used to rate a share’s value regarding the firm’s assets. He didn’t base the valuation on the firm’s ability to build-and-maintain value in long-term. Buffett had a skill for finding undervalued firms as per Graham’s formula. He named it cigar butt investing. There was a theory behind this. A cigar butt having just one more puff doesn’t have much to offer. But, a bargain buy will make this puff all profit. During 1950s-60s, many shares were undervalued. And, the cigar butt investing during that time made Buffett successful.

Buffett partnership’s value increased at a compound yearly rate of 30% from 1956-1969. The Dow rose by 10%. When Buffett turned 26, he had three partnerships. These provided the seed money for his upcoming projects. Buffett took money from Dempster Mills, a manufacturing firm he bought. He then invested this money in other firms on behalf of the partnership. To further his goals, Buffett became Dempster’s Chairman in 1961. But, he couldn’t influence Mills’ managers to close their assembly lines. Thus, he didn’t get capital for his investment. So, Buffett sold his share in Dempster and bought shares of Berkshire Hathaway. By 1965, took over Berkshire’s operations.

Buffett met his now-partner and 2nd mentor, Charles Munger in 1959. 

Meister Munger

By 1970, Buffett wanted to cease his partnerships. He tried to remove the pressure they built to beat earlier achievements. Buffett was ready to follow Munger’s often repeated lessons. But, these lessons were in contrast with Graham’s teachings. Munger was Buffett’s west-coast philosopher. Buffett said that Munger didn’t have any formal training in economics or business. But, he has a keen mind and a natural grasp for investing. Due to such traits, Buffett finally took his advice.

Berkshire and Dempster were similar. They both made goods as cheaply as possible. Then they sold them at competing prices. To stay competitive, they used the money for new tooling, expanded marketing and distribution. Buffett didn’t use Berkshire’s capital to invest in other firms. Instead, he got fixed with the textile business. In this business, each brand’s products have the same relative low value. Investment money was the only hurdle for new entrants.

Buffett stuck with this business for very long. It was due to the same competitive desires which trap many others. Warren finally shut the mills. But, he knew this should’ve been done a decade ago.

This exchange between Buffett and Munger exposed a big difference. It was between managing capital versus being in business. What’s important is what motivates investors to act or not act in strategic silence. Munger was always against keeping a business mindset. This mindset serves the interests of investors over-and-above that of the company. And often the board of directors allows this approach as part of the strategic plan. 

The Aha! Moment

Munger asked Buffett one thing during the initial of Berkshire. It was whether Buffett wanted to keep the mills running due to his ego. If Buffett was keeping them as one day, they might generate enough profit. He even cautioned Buffett. Munger said its risky to understand an unknown sector without getting practical knowledge. So, Munger motivated Buffett to create mental models having different scenarios. Then he asked Buffett to refer to these models when needed. He even convinced Buffett to rethink his decision-making style. Munger guided Buffett to see each situation backward. That is, first think of the ideal way to damage your firm. Compare your existing plans with that. This way you’ll see what to avoid and what to do.

As per Buffett intelligence wasn’t enough. It’s important to depend on experience and information too. With Munger’s advice, Buffett started self-evaluating himself. He also practiced mental discipline. Munger showed Buffett where he was wrong. Then he gave him alternate ways of doing things. This made Buffett realize that he could’ve been more successful.

Nonetheless, Buffett saw a burst of understanding. He now knew what he had to do. Buffett completely changed his approach to business. He started seeing opportunities more widely. Plus, he began working mainly as a capital allocator, instead of an entrepreneur.

Ted Williams’ Eyes

Buffett enjoys baseball comparisons. He learned a nice metaphor from Ted Williams, a leading baseball player. This was the core benefit of dividing the strike zone into the most efficient cells. And then to swing it. Not just at strikes, but only at attacks which went into the sweet spot. Buffett didn’t want to become a successful investor. Instead, he desired to be in the Baseball Hall of Fame equivalent for investors.

Hence, he stopped seeking good businesses at great prices. Instead, he started investing in a great company at decent prices. Under his guidance, Berkshire chose GEICO, Gillette, Coca-Cola, Sees Candy and Buffalo Evening News. These firms provided low cost and excellent management. They also assured that they couldn’t be beaten by uncertain, extraordinary events.

Buffett avoided investing in the technological reform of the 90s. Especially so as it was outside his competence circle. Dot.coms were not knowable. So, he avoided them confidently. With every solid buy, Berkshire’s companies got armor plating. For example, Pepsi may compete with Coke. But, it can never have the resources to overthrow Coke.

Similarly, who’ll compete with Buffalo when Buffett was influencing so much with the paper. Buffett says, “Our job is focusing on things that make a difference. If something doesn’t make a difference or is unknowable, write it off. I seek what’s permanent and what’s not.” 

Acquisitions

There was a lengthy debate on Buffett’s move of merging with General Re. It was in the year 1998. General Re assured a massive float. It even held around 20% of its $24bn in equities and assets. Berkshire had 80% of its $50bn investment assets in equities. With this merger, Buffett decreased exposure to high-risk equities by 20%. And, he didn’t pay a dime in tax. This was the good news.

When the market dropped, Berkshire was prosperous. It bought most of MidAmerican Energy, Jordan’s Furniture, U.S. Liability, CORT Business Services, Benjamin Moore Paint, MiTek Inc., Johns Manville, and XTRA Corp. All this for a total of $10bn.

This was a classic example of Munger and Buffett’s acceptance of fluctuation. Berkshire share fell in value by half from 1998 to 2000. But they couldn’t care less.

Catastrophe Hits

On 9/11, 2001, the main catastrophic insurance firms faced something no one imagined. Not even Buffett who had many insurance firms. But, Buffett saw the terror attacks also as an opportunity. Few could handle the blow Berkshire bore. Now Berkshire proved itself to be dominant and unbeatable insurance seller. And that too, in a market where a big tragedy drove premiums sky-high.

In May 2002, Buffett introduced the first negative interest loan tool. Berkshire stood firm against conventional expectations. But Munger and Buffett were sure of it. Now, Buffett invented something new. It was negative coupon security intended to provide something not available to investors. He raised around $400mn. In return, investors also got 3% yearly. Plus, they could buy Berkshire share at a 15% off in 5 years. Buffett called it SQUARZ. The best thing was that SQUARZ investor gave Berkshire a 3.7% premium yearly on the warrants. 

“In that era of capitalism in which we had scaled the in­tel­lec­tual barriers to progress but not yet torn down the walls of psychology and emotion, Buffett will stand out as the man who did.”

Bershire Fundamentals

Such actions would harm other CEOs and frighten ordinary stockholders. But, not at Berkshire. Buffett understood one thing. That is, analysis through “year-ago-this-time” share price comparisons, is useless. The firm doesn’t pay any dividend. It sees its incentives and benefits as real costs. The firm maintains a simple annual report. There’s no use of a marketing company to speak with investors. It declines to divide its stock. Berkshire does everything possible to make its people comfortable. Also, it turns-down investors who aren’t ready to be with Berkshire in the long-run.

Buffett often says that a CEO must think what’s wrong with his firm. This’s especially so when investors are continuously selling and buying his firm’s stocks. For Buffett, his investors are his partners. So, he’d be worried if his partners were selling their stock so often. Does this contradict every teaching of Graham? To this Buffett has a fitting reply. “I’d be a beggar on the street if the market were efficient,” he says.

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The Real Warren Buffett Review

James O’Loughlin wrote an inspiring book about the quotes related to sports and real life.  He introduced incredible writings combined with magician’s vision that touches the heart of the reader.  At the start of his business, he was not like a genius businessman. His natural skills enabled him to improve as the first collected financial information’s about the traders and selects the stock that generates profits. After reading the book, I am feeling as full of courage. I have learned about the good qualities of managers and how excellent managers, as well as owners, learn about the industry. The terms and conditions in the business empower the business, and the owner can make more profits.

According to Buffett the business can be divided into four major boxes, and the boxes include uncertain and in signification things, worth remembering facts, essential but not possible things for the understanding, and the fourth box includes safety margins. The fact here depends on the efficiency of the market and the expectations of shareholders. The book told me about share prices and intrinsic values in the organizations. In the business, I tried to develop some partnerships with my friend and failed to convince him. The book enabled me to learn about effective operations that a manager can do to improve the business. The Aah moment in business depends on the experience and information of the manager. There are some alternative ways so the businessman can use to make burst entry in the market.

The best quote mentioned in the book was Buffett’s personal experience, and he described it as “in that era of capitalism in which we had scaled the in­tel­lec­tual barriers to progress but not yet torn down the walls of psychology and emotion, Buffett will stand out as the man who did”

The Real Warren Buffett Quotes

“Standing alone holds no fear for him: it never has. This is why he has the resolve to step away when prices deteriorate, why he glories in the loneliness of being logical.”

“In that era of capitalism in which we had scaled the in­tel­lec­tual barriers to progress but not yet torn down the walls of psychology and emotion, Buffett will stand out as the man who did.”

“Ben Franklin once said: ’Never confuse motion for action.’ Warren Buffett doesn’t. The trick is, he says, ’When there is nothing to do, do nothing’.”

“Buffett believes that trans­form­ing an area of knowledge into a Circle of Competence, and keeping it that way, can only be achieved if he constantly stress tests what he believes to be true.”

“Commitments to business manifest their own dynamics, divorced from their original conception, aggregated around self interest.”

“If he were to grow at the same rate as Buffett has managed to grow the value of Berkshire, by the time he is 37, he would be taller than the Empire State Building!”

“The law of the economic jungle is that high returns revert to the mean.”

“This is the objectivity that Buffett is seeking: business processes that generate statistical backgrounds allowing him to bring calibrated confidence to bear, to produce forecasts that can be made.”

“However, basing judgments on signals flashed by prices and informing decisions by deferring to contagious emotion are natural when investors have not set bounds to their Circle of Competence.”

“Con­se­quently, management to ex­pec­ta­tions has become endemic in the CEO community. Far more companies generate linear streams of earnings than can be explained by chance.”

About the Author

James O’Loughlin is an investment manager from England. He’s also the head of global equity strategy for Cooperative Insurance Society.

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10 COMMENTS

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