HOW TO THINK LIKE WARREN BUFFETT - womlib.ru

1 HOWTOTHINKLIKEBENJAMINGRAHAMANDINVESTLIK EWARRENBUFFETTThis page intentionally left TO THINK LIKEBENJAMIN GRAHAMAND INVEST LIKEWARREN BUFFETTL awrenceA. CunninghamMcGraw-HillNew Yor kChicago San FranciscoLisbon London Madrid Mexico CityMilan New Delhi San Juan SeoulSingapore Sydney TorontoCopyright 2001 by the McGraw-Hill Companies,Inc. All rights reserved. Manufactured in the UnitedStates of America. Except as permitted under the United States Copyright Act of 1976, no part of thispublication may be reproduced or distributed in any form or by any means, or stored in a database orretrieval system, without the prior written permission of the publisher. 0-07-138104-X The material in this eBook also appears in the print version of this title: 0-07-136992-9. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol afterevery occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefitof the trademark owner, with no intention of infringement of the trademark.

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4 This limitation of lia-bility shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tortor : abc McGraw-Hill vCONTENTSA cknowledgements ixIntroduction: The Q Culture xiPAR TI:A TALE OF TWO MARKETS1 Chapter1. Mr. Market s Bipolar Disorder3 Swings, Bubbles, and Crashes / 5Be an Anomaly / 11 Barrel of Monkeys? / 12 Chapter2. Prozac Market17 Obscurity / 17 Simplicity / 18 The Perfec tDream / 22 Tidying Up the Tale / 28 Chapter3. Chaotic Market33 New Wave / 33 Nex tWave / 36 Complexity / 46 Behavioral Finance / 47 Chapter4. Amplified Volatility51 Information Volatility / 51 Transaction Volatility / 59 Trader Volatility / 63 Prognosis / 66 Chapter5. Take the Fifth69 Who s in Charge? / 70 Sticking to Your Knitting / 71 Alchemy / 81 The Long Run / 86 Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of UseviContentsPAR TII:SHOW ME THE MONEY89 Chapter6.

5 Apple Trees and Experience91 Fools and Wisdom / 91 Horse Sense / 100 Chapter7. Your Circle of Competence105 The Initial Circle / 106 The Nurtured Circle / 109A Full Circle / 114 Decision Making / 116 Chapter8. Recognizing Success119 Business Fuel / 120 Managers under the Microscope / 124 Bang for the Buck / 128 The Full Tool Ches t/ 131 Chapter9. You Make the Call133 Assets / 134 Earnings / 138 Silver Bullets and the Margin of Safety / 142 Cash / 144 Marke tCirculari ty / 146 Chapter10. Making (Up) Numbers153 Perennials / 153 Satire / 157 Charades / 162 Coda / 167 PAR TIII:IN MANAGERS WE TRUST169 Chapter11. Going Global171 The Two-World Story / 172 Illusions of Duty / 176 One World to Come / 180 ContentsviiChapter12. Rules and Trust193 The Family Manager / 193 Local Governance / 195 General Governance / 200 Your Voice a t the Table / 202 Chapter13. Directors at Work205 Hail to the Chief / 206 Pay / 207 Deals / 212 Capital / 215 Checking Up / 217 Chapter14.

6 The Fireside CEO221 Master Servants / 221 Action / 222 Lights / 230 Trus t/ 235 Conclusion: The V Culture 243 Notes 245 Index 257 This page intentionally left main ideas in this boo ktrace their intellectual lineage toBenjamin Graham, whom I never knew but must thank post-humously, and WARREN BUFFETT , whom I have the great fortune toknow and from whose writings, talks, and conversations I havegained knowledge and insight. Neither of these men, of course, hasany responsibility for this book s content and no doubt would disa-gree with some of what it says, though it is written as a narrativeinterpretation of principles they developed, to which it tries to BUFFETT deserves my continuing thanks for permitting me toprepare a collection of his letters to the shareholders of BerkshireHathaway,The Essays of WARREN BUFFETT : Lessons for Corporate Amer-ica, and for participating along with Berkshire Vice-ChairmanCharles Munger in a symposium I organized to analyze it.

7 Thanksalso to the readers of that collection of wonderful writings for en-couraging me to write the present book, especially the courageouscollege and business school professors who use that boo kin theircourses and their many students who tell me how valuable it fans of that boo kwho encouraged me to write this oneinclude my friends at Morgan Stanley Dean Witter, led by DavidDarst and John Snyder; Chris Davis and KimMarie Zamot at DavisSelected Advisers; the team at Edward D. Jones; and supporters toonumerous to mention at other firms who appreciate the businessanalysis way of training and professional habit I am a corporate lawyer, andas my students know, effectiveness as a corporate lawyer requiresmastering not only (or mostly) law but also business, including fi-nance, accounting, and governance. For tutelage in that philosophy,I than kmy friends and former colleagues at Cravath, Swaine &Moore as well as that firm s all law faculties recognize the intersection of law and busi-ness.

8 My colleagues at Cardozo Law School do and support my re-Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of UsexAcknowledgmentssearch and writing in the fields of finance, accounting, and gover-nance that seem to others a step beyond law as such. Among thesecolleagues, special thanks to Monroe Price for introducing me toWarren BUFFETT through their mutual friend Bob Denham. For grant-ing me a sabbatical to devote time to wor kon this boo k, I especiallythan kDean Paul Ver kuil and Dean Michael personal and institutional ability to span these and othersubjects has been greatly aided by Samuel and Ronnie Heyman, bothnonpracticing lawyers and astoundingly talented businesspeople, in-vestors, and philanthropists. They generously endowed the Samueland Ronnie Heyman Center on Corporate Governance at Cardozo,a multifaceted program I direct that explores this range of disciplinesin teaching, research, and policy own teachers also deserve my thanks, particularly ElliottWeiss, now professor at the University of Arizona College of Law,who long ago drew my attention to Graham and BUFFETT s ideas andwho generously shares his wealth of knowledge.

9 For allowing me touse in modified form some materials from a textboo kwe wor ked ontogether. I also than kProfessor Jeffrey D. Bauman of GeorgetownUniversity Law Center, and West Group, that book s also to West Group for allowing me to use in modified formsome materials from another textboo kI wrote,Introductory Account-ing and Finance for Lawyers, which is not for lawyers thanks to the whole team at McGraw-Hill for their con-fidence, enthusiasm, and guidance, particularly Kelli Christiansen,Jeffrey Krames and Scott of all, thanks to my wife, JoAnna Cunningham, who pains-takingly edited the entire manuscript with precision and grace andencouraged me every step of the :THE Q CULTUREC ommon sense is the heart of investing and business manage-ment. Yet the paradox of common sense is that it is so uncom-mon. For example, people often refer to a stoc kor the mar ket levelas either overvalued or undervalued. That is an empty share of stoc kor the aggregate of all shares in a mar ket index havean intrinsic value.

10 It is the sum of all future cash flows the share orthe index will generate in the future, discounted to present that amount of cash flow and its present value aredifficult. But that defines value, and it is the same without regardto what people hope or guess it is. The result of the hoping andguessing game sometimes the product of analysis, often not isthe share price or market level. Thus, it is more accurate to refer toa stoc kor a mar ket index as overpricedor underpricedthan as over-valuedor insight that prices vary differently from underlying values iscommon sense, but it defies prevalent sense. Thin kabout the tic kersymbol for the popular Nasdaq 100: QQQ. The marketing geniusesat the National Association of Securities Dealers may have chosenthree Qs because Q is a cool and brandable letter (thin kQ-Tips).In choosing from the letters N, A, S, D, and Q, however, they se-lected the one (three times) that stands for Quotation and unwit-tingly reflect a quote-driven culture by this quintessentially NewEconomy index created in of prices command constant attention in the mad, mod-ern market where buyers and sellers of stocks have no idea of thebusinesses behind the paper they swap but precisely what the priceis.