How to think like Benjamin Graham and invest like Warren Buffett

288 Pages·2011·1.025 MB·English

by  Cunningham, Lawrence A

HOW TO THINK LIKE
BENJAMIN GRAHAM
AND INVEST LIKE
WARREN BUFFETT
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HOW TO THINK LIKE
BENJAMIN GRAHAM
AND INVEST LIKE
WARREN BUFFETT
awrence unningham
L A. C
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DOI: 10.1036/007138104X
CONTENTS
Acknowledgements ix
Introduction: The Q Culture xi
PART I:
A TALE OF TWO MARKETS 1
Chapter 1. Mr. Market’s Bipolar Disorder 3
Swings, Bubbles, and Crashes / 5
Be an Anomaly / 11
Barrel of Monkeys? / 12
Chapter 2. Prozac Market 17
Obscurity / 17
Simplicity / 18
The Perfect Dream / 22
Tidying Up the Tale / 28
Chapter 3. Chaotic Market 33
New Wave / 33
Next Wave / 36
Complexity / 46
Behavioral Finance / 47
Chapter 4. Amplified Volatility 51
Information Volatility / 51
Transaction Volatility / 59
Trader Volatility / 63
Prognosis / 66
Chapter 5. Take the Fifth 69
Who’s in Charge? / 70
Sticking to Your Knitting / 71
Alchemy / 81
The Long Run / 86
v
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vi Contents
PART II:
SHOW ME THE MONEY 89
Chapter 6. Apple Trees and Experience 91
Fools and Wisdom / 91
Horse Sense / 100
Chapter 7. Your Circle of Competence 105
The Initial Circle / 106
The Nurtured Circle / 109
A Full Circle / 114
Decision Making / 116
Chapter 8. Recognizing Success 119
Business Fuel / 120
Managers under the Microscope / 124
Bang for the Buck / 128
The Full Tool Chest / 131
Chapter 9. You Make the Call 133
Assets / 134
Earnings / 138
Silver Bullets and the Margin of Safety / 142
Cash / 144
Market Circularity / 146
Chapter 10. Making (Up) Numbers 153
Perennials / 153
Satire / 157
Charades / 162
Coda / 167
PART III:
IN MANAGERS WE TRUST 169
Chapter 11. Going Global 171
The Two-World Story / 172
Illusions of Duty / 176
One World to Come / 180
Contents vii
Chapter 12. Rules and Trust 193
The Family Manager / 193
Local Governance / 195
General Governance / 200
Your Voice at the Table / 202
Chapter 13. Directors at Work 205
Hail to the Chief / 206
Pay / 207
Deals / 212
Capital / 215
Checking Up / 217
Chapter 14. The Fireside CEO 221
Master Servants / 221
Action / 222
Lights / 230
Trust / 235
Conclusion: The V Culture 243
Notes 245
Index 257
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ACKNOWLEDGMENTS
The main ideas in this book trace their intellectual lineage to
Benjamin Graham, whom I never knew but must thank post-
humously, and Warren Buffett, whom I have the great fortune to
know and from whose writings, talks, and conversations I have
gained knowledge and insight. Neither of these men, of course, has
any responsibility for this book’s content and no doubt would disa-
gree with some of what it says, though it is written as a narrative
interpretation of principles they developed, to which it tries to be
faithful.
Mr. Buffett deserves my continuing thanks for permitting me to
prepare a collection of his letters to the shareholders of Berkshire
Hathaway, The Essays of Warren Buffett: Lessons for CorporateAmer-
ica, and for participating along with Berkshire Vice-Chairman
Charles Munger in a symposium I organized to analyze it. Thanks
also to the readers of that collection of wonderful writings for en-
couraging me to write the present book, especially the courageous
college and business school professors who use that book in their
courses and their many students who tell me how valuable it is.
Other fans of that book who encouraged me to write this one
include my friends at Morgan Stanley Dean Witter, led by David
Darst and John Snyder; Chris Davis and KimMarie Zamot at Davis
Selected Advisers; the team at Edward D. Jones; and supporters too
numerous to mention at other firms who appreciate the business
analysis way of investing.
By training and professional habit I am a corporate lawyer, and
as my students know, effectiveness as a corporate lawyer requires
mastering not only (or mostly) law but also business, including fi-
nance, accounting, and governance. For tutelage in that philosophy,
I thank my friends and former colleagues at Cravath, Swaine &
Moore as well as that firm’s clients.
Not all law faculties recognize the intersection of law and busi-
ness. My colleagues at Cardozo Law School do and support my re-
ix
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x Acknowledgments
search and writing in the fields of finance, accounting, and gover-
nance that seem to others a step beyond law as such. Among these
colleagues, special thanks to Monroe Price for introducing me to
WarrenBuffettthroughtheirmutualfriendBobDenham.Forgrant-
ing me a sabbatical to devote time to work on this book, I especially
thank Dean Paul Verkuil and Dean Michael Herz.
My personal and institutional ability to span these and other
subjectshasbeengreatlyaidedbySamuelandRonnieHeyman,both
nonpracticing lawyers and astoundingly talented businesspeople,in-
vestors, and philanthropists. They generously endowed the Samuel
and Ronnie Heyman Center on Corporate Governance at Cardozo,
amultifacetedprogramIdirectthatexploresthisrangeofdisciplines
in teaching, research, and policy review.
My own teachers also deserve my thanks, particularly Elliott
Weiss, now professor at the University of Arizona College of Law,
who long ago drew my attention to Graham and Buffett’s ideas and
who generously shares his wealth of knowledge. For allowing me to
use in modified form some materials from a textbook we worked on
together. I also thank Professor Jeffrey D. Bauman of Georgetown
University Law Center, and West Group, that book’s publisher.
Thanks also to West Group for allowing me to use in modified form
somematerialsfromanothertextbookIwrote,IntroductoryAccount-
ing and Finance for Lawyers, which is not for lawyers only.
Many thanks to the whole team at McGraw-Hill for their con-
fidence, enthusiasm, and guidance, particularly Kelli Christiansen,
Jeffrey Krames and Scott Amerman.
Most of all, thanks to my wife, JoAnna Cunningham,whopains-
takingly edited the entire manuscript with precision and grace and
encouraged me every step of the way.