John Train - The Midas Touch: The strategies that have made Warren Buffett the worlds most successful investor

Much has happened to Warren Buffett since this book first appeared. As is well known, following the same principles explained here, he has become one of the richest men in the world. Though the size and complexity of the transactions Buffett can now manage has increased since The Midas Touch was first published, his recent operations are less instructive than the ones described in this book I would say that most of the investment principles one could acquire by studying Buffett can be learned in these pages. Nonetheless, those wishing to follow current activities at Berkshire, and Buffetts transactions, may find a website called Warren Buffett News Watch interesting.

Buffetts company, Berkshire Hathaway, has continued to grow and evolve, and is now considered an operational insurance company, which means that the shareholders worry somewhat less about the embedded capital gains in its positions than they would if it were essentially a holding company. At an earlier stage in the companys development, when Buffett essentially made huge insurance bets from time to time, I asked Hank Greenberg, the then head of AIG, what he thought. Warren hasnt got an insurance business there, said Greenberg. That was true at the time, but that wonderful business AIG came apart after Greenbergs departure and lost most of its value, whereas Buffetts more ramshackle construction has prospered. One thinks of a comparison made between the Duke of Wellington and Napoleon Bonaparte. The Dukes strategic arrangements were said to be made of string when a piece broke, the parts could be knotted again whereas Napoleons splendid constructions, once ripped, fell apart.

I need not tell the reader that Buffett has also become a showman. Berkshires annual meeting is a fantastic extravaganza, and wise remarks emerge from Omaha on all occasions.

Even with this success, and showmanship, Buffett remains primarily a miser; he hates to spend money. It is true that he has manifested a genial side, and has found a way to keep his fortune away from the government at the same time. He has achieved this by giving money to the Bill and Melinda Gates Foundation, where it will do good. However, even acknowledging these charitable donations, it is still hard to say whether Buffetts whole career will have benefited humanity. There is no corresponding event to the Woodstock for Capitalists for the sellers of the stocks he bought at bargain prices, and the work of the Gates Foundation may not be more useful than anything the sellers themselves would have done with the money, nor more useful than the projects the government might have funded with the taxes it now wont collect.

Since the last edition of this book, Charlie Munger, Buffetts business partner and an eminent investor in his own right, expounded several Buffettesque investment principles in a speech. John Templeton sent me a summary of these points, and I have reproduced them here, slightly edited:

1. Specialization in the business world often produces very good business economics.
2. Advantages of scale are important. When Jack Welch says hes either going to be number one or number two in a business or out, he is not crazy, just tough. Too many incompetent CEOs do not understand this. But bigger is not better if it creates bureaucracy, e.g., the federal government or AT&T.
3. Technology can either help you or kill you. The difference is whether the customer gets all the savings or if some of the savings go to the shareholders.
4. Investors should figure out where they have an edge and stay there. Stay in your circle of competence. Remember the John Train question: How do you beat Bobby Fischer? Reply: Get him to play you any game except chess.
5. Winners bet big when they have the odds otherwise, they do not bet at all. Those who make a few well-calculated bets have a much greater chance. Very few investors or investment funds operate this way. So, load up on a good idea; it is hard to find a good business at a great discount.
6. A significant discount means more upside and a greater margin of safety. Buy shares of a good business at a significant discount to what a private buyer would pay.
7. Buy quality businesses even if you have to pay up. Warren Buffett claims this is the most important thing he ever learned from Charlie Munger.
8. Low turnover reduces taxes and increases your return. Two investors earn the same compound annual return of 15% for thirty years. If the first pays a 35% tax at the end of the thirty years and the second pays a 35% tax each year, the first investor will have over two and a half times as much money as the second.