SPECIAL REPORT

Invest Like Warren Buffett

authored by:

The investor’s best friend

This report is exclusively for subscribers of Equitymaster’s “The 5 Minute Wrapup”.

The investor’s best friend

Invest Like Warren Buffett SPECIAL REPORT

Preface

If one were to compile a list of investing gurus, the one name that will probably be on the top is that of Warren E. Buffett. Mr. Buffett is the legendary value investor who by following, and improvising, on the teachings of Benjamin Graham, has gone on to become the richest person in the world. The book value of Mr. Buffett's company, Berkshire Hathaway, has grown by over 20% per annum over the last 47 years. In terms of absolute returns, this works out to a staggering 458193%!!

In Mr. Buffett, we have someone who has walked his talk and delivered fantastic returns over not just a few years, but over decades. And as any prudent investor would do when Mr. Buffett talks, listen with rapt attention.

Fortunately for us, Mr. Buffett has been “talking” to investors at large via his publicly available “Letter to Shareholders”. He has been writing the same religiously for over four decades now. In our view, these letters are among the best sources of investment wisdom.

We have spent several months going through each of his 'Letter to Shareholders'. Our objective - to select the best of Buffett's “teachings”, which could go a long way in helping you take smarter and sensible investment decisions. We have compiled these in this exclusive report.

We are sure you will make the most of it.

Happy investing! Team Equitymaster

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Contents:

1. In search of 'bulletproof' franchises ----------------------------------------------------------------------------------------- 04

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Of price and value and the great divide -------------------------------------------------------------------------------------

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3.

Mr. Market and its now sullen and now ecstatic moods -----------------------------------------------------------------

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4.

Even the legendary Buffett is fallible -----------------------------------------------------------------------------------------

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5.

Mr. Buffett's Owner's Manual -------------------------------------------------------------------------------------------------

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6.

Equitymaster Recommends ---------------------------------------------------------------------------------------------------

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Disclaimer This booklet is for private circulation only and not for sale. The information/content in this booklet has been compiled from sources we believe to be true and reliable, but we do not hold ourselves responsible for its completeness or accuracy. This booklet is only for information purposes and Equitymaster Agora Research Private Ltd (Equitymaster) disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this booklet, including without limitation the implied warranties of merchantability and fitness for a particular purpose. Equitymaster will not be responsible for any loss or liability incurred by the user as a consequence of his taking any investment decision based on the contents of this booklet. All opinions/views included in this booklet constitute our judgment as of this date and are subject to change from time to time without notice.

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In search of 'bulletproof' franchises

All stock investment decisions should ideally start with identifying good companies/businesses. In this note, we discuss what Mr. Buffett has to say on which companies/businesses make the best investments. In his 1991 letter to shareholders, Mr. Buffett delivered a gem of an advice that can do a great job in helping you analyze a business. Based on his enormous experience in analyzing companies, Mr. Buffett classifies them into two main types - a. a business, or b. a franchise Mr. Buffett believes that many companies fall in some middle ground between the two and can at best be described as weak franchises or strong businesses. This is what he has to say on the characteristics of each of them: Drawing the line Mr Buffett says, "An economic franchise arises from a product or service that: (1) is needed or desired, (2) is thought by its customers to have no close substitute, and (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage”. He further goes on to add, “In contrast, a 'business' earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a

franchise, can be killed by poor management We believe investors can do themselves a world of good by applying the above advice as they go about selecting stocks to invest in. If one were to visualize the financials of a company possessing characteristics of a 'franchise', the company that emerges is the one with a consistent long-term growth in revenues and high and stable margins, which arise from the pricing power the franchise enjoys. On the other hand, a 'business' would be one with erratic growth in earnings owing to frequent demand-supply imbalances or one with a continuous decline after a period of strong growth owing to the competition having caught up. Mr. Buffett further says that since a bad management cannot permanently dent the profitability of a franchise, turbulent times in such firms could be looked upon as opportunities. It should, however, be borne in mind that Mr. Buffett is also of the opinion that most companies lie between the two definitions and hence, one needs to exercise utmost caution before investing in a so-called 'franchise'. Of meaty moats Mr. Buffett calls 'franchises' as 'companies with wide moats'. Moats are indicative of the strong walls built around a castle in pre-historic times that offered stiff resistance to enemies looking to attack them. Thus, Mr.Buffett has likened 'moats' to the competitive advantages that a company enjoys in the market place and which in turn enable it to command higher profit margins and superior return on capital. The stronger these advantages are, the more difficult it is for competitors to take the market share away from the company and put pressure on prices. Hence, any investor looking to invest in a company should ideally look at those businesses, which have consistent history of higher margins and superior return on capital. Please remember the word 'consistent', as a year or two of great performance does not qualify a company as a 'franchise'.

can be killed by poor management."

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The Indian context - Colgate's moat as wide as the smile from it While there are indeed a few Indian companies that possess 'wide moats', the one that we would like to discuss here is Colgate, the maker of the ubiquitous oral care products. In India, the name Colgate has been synonymous with toothpaste and toothbrushes and no other brand commands the same recall in this segment as 'Colgate'. But having a strong brand is one thing and performing consistently year after year is another. So, how does the company fare in terms of its financial performance? We would say not bad at all! Between 2002 and 2012, a period long enough to test a company's 'moat', Colgate has had just one year of a marginal drop in profitability. Otherwise, the company has managed to grow its revenues and profits at compounded annual growth rates (CAGR) of close to 10% and 20% respectively over this time period. Even the return ratios have been remarkably consistent with return on net worth (RONW - an indicator of the kind of returns a company is generating for its shareholders. It is defined as PAT upon the net worth of the company) not dropping below 30% at any point in time. Indeed, not many companies in the Indian corporate

landscape can boast of such a record over such a long period of time. Hence, this is the type of businesses that one should look at and this is the kind of companies that we believe could be called as a 'franchise' or a company with 'wide moat'. Kingfisher Airlines - Moat always under turbulence As far as companies with 'narrow moats' are concerned, we would mostly find such companies in commodity sectors like textiles, airlines and the like. Let us take Kingfisher Airlines as an example. The company perhaps represents the best in customer service and flying experience. But does it have the financial numbers to show for it? Certainly not. It has recorded losses at the bottomline level for eight of the past ten years. And thanks to these losses, it had a negative equity at last count, implying that all these years of losses had completely wiped away its equity. This is clearly an indication of how even the most customer centric companies can run into trouble if the moat is not present.

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Of price and value and the great divide

In the previous note, we looked at how to go about selecting an economic franchise as against a business. We also learned the concept of 'moat'. Once an investor has zeroed in on a good 'franchise' that he believes will be able to sustain high returns and profitability well into the future, should he go ahead and invest in the company without further considerations? We believe otherwise.

Even the best of businesses bought at expensive valuations will not lead to attractive returns. Now the question is, how does one determine what are 'attractive valuations'? In his 1992 letter to shareholders, Mr. Buffett has explained the concept of valuations in as easy a manner as possible. This is what he has to say on the issue-

Mr. Buffett on Identifying the Value of a Stock Mr Buffett quotes, “In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds. Even so, there is an important, and difficult to deal with, difference between the two: A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investment analyst must himself estimate the future ‘coupons’. Furthermore, the quality of management affects the bond coupon only rarely - chiefly when management is so inept or dishonest that payment of interest is suspended. In contrast, the ability of management can dramatically affect the equity 'coupons'.”

As evident from the above paragraph, Mr. Buffett seems to be a firm believer in using the 'discounted cash flow’ approach or what is more popularly known as the DCF approach to valuations. So, what is DCF and how does it work?

DCF is a valuation technique, the purpose of which is to arrive at future cash flows that the company is expected to generate over its lifetime and adjust it for time value of money. The resultant value is nothing but an 'intrinsic value' (since different people will have different assumptions about a company's future cash flows, intrinsic value might vary from person to person) and which is then compared to the prevailing stock price to judge the investment worthiness of the stock. If the intrinsic value is higher than the actual stock price of the company, then the stock offers an investment opportunity; the greater the discount to the intrinsic value, the more attractive the investment opportunity. Conversely, if the intrinsic value is lower than the current market price, then the stock is 'over valued' and should be avoided.

Mr. Buffett also goes on to recommend further that an investment that appears to be the cheapest under the DCF analysis should be bought irrespective of what the other valuation techniques such as P/E (price to earnings) or P/BV (price to book value) indicate. Investors who've tried using the DCF would know that cash flows of not all companies can be predicted with great degree of certainty given their past history of inconsistent performances and the nature of their businesses. Furthermore, even in cases where cash flows can be predicted with some degree of certainty, one is not sure whether they will actually fructify. What should be done in such cases? Mr. Buffett has dealt with these two issues as well and this is what he has to say on them.

Mr. Buffett hates changes Mr. Buffett says, “Though the mathematical calculations required to evaluate equities are not difficult, an analyst - even one who is experienced and intelligent - can easily go wrong in estimating future "coupons." At Berkshire, we attempt to deal with this problem in two ways. First, we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we're not smart enough to predict future cash

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flows. Incidentally, that shortcoming doesn't bother us.

What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes.”

The Circle of Competence Simple, isn't it? Focus on what you know and leave aside what you do not. In other words, define your 'circle of competence'. Mr. Buffett is famously known to have shunned technology stocks in the late 1990s at a time when they were a rage and anyone not owning them was labeled as stupid. At that time, he had argued that technology stocks fell outside his circle of competence and hence, he was not comfortable owning them. It turns out that most people who actually invested in technology stocks, some of who ridiculed Mr. Buffett, did not understand them either! Investors can draw some very big lessons from this incident and develop a discipline that makes them avoid anything that falls outside their circle of competence.

Now that one has performed a DCF on the company that falls under one's circle of competence and has found out that the value arrived from DCF is greater than the market price, should he go ahead and invest in the company? Mr. Buffett thinks otherwise.

The Concept of Margin of Safety

Pay as little as possible for your mistakes Mr Buffett says, “We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.”

Civil engineers, who construct bridges, always insist on using a 'margin of safety' in the maximum load a bridge can carry at any given time. Thus, if a signpost on a bridge says 'maximum payload capacity 1,000 tonnes', one can be sure that the engineers have designed the bridge in such a way that it can carry weight 20% to 30% more than the designated payload capacity. This is done to not only

account for any errors that must have crept in while designing but also for the errors made while projecting the future traffic needs of the bridge.

Similarly, since doing DCF involves predicting the future, which as we all know is uncertain, errors are bound to creep into our analyses. Thus, having a margin of safety is important, as in the case of a bridge construction. Mr. Buffett learnt this technique from his mentor Benjamin Graham and widely believes it to be the cornerstone of investment success. Thus, whenever you do DCF next, consider buying only if your estimations are at least 50% more than the current market price of the stock, so that even if you go wrong in your assumptions, capital loss can be minimised.

The Indian context

Reliance Power IPO -Little room for error Reliance Power, one of the biggest IPOs to hit the Indian capital markets was a huge draw. Everyone wanted to invest in the company's shares, which were being offered as part of an Initial Public Offering (IPO). Infact, it took just few minutes for the investors to fully subscribe to the US$ 3 bn IPO.

At Equitymaster, the issue was put through our research process to evaluate whether or not to recommend it to our subscribers. When we conducted a DCF analysis on the company, an important but not the only aspect of the process, we realized that there was not enough margin of safety in the issue price. Hence for this and other reasons, we recommended to our subscribers that they “avoid” applying for the company's shares.

In the near term, we could have been wrong in our view, given the investor sentiment surrounding the stock (in the grey market, the stock was trading at a premium of over 100% of the issue price). But we remained honest to our research process. And it paid off for our subscribers.

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Mr. Market and its ‘now sullen’ and ‘now ecstatic’ moods

Mr. Buffett is often heard saying that when investing, only two skills are of paramount importance:

One, is that of valuing a business, and Two, is knowing how to think about market prices.

In fact, this is what he had to say on the topic in his 1996 letter to shareholders.

Sorry, that's too academic! Mr Buffett says, "To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - 'How to value a business?' and 'How to think about market prices'.”

Earlier in this guide, we learnt how one should go about valuing a business. Now we focus on the second aspect i.e., 'How to think about market prices?' Here too, Mr. Buffett turns to his mentor Benjamin Graham, whose famous 'Mr. Market' analogy has immensely helped value investors and others to take advantage of the irrationalities that prevail from time to time in the stock markets.

But before we move ahead, let us understand who is a “value investor”?

The discipline of investing in stocks that trade at a significant discount to its DCF based value (also known as intrinsic value) is known as value investing and the investor who follows this discipline is known as a ‘value investor’. This is one of the several acceptable definitions out there for value investing/investor. Benjamin Graham is widely believed to be the father of value investing, having introduced it at a time when a proper investment framework was yet to evolve in the field of investing. Mr. Buffett is known as the foremost proponent of value investing and reckons it to be the safest mode of investment around.

Coming back to Mr. Market, what is this 'Mr. Market' analogy? In his 1987 letter to shareholders, Mr. Buffett has explained the concept in detail.

Mr. Buffett and the incurable Mr Market Mr. Buffett says, “Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his”.

Mr. Buffett further says, “Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.”

He further states, “Mr. Market has another endearing characteristic - he doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic- depressive his behavior, the better for you. “

“But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice - Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game.”

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Thus, Benjamin Graham's concept of 'Mr. Market' seems to have its roots in the psychology of an average investor, who tends to overreact on either side. When excessive optimism prevails in the market, the investor will drive up the price of a stock beyond its intrinsic value and when excessive pessimism prevails, the very same investor drives down the price much below the intrinsic value.

Mr. Buffett has urged investors to take advantage of these idiosyncrasies so that attractive returns can be generated over one's investment lifetime. Mr. Buffett's own success can be attributed to taking advantage of the same idiosyncrasies. Hence, the next time the stock price of a firm crashes, do not forget to ask 'Is the fall justified or is Mr. Market being overly pessimistic today?’

Mr Market's Indian adventures In conclusion, we would like to quote two examples from our own observations of the Indian stock market where in the first case, Mr. Market became so pessimistic that even the fundamentally strongest stocks started to look like absolute bargains. And in the second case, he (Mr. Market) became so optimistic that even the fundamentally weakest stocks started trading at way above their intrinsic values.

A solid infrastructure financier feels the pinch The recent stock market meltdown, which enveloped markets across the world, also had a severe impact on the Indian markets, pulling down market caps of most blue chip companies drastically by a few percentage points. One such company that bore the brunt was IDFC, one of India's largest infrastructure financing companies known for its excellent management quality and having brilliant growth prospects.

However, Mr. Market had turned so pessimistic during that period that the market cap of the company tumbled by nearly 60% from its highs. Given the fundamentals of the company, such a fall was indeed not justified. But Mr. Market was in such a depressed mood that he just dumped the company's shares, resulting in a sharp fall in the stock price.

Later on, when rationality returned, Mr. Market finally came to senses, he realised the folly and started giving the company its due. Slowly and steadily, the stock price of the company inched upwards and has now made up for most of the lost ground, edging higher by more than 80% in a short span of few months! Nothing much has changed in the company fundamentally, but it was the victim of Mr. Market's selling frenzy.

The 'power'ful crash Moving to other extreme of Mr. Market's mood, recently, the power sector was his blue-eyed boy. In fact, so happy was he with the sector's 'growth prospects' that it had led to market cap of most companies in the sector recording a manifold rise in their stock prices in a matter of few months. However, amidst all the euphoria he forgot that the sector has huge gestation period and hence, there could be a lot of roadblocks along the way. Indeed, when such roadblocks appeared, the stock prices of the same companies came down as fast as they had gone up.

Thus, as we saw in the above examples, Mr. Market will not always appear rational and it this irrationality that value investors should try to capitalise on while making investments.

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Even the legendary Buffett is fallible

Mr. Buffett says, “An investor needs to do very few things right as long as he or she avoids big mistakes.” The concepts we have discussed so far in this guide will help you do just that.

However, it should be borne in mind that investing is not a perfect science and hence, mistakes cannot be completely eliminated. A few of them might creep in every now and then.

In fact, even Mr. Buffett has acknowledged that he has made quite a few mistakes in his investment career. In a section titled 'Mistakes of the First Twenty-five Years' from the 1989 letter to shareholders, Mr. Buffett has reviewed some of the major investment related mistakes that he has made in the twenty-five years preceding the year 1989. These are the conclusions that he has drawn from them.

Mr. Buffett on Quality over Quantity Mr Buffett says, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie (Buffett's business partner) understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first- c l a s s b u s i n e s s e s a c c o m p a n i e d b y f i r s t - c l a s s managements. Good jockeys will do well on good horses, but not on broken-down nags. The same managers e m p l o y e d i n a b u s i n e s s w i t h g o o d e c o n o m i c characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand."

It is worth mentioning here that in the early years of his career, Mr. Buffett bought into businesses based on statistical cheapness rather than qualitative cheapness. While he experienced success using this approach, the difficult time faced by the textile business made him realize the virtue of a good business i.e., businesses with worthwhile returns and profit margins and run by exceptionally smart people.

According to him, while one may make decent profits in an ordinary business purchased at very low prices, lot of time may elapse before such profits can be made. Hence,

he feels that it is always better to stick with a wonderful company at a fair price, as according to him, time is the friend of a good business and an enemy of a bad business.

Mr Buffett's 'If you can't confront them avoid them' attitude In his 1989 letter to shareholders, Mr. Buffett said, "Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers."

Mr. Buffett's reluctance to invest in tech stocks during the tech boom is legendary. Invest in companies whose businesses are within your circle of competence and keep it easy and simple. According to him, human beings have this perverse tendency of making easy things difficult and one must not fall into such a trap.

Mr. Buffett on Managers In his 1989 letter to shareholders, Mr. Buffett talked about the quality of managers managing businesses he would have invested in. This is what he had to say - "After some other mistakes, I learned to go into business only with people whom I like, trust, and admire. As I noted before, this policy in itself will not ensure success: A second-class textile or department store company won't prosper simply because its managers are men that you would be pleased to see your daughter marry. However, an owner - or investor - can accomplish wonders if he manages to associate himself with such people in businesses that possess decent economic characteristics. Conversely, we do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person.”

Next on the list of investment mistakes is a confession that makes us realise that even Mr. Buffett is prone to slip up occasionally. But what makes him a truly outstanding investor is the fact that he has had relatively fewer mistakes of commission rather than omission. In other

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words, while he may have let go of a few very attractive investments, he has hardly ever made an investment that cost him huge amounts of money (Like he says “avoid big mistakes”).

Mr. Buffett on Mistakes of Inactivity This is what Mr. Buffett has to say - "Some of my worst mistakes were not publicly visible. These were stock and business purchases whose virtues I understood and yet didn't make. It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge.”

Mr. Buffett rounds off the list with a masterpiece of a comment. It gives us an insight into his almost superhuman like risk aversion qualities and goes us to show that he will hardly ever make an investment unless he is 100% sure of the outcome. It comes out brilliantly in this, his last comment on his investment mistakes of the past twenty-five years.

Mr. Buffett on Leverage In his 1989 letter to shareholders, Mr. Buffett said, "Our consistently conservative financial policies may appear to have been a mistake, but in my view were not. In

retrospect, it is clear that significantly higher, though still conventional, leverage ratios at Berkshire would have produced considerably better returns on equity than the 23.8% we have actually averaged. Even in 1965, perhaps we could have judged there to be a 99% probability that higher leverage would lead to nothing but good. Correspondingly, we might have seen only a 1% chance that some shock factor, external or internal, would cause a conventional debt ratio to produce a result falling somewhere between temporary anguish and default.”

He further stated, “We wouldn't have liked those 99:1 odds - and never will. A small chance of distress or disgrace cannot, in our view, be offset by a large chance of extra returns. If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also.”

To sum up, invest in businesses that besides being easy to understand have strong fundamentals and are run by able and honest managements. Secondly, always beware of the irrationality that may lead you to take decisions that would harm you in the long run. And finally, no matter how good the opportunity, do not borrow funds to make investments i.e., invest with your own funds.

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Mr. Buffett's Owner's Manual

In his letters especially from the earlier years, Mr. Buffett had followed the practice of putting out a list of key points that a company needs to satisfy if it wished to get acquired by his investment vehicle, Berkshire Hathaway. The reproduction of those key points in this report will not only help us get an insight into what Mr. Buffett looked at while making investments but will also act as a perfect conclusion to our report since it also pretty much summarises the key points covered in this report.

Laid out below are the key points that Mr. Buffett has mentioned in most of his earlier letters to shareholders. He looks to invest in companies, which have -

(1) Demonstrated consistent earning power (future

projections are of little interest to him, nor are 'turnaround' situations),

(2) Businesses earning good returns on equity while employing little or no debt,

(3) Management in place (Mr. Buffett says that he can't supply it),

(4) Simple businesses (if there is lots of technology, Mr. Buffett will not understand it),

(5) An offering price (Mr. Buffett will not like to waste his time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

Since all the above points are self explanatory, we do not intend to add anything more except for a small quote from Mr. Buffett, which you should go through so many times that it remains forever etched in your memory.

Mr. Buffett once famously said:

“Only follow two rules in investing Rule#1: Do not lose money, and Rule#2: Do not forget Rule no. 1”

If one devotes his investment lifetime to strictly following what we have outlined in this note and also the above quote of Mr. Buffett, he is likely to emerge a much wealthier person than most of his peers.

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Equitymaster Recommends

The Intelligent Investor - Benjamin Graham This book is "directed to investors as distinguished from speculators" and discusses at length the value style of investing. For the uninitiated, Warren Buffet, the world's most successful investor, was a student of Benjamin Graham and follows the “value” style of investing. Buffet's take on the book - "By far the best book on investing ever written". Our take - read it now!

Security Analysis - Graham & Dodd Another hugely important book from the father of value investing. Credited for transforming investment analysis into a discipline, the book still forms a worthwhile reference guide for even the savviest of investors. Although many editions are available, Warren Buffett finds the 1940 edition as the best of the lot.

Common Stocks and Uncommon Profits - Philip Fisher Regarded by many as the father of growth investing, Philip Fisher's seminal work, especially the fifteen points to look for in a stock can prove to be an extremely useful screener for someone looking to analyse a growth stock. The best compliment though comes from Warren Buffett who once unabashedly proclaimed that he is 85% Graham and 15% Fisher.

The Warren Buffett Way - Robert Hagstrom When you are the world's greatest investor, you are bound to be dissected relentlessly. Although many good books have been written on the master, we believe this books comes the closest in terms of scrutinizing his investment style. After all, what better than profiting from the investment philosophies of one of the best in the business.

Essays of Warren Buffett - Lawrence Cunningham This book contains investment wisdom from Warren Buffett's letters to shareholders compiled in a nice, easy to understand format. We believe the author has done a brilliant job and even Warren Buffett thinks so as he too has recommended the book at various forums.

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