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by Ronald L. Moy, CFA

Think, Act, and Invest Like Warren Buffett

It seems that a new book about Warren Buffett's investment strategy is released to the public every few months, probably for good reason. Buffett's success as an investor over more than a half century has made him an icon to not only those interested in investing, business, and financial markets but also the public at large. In addition, his folksy, Midwestern wisdom resonates with many people.

Many of the books that purport to explain Buffett's investment strategy to the layperson draw on his widely read annual letters to Berkshire Hathaway (BRK.A, BRK.B) shareholders as well as speeches and interviews he has given. These books tend to focus on Buffett's strategy of investing in a business at a bargain price and holding the stock forever.

When a new book on investing like Buffett is published, one has to ask what new insight the author can offer. Surprisingly, Larry E. Swedroe, a principal and research director at the BAM ALLIANCE and the author of several other popular investment books, has delivered a unique take on the Buffett investment philosophy with Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals.

When you begin this short book, you are likely to be reminded of investment icon John Bogle, founder of the Vanguard Group, rather than Buffett. Although Bogle is highly regarded in the investment world and has written several best-selling books, the marketing executives probably decided they could sell a lot more books on how to think, act, and invest like Warren Buffett than books on how to think, act, and invest like John Bogle. But the Bogle philosophy comes through in the book's decidedly favorable opinion of indexing. This perspective is not inconsistent with the view of Buffett, who has repeatedly recommended the indexing approach for the average investor. Buffett believes so strongly in indexing that he is in the midst of a 10-year wager with the investment management firm Protégé Partners that a low-cost index fund (the Vanguard 500 Index Fund Admiral Shares) will outperform a portfolio of five hedge funds of funds chosen by Protégé. The bet concludes in 2017; at last tally, the two were in a virtual dead heat.

Swedroe's real gift is not his ability to decipher Buffett's - or Bogle's - investment strategies but, rather, his ability to communicate the tenets of a sound investment strategy in clear and succinct language. Readers of the Financial Analysts Journal and other investment professionals are unlikely to pick up any new investment insights, but they will learn how to convey complex portfolio management concepts in a manner that laypeople can understand. This lesson is one that Swedroe has certainly learned from Buffett, who has long been admired for his skill in communicating with Berkshire Hathaway shareholders.

For such a short book, Think, Act, and Invest Like Warren Buffett covers nearly all the basics of personal financial planning. Unlike many other investment book authors, who jump immediately into the process of security selection, Swedroe begins with the essentials of a sound investment plan, including the preparation of an investment policy statement. Thinking like Warren Buffett requires having a plan and sticking with it. The investment policy statement provides such a plan for all investors, regardless of their level of sophistication.

Throughout the book, Swedroe does an excellent job of summarizing important research in finance without bogging the reader down with needless citations. Those who have formally studied investing may enjoy seeing the names Harry Markowitz and William Sharpe; for the lay investor, however, such extra information may obscure the essential principles.

One of the book's more enlightening chapters lays out an approach to producing a diversified portfolio. Using data for 1975-2011, Swedroe provides a simple example of how diversification works. He does not burden the reader with the mathematics of modern portfolio theory. Instead, he shows how an investor who holds a mix of 60% in the S&P 500 Index and 40% in five-year U.S. Treasury notes can alter the portfolio's risk-return characteristics by partially replacing those core holdings with other asset classes that possess more-favorable properties. Swedroe generates five sample multi-asset portfolios by starting with the basic 60/40 portfolio and adjusting its composition in stages. Using this step-by-step approach, Swedroe is able to show the lay investor that systematically and thoughtfully changing simple asset allocations not only reduces risk but also enhances returns. Investment professionals and educators will find this exercise to be an extremely effective way to communicate the benefits of diversification.

Finally, Swedroe argues that the passive approach to investing allows investors to win not only the investment game but also the game of life. Investors who choose to pursue an active role in stock selection will find that they are playing a losing game. Perhaps more importantly, the time spent ferreting out investment opportunities is time taken away from other aspects of life, such as family, friends, and a variety of rewarding endeavors.

Although Think, Act, and Invest Like Warren Buffett provides no new insights, it should be read by everyone who is interested in investing. Lay investors will learn the basics of producing a sound investment strategy. Students of finance will gain insight into the intuition that underlies much of the mathematical theory they have studied. And investment professionals and those who teach investing will discover that it is possible to communicate complex financial topics by using a succinct and easy-to-follow approach.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Source: Book Review: Think, Act, And Invest Like Warren Buffett