How 'lousy trader' made book on Warren Buffett's bets

Robert G. Hagstrom Jr. recalls the first "playbook" he received as a rookie stockbroker at Legg Mason Inc. in 1984: it explained Legg's value investing approach and preached the exalted "way" of legendary value investor Warren Buffett.

Ironically, Mr. Hagstrom's poor performance in his first days at Legg led him to a decade of study -- and ultimately a book -- about the man he regards as the best in the business, he said. Mr. Hagstrom's "The Warren Buffett Way: Investment Strategies of the World's Greatest Investor," has been on the best-seller lists since it was published last fall.


"I was lousy as a trader," he explained during a conference for Legg Mason's 90 branch managers at the Stouffer Renaissance Harborplace Hotel in Baltimore yesterday. "If I had been a better trader I probably wouldn't have written the book."

Largely because of his inability to evaluate the latest investment fad, he became fascinated with the success of Mr. Buffett, the foremost practitioner of "buy and hold" investing. "It became almost like a hobby," Mr. Hagstrom said. He collected everything Mr. Buffett wrote and said over the years, so that when he sat down to write his book, "the research was pretty much done."


The book has little biographical material, and Mr. Buffett was not interviewed, although his famous annual report essays are quoted extensively. What readers will find in "The Warren Buffett Way" is a compendium of the investor's ideas, with case studies that illustrate how the chairman of Omaha, Neb.-based Berkshire Hathaway Inc. has applied them.

The distinction between speculating and investing lies at the heart of the Buffett way, according to Mr. Hagstrom, 38, a principal at the investment firm of Lloyd, Leith & Swain in Philadelphia.

"Your clients have two pools," Mr. Hagstrom told his former colleagues. "They have an investment pool, which they can't take a lot of risk, they can't afford a lot of losses; and they have a speculation pool."

For Mr. Buffett, whose net worth is estimated at $9 billion, investing means focusing on companies, not speculating on the direction of the stock market. He has said that if Federal Reserve Chairman Alan Greenspan were to whisper in his ear his planned monetary policy for the next two years, Mr. Buffett wouldn't change the way he invests.

Mr. Buffett seeks out and sticks with businesses based on fundamentals, such as profits and cash flow, and management attuned to the best interests of the shareholders. He shuns wide diversification, choosing to invest large amounts in a relatively small number of stocks that he can understand and follow closely.

The core holdings of Berkshire Hathaway include Coca-Cola Inc., Capital Cities/ABC, Gillette, the Washington Post Co. and GEICO, the Washington-based auto insurer.

It may be encouraging to know that Mr. Buffett has made his mistakes, Mr. Hagstrom noted, including the Salomon Bros. investment bank, which Berkshire bought at about $50 a share, or $15 above where it is now; and USAir Inc., bought at about $50 and now trading below $6.

But the successes far outweigh the duds. Berkshire Hathaway's stock has managed a 23 percent average annual return for the past 30 years, more than twice the Standard & Poor's 500 Index.


Some reviewers of the book have scoffed at the notion that Mr. Buffett's success can be replicated simply by understanding his philosophy.

In fact, Mr. Hagstrom acknowledges that time-consuming research backs up the straightforward ideas. But if the book does nothing else, he suggested, it should warn against straying too far afield of one's knowledge and competence. For instance, Mr. Buffett has called his friend Bill Gates, chairman of Microsoft Corp., the smartest man in America. But he hasn't invested a dime in Microsoft stock because he doesn't understand the company well enough to value it.

"I felt that Warren Buffett's success may have been more of a result of limiting certain behavior," Mr. Hagstrom said, rather than always straining for the next great idea.