stocks

Hagstrom's second book is outstanding, especially for anyone looking to develop and define a rational investment style and process for managing their own money. As a professional money manager, I have read many books on investing, and like to refer the better ones to my clients. This one would be at the top of my recommended list, because it is clearly written, logical in its approach (Hagstrom backs up the tenets of his "focused portfolio" approach to investing with good empirical data), and provides a consistent and rational framework for people to invest their money. Hagstrom advocates that investors own relatively few stocks (maybe 10-15), and concentrate their holdings in companies that have a high probability of enjoying financial success over the long term. He points out the risks of this approach (fewer stocks in a portfolio can result in higher than average portfolio volatility in the short run, which can be disconcerting to some investors), but also highlights the success that Buffett and other practicioners of a long term, focused approach have had historically. Hagstrom includes interesting discussions of the math underlying his strategy, and the psychological factors that predispose a person to embrace or reject the principles of investing he recommends. The beauty of the book, and the focused portfolio approach to investing, is that it is logical, supported by solid mathematical principles, makes sense intuitively, is relatively easy to apply, skews the odds of outstanding absolute and relative total returns in the investor's favor, and provides a solid framework against which to invest in a world that is fraught with risk and dominated by a media culture that probably hurts more individual investors it helps (CNBC, internet sites, mutual fund advertising, etc). Hagstrom's approach is obviously not for everyone--despite its simplicity and logic, few professionals or individuals, in my experience, have the patience or discipline to concentrate their investments and stay with them over a period of years. But for those people looking for an approach that cuts through all the clutter in the investment world, this book is worth a read. For what it is worth, the best book on Buffett himself is Lowenstein's "The Making of an American Capitalist;" other must read or own books for do-it-yourself investors would include "Investment Policy" by Ellis, "Against the Gods" by Bernstein, "The Gorilla Game" (for technology stock investing) by Moore, "Classics" and "Classics II " by Ellis, and "When Genius Failed" by Lowenstein.

I wasn't expecting much, so I was pleasantly surprised. It's a pretty solid overview of Buffett's investment philosophy, with an emphasis on his portfolio management style, which Hagstrom calls Focus Investing. He defines it as:

"Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady during any short-term market gyrations."

I couldn't agree more!

The book has a lot of other somewhat random but interesting stuff like a chapter on The Psychology of Investing, which is a shorter version of one of my favorite books, Why Smart People Make Big Money Mistakes.

In short, I wouldn't recommend this book above many others on Buffett (starting with The Collected Essays of Warren Buffett), but if you've read those and just can't get enough of Buffett, this book is an enjoyable read.

In "The Warren Buffett Portfolio", author Robert Hagstrom devotes an entire book to debunking the greatest misconception prevalent in the investment world today: the myth of "diversification". Hagstrom sets out to prove that Mark Twain was a market wizard when he said "put all of your eggs in one basket, and guard the hell out of that basket!"

The heart of this book rests on the premise that a proper portfolio must be "diverse" (i.e. must include 40 to 100 different companies) in order to remain "safe" and avoid a loss of capital. However, while such a notion may decrease short-term volatility, it does not necessarily increase returns. Hagstrom examines investment guru Warren Buffett's ideas on the subject, such as "knowledge decreases risk, not the number of stocks in your portfolio". Such an approach makes sense. Which is better, to own a few companies that you know everything about, or a lot of companies that you know little or nothing about? The less you know about a company, the more likely it is that an unforeseen event will sneak up on you and hammer your portfolio.

The book also addresses the fallacy of "re-balancing a portfolio". Again, Warren asks, why are you selling off your best company to buy a bunch of under-performing companies? Such a line of thinking is akin to saying "Michael Jordan takes too many shots and makes too much money relative to the other players on his team, so he should be traded to another team for three players so as to decrease the risk of an injury hurting the team... or we should give more shot opportunities to players of lesser talent so that the team doesn't become dependent on Michael Jordan to win." Nobody ever won an NBA Championship with run-of-the-mill players, but the Bulls won six NBA titles by relying on Michael Jordan.

It's this stalwart advance in the face of conventional wisdom that separates this book from most in the stock investment genre. Give it a try. You may find it's the most profitable book you've ever purchased...

Britt Gillette
Author of "Conquest of Paradise: An End-Times Nano-Thriller"