The Evolution Of Warren Buffett
Interested in Buffett's money mind, his inspiration, teachers, and evolution as an investor?

Then I'd highly recommend reading Warren Buffett Inside The Ultimate Money Mind is an excellent book by Robert Hagstrom

Here are my takeaways:

The ultimate money mind is made of multiple qualities:
- Self-reliance
  • Rationality
  • Adaptability
  • Pragmatism
  • Mindset
  • Business-driven focus
  • Sound mindedness

Let's dig into how Buffett learned these lessons from people who had major impacts on his investing framework

Lessons from Frances Minaker, the author of One Thousand Ways to Make $1000:
  • Take action
  • Don't be swayed to inaction by the counsel of others
  • Read everything you can about a potential business
  • Understand how to succeed and how to fail

Buffett's early life lessons:
  • Performance should be measured over 3-5 year time spans, not daily, weekly, or quarterly
  • Began understanding the magic of compound interest. He learned this by plowing back earning from his various jobs into his business enterprise.

Lessons from Howard Buffett:
  • Warren learned self-reliance through his father
  • Self-reliance is an Emersonian principle of nonconformity
  • An individual "must do whats right no matter what other thinks."
  • Patriotism

When asked the best advice Warren was ever given by his father, he replied "He told me It took 20 years to build a reputation and 20 minutes to lose it. And if you remember that, you'll do things differently.

He learned the powers of principles.

His father was his hero.

Lessons from Benjamin Graham:
  • Taught Buffett that you must have courage of your knowledge and experience
  • You are neither right nor wrong because others agree or disagree with you
  • Successful investing doesn't require high IQ. It requires sound thinking and rationality
  • Do not fall under the influence of Mr. Market
  • Use Mr. Markets moods to get well priced opportunities
  • Do not buy businesses you do not understand
  • Always buy with a margin of safety
  • Have a business owners mindset

This led to stage 1 of Buffets Evolution:
  • Thinking like an investor is superior to thinking like a speculator
  • High prices create risk
  • Don't lose money
  • Look for companies that will reach intrinsic value
  • Low PB and PE were the norm

From this stage he learned this wasn't his optimal strategy:
  • Low quality businesses didn't end up delivering economic benefits to Berkshire (see Berkshire textiles)
  • High quality businesses that earned above average returns on incremental capital created the compounding effect

Lessons from Charlie Munger:
  • Pursuit of worldly wisdom
  • The study of failure
  • Rationality
  • The use of multiple mental models
  • Pragmatism

Lessons from Philip Fisher:
  • Superior profits come from businesses w/ great economics and superb management
  • He liked companies that didn't require outside financing. This way you avoided dilution and debt
  • Scuttlebutt to learn more about a company outside of their reports
  • Concentration

Stage 2 of Buffett's evolution was ready:
  • A preference to quality over cheapness
  • A willingness to pay up for that quality
  • The ability to hold companies for the long-term rather than constantly seeking out cigar butts
  • This helped scale Berkshire

Stage 3 was including network effects:
  • Buffett learned through Apple, the power of network effects
  • Apple products were interconnected, creating network effects
  • They generate high ROIC, which he emphasized in stage 2
  • This shows how adaptable Warren was

Let's look at Buffett views investing through a business-driven lens:
  • The temperament of a businessperson >>> to that of a speculator
  • Allows the investor to hold a position as long as it offers a return over their hurdle

"The investor and the businessperson should look at the company in the same way, b/c they both want the same thing. The businessperson wants to buy the entire company; the investor wants to buy portions. Both will profit from growth in intrinsic value of the business they own."

As a business owner requires you understand the specific business you own:
  • What is the company objective
  • What are it's products or services
  • Who are its customers
  • What do they do better than competition

Warren's lessons on what makes a great business:
  • The business will be great in 25-30 years
  • They sell a product with no close substitute
  • Have large runways
  • Reinvestment opportunities
  • Ability to withstand economic mishaps

When Buffett looks at the financials of a great business, here is what he looks for:
  • Cash generative
  • Sustained high returns on capital with little to no debt
  • Preference to organic growth > M&A growth

Buffet created his look-through earnings in 91' and told shareholders that if look-through earnings grew at 10%, the rate of return was also likely to be 10%.

He has focused on acquiring companies with ever increasing earnings power.

Lessons from John Meynard Keynes:
  • Investors can only understand and focus on a few companies
  • Concentrated portfolio decrease risk because the investor must be very comfortable owning few names in their portfolio
  • Compounding retained earnings has enormous value

Buffett on EMH:
  • Successful investors can completely ignore EMH and still prosper
  • You only need two courses:
  1. How to value a business
  2. How to think about market prices
Sidni Standard's avatar
I’m definitely going to be reading this book… thank you for sharing all of these insights!
The Thinking Investor's avatar
Great call. And your welcome!
Eric Messenger's avatar
Man I just finished my 3rd Hagstrom book; 2 focused on Buffet, 1 focused more on Munger. I am re-reading “The Warren Buffet Way” now. Will have to order this one too. Didn’t know he’d written another about Buffet.
The Thinking Investor's avatar
@wall_street_deebo Yea this is his newest one. It was very informative. Dives deep into some of the philosophical minds that shaped some of Buffett’s key teachers as well. If you like his other books you’ll enjoy this on too.
Neeraj's avatar
Thanks for the cliff notes
The Thinking Investor's avatar
@nsanghani Glad you found it helpful.
Reasonable Yield's avatar
This was fantastic thanks!

Not sure when Commonstock added this, but there is now a little "follow" button on the feed whenever you don't follow someone, I hadn't even noticed I was not following you, so corrected that!

The Thinking Investor's avatar
@reasonableyield appreciate the feedback. Followed back!