The Warren Buffett Way, + Website, 3rd Edition

Preface

In June 1984, I enrolled in a training program at Legg Mason Wood Walker in Baltimore, Maryland. For two weeks I listened to presentations on investing, market analysis, compliance, and selling techniques. I was expected to start my career as an investment broker soon, but I couldn’t shake the feeling that I had made a terrible mistake.

Legg Mason was a value shop, and its training program emphasized the classic works on value investing, including Benjamin Graham and David Dodd’s Security Analysis and Graham’s The Intelligent Investor. Each day, the firm’s veteran brokers would stop by and share their insights on stocks and the market. They handed us a Value Line Investment Survey of their favorite stock. Each company possessed the same attributes: a low price-to-earnings ratio, a low price-to-book ratio, and a high dividend yield. More often than not, the company was also deeply out of favor with the market, as evidenced by the long period the stock had underperformed the market. Over and over again, we were told to avoid the high-flying popular growth stocks and instead focus on the downtrodden, where the risk-reward ratio was much more favorable.

I understood the logic of the value investment approach; the math was not difficult. Value Line gave us an easy snapshot of a company’s balance sheet and income statement dating back 20 years. On top was a graph of the company’s stock price marching in lockstep with each year’s results. But no matter how many times I looked ...