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What Is Warren Buffett's Investing Style? 2

Second, the ‘Warren Buffett way’ can be viewed as a core, traditional style of investing that is open to adaptation. Even the author of the best-selling book - who is a practicing disciple, or "Buffettologist" as such a practitioner is sometimes called - modified his own approach along the way to include hi-tech stocks, a category Buffett conspicuously continues to avoid. One of the compelling aspects of Buffettology is its flexibility alongside its phenomenal success. If it were a religion, it would not be dogmatic but instead self-reflective and adaptive to the times. This is a good thing. Day traders may require rigid discipline and adherence to a formula (i.e. as a means of controlling emotions), but I think we can safely say that successful investors, if nothing else, need to be willing to adapt their mental models to the changing times.

According to Hagstrom, Buffett has twelve investing tenets. These tenets are categorized into the areas of business, management, financial measures and value.

Business
Buffett adamantly restricts himself to his “circle of competence” - businesses he can understand and analyze. As Hagstrom writes, investment success is not a matter of how much you know but how realistically you define what you don’t know. Buffett considers this deep understanding of the operating business to be a prerequisite of a viable forecast of future business performance; i.e. if you don’t understand the business, how can you project performance? Buffett’s business tenets each support the goal of producing a robust projection: first, remember you are analyzing a business - not the market or the economy or investor sentiment. Second, look for a consistent operating history because this will improve your ability to, thirdly, ascertain whether the business has favorable long-term prospects.

Management
Buffett’s three management tenets concern the evaluation of management quality. This is perhaps the most difficult analytical task for an investor. Buffett asks, "Is management rational?" Specifically, is management wise when it comes to the question of re-investing (retaining) earnings or returning profits to shareholders as dividends? This is a profound question; most research suggests that historically, as a group and on average, management has tended to be greedy and retain a bit too much (profits) as they are naturally inclined to build empires and seek scale rather than utilize cash flow in the manner that would maximize shareholder value. Another tenet asks if management is candid. That is, do they admit mistakes? And the final management tenet asks this: does management resist the institutional imperative? This tenet is substantial in breadth and includes looking for a management team that resists a “lust for activity” and the lemming-like duplication of competitor strategies and tactics. If you read the book, this particular tenet is worth savoring. It requires thought (e.g. where is the fine line between blind duplication of competitor strategy and outmaneuvering a company that is first to market?) and is among the most important.

Financial Measures
The financial tenets are not sophisticated. Buffett looks

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