It was with some trepidation that I picked up Lawrence A Cunningham's The Essays of Warren Buffett: Lessons for Investors and Managers (3rd Ed. 2009). I had heard that the book was mainly a collection of excerpts from Berkshire Hathaway annual reports and I usually find annual reports dry and monotonous.
This book was, however, refreshingly accessible mainly because of Buffett's disarmingly pleasant style of writing. The Essays cover a wide gamut from Corporate Governance, Corporate Finance and Mergers and Acquisitions to Accounting and Valuation (The last topic I found a bit over the head; in particular, if somebody could explain to me what "owner earnings" is, I would be most obliged).
I am not much of a stock investor. I mainly stick to mutual funds. Buffett has several things to say to retail investors. He points out: "Many commentators ... are fond of saying that the small investor has no chance in a market dominated by the erratic behavior of the big boys. This conclusion is dead wrong: Such markets are ideal for any investor - small or large - so long as he sticks to his investment knitting. Volatility caused by money managers who speculate irrationally with huge sums will offer the true investor more chances to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times."
Buffett eloquently rails against the manipulations in balance sheet reporting. He dismisses the concept of EBDIT - earnings before depreciation, interest and taxes - calling it "an abomination". As he puts it: "Even a high school dropout knows that to finance a car he must have income that covers not only interest and operating expenses, but also realistically-calculated depreciation. He would be laughed out of the bank if started talking about EBDIT.
He also warns retail investors about the dangers of derivatives calling them "financial weapons of mass destruction". It seems Mark Twain once said: "A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way." To this Buffett adds: "If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats."
The book is not all that easy for a layman to understand at first go. For instance, I did not fully understand the discussion on "Economic Goodwill versus Accounting Goodwill". Perhaps a more careful rereading of the book would demystify the terms.
This book was, however, refreshingly accessible mainly because of Buffett's disarmingly pleasant style of writing. The Essays cover a wide gamut from Corporate Governance, Corporate Finance and Mergers and Acquisitions to Accounting and Valuation (The last topic I found a bit over the head; in particular, if somebody could explain to me what "owner earnings" is, I would be most obliged).
I am not much of a stock investor. I mainly stick to mutual funds. Buffett has several things to say to retail investors. He points out: "Many commentators ... are fond of saying that the small investor has no chance in a market dominated by the erratic behavior of the big boys. This conclusion is dead wrong: Such markets are ideal for any investor - small or large - so long as he sticks to his investment knitting. Volatility caused by money managers who speculate irrationally with huge sums will offer the true investor more chances to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times."
Buffett eloquently rails against the manipulations in balance sheet reporting. He dismisses the concept of EBDIT - earnings before depreciation, interest and taxes - calling it "an abomination". As he puts it: "Even a high school dropout knows that to finance a car he must have income that covers not only interest and operating expenses, but also realistically-calculated depreciation. He would be laughed out of the bank if started talking about EBDIT.
He also warns retail investors about the dangers of derivatives calling them "financial weapons of mass destruction". It seems Mark Twain once said: "A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way." To this Buffett adds: "If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats."
The book is not all that easy for a layman to understand at first go. For instance, I did not fully understand the discussion on "Economic Goodwill versus Accounting Goodwill". Perhaps a more careful rereading of the book would demystify the terms.
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