Warren Buffett's Three Favorite Books

by Preston Pysh

Section 3

Billy, playing dumb, said, “I have no idea. We probably need to count them.” Billy’s ploy was an attempt to remain innocent in his secret that he was selling the business for $1,000.

“Billy, how can you possibly take $45 from me and only give me a measly $13.50 in return?” Joe said. “I even volunteered to help every day after I became an owner.” As Joe’s voice became louder, everyone in the room became uncomfortable.

Joe held $45 in the air ($13.50 for the earnings and $31.50 for the resale of his 45 shares. Remember, Joe invested $45 to start with.)

The point is investors should always consider the growth of their assets in relative terms.

the success of a stock pick heavily relies on the purchase price as much as the productivity of the already-successful business.

the higher the P/E goes, the worse the sentence sounds.

Chapter 2 A Child’s First Bond (Bonds 101)

loan. Essentially, you are lending a person, a business, or a government your money.

bond is an agreement that specifies when and how the organization or person will give you your money back – with interest.”

George thought to himself If only adults could start thinking like kids, they would probably find themselves in a lot less trouble.

As Billy looked down at his pile of money his father gave him for the initial purchase of the bond, he realized there was only $95 remaining.

Purchasing a bond is nothing more than a way for you to loan money to a company or government. As you’ll find in the second portion of this book, there are advantages and disadvantages for all sorts of bond investments.

Purchasing a Bond = Providing a Loan

Course 1, Unit 2 Bonds 101

Chapter 3 The Lake (The Market 101)

Billy had never been to a lake, and he couldn’t understand why people would want to swim in a dark and unclean pool of water.

“How in the world did they all know to swim away?”

If they are all right here, think about all the food that’s not getting eaten out there.”

instinct, fear, and greed.

With such a small number of fish actually being threatened, how many swam away? That’s right, all of them.

How many times in financial markets do investors sell their shares because they are scared of the unknown? Often. They are the small fish who see the big ones moving out.

Instead of looking above the water to where the rock is being thrown, they are focused on the tails ...

the instinct of fear determined the children’s decision to sell their profitable business – not value.

how many people did you know during the darkest days of the 2008 recession who were actively investing large amounts of money in stocks? Probably not that many.

Stocks During Fear Cycles (Recessions): These are the least risky and most profitable times for purchasing stock.

Bonds During Fear Cycles (Recessions): These are the most risky and least profitable times for purchasing bonds.

“Be fearful when others are greedy, and greedy when others are fearful.”

Market price is never equal to intrinsic value

Relatively speaking, stocks and bonds are either profitable or unprofitable. The amount depends on which side and magnitude the market value falls, at any given point in time, from the assessed intrinsic value of the security.

the more expensive price of Billy’s shares produced the same return as the zero-risk savings bond! Based on those circumstances, I think everyone can agree the savings bond is a much better deal because it has no risk.

Why zero-risk ?

Your job is to find the quality companies (like Billy’s lemonade stand) that are selling for $1 and not $20.

Great investors always think for themselves. Never let the opinions of the masses sway the calculative value you place on your investments.

Chapter 4 George’s Final Guidance (The Connection)

I bought these 30-year bonds for $1,000 each only 3 years ago. These bonds pay 6% interest every year. Right now, everyone is scared about the economy, and I can sell each bond for $1,432. If people were going to buy a bond today, the best rate they could get is 3.5%. Because that’s the best rate, and I’m sitting on a 6% bond, I can charge $1,432 for each.”

“Three years ago, our country was experiencing an enormous boom in the stock market. Everyone in this country was buying stock like dogs chasing a meat wagon. Billy, do you know what I was buying during those great times?” A little confused, Billy shrugged his shoulders. Looking down at the briefcase, George paused and said, “Those bonds right there. I could have been following the crowd of greedy investors and buying stocks, but I knew they were overvalued. As a result, bonds were actually a better investment despite the opinions of most people.”

You simply compare your expected return of a stock to the expected return of a long-term bond. Whichever has the higher return is the one you buy.”

PART II Teaching Yourself

not everything with stock investing is intuitive.

one of the things I had beat into my head at the U.S. Military Academy was the idea of taking the initiative.

the Thayer method.

Chapter 5 How Do We Define Success? Section 1

Most people treat the market like gambling. They are driven by groupthink, fear, and greed.

For the sake of argument here, we will use the 10-year Federal Treasury note as a standard

The reason the Treasury note is regarded as a foundational standard is because it cannot fail to pay. Credit risk is irrelevant when looking at this note because the issuer of this note (the Federal Treasury) can simply print more money.

All other securities will be considered to be of higher risk (unless issued by the Federal Treasury).

a note purchased for $100 would send you a check for $2.13 each year for 10 years before returning your $100.

If this Treasury note investment is considered to be risk-free, then why would anyone enter an investment that makes less than 2.125%?

Section 2