Howard Marks Prefaces 'The Buffett Way,' Distilling Nine Traits and Investment Cases

What exactly accounts for Warren Buffett's investment miracle? In Robert Hagstrom's book 'The Buffett Way,' Howard Marks provides a preface that precisely and comprehensively interprets Buffett's investment philosophy. Marks notes that Buffett has beaten stock market indices for many consecutive years. Starting his investment career in 1965 with $105,000, Berkshire Hathaway now holds $143 billion in investments and $202 billion in net worth, making him the second-richest person in the United States. Other billionaires on the Forbes list have largely built their wealth in real estate or high technology, but Buffett's fortune was built entirely through the investment market, a market accessible to everyone.

Buffett possesses extraordinary analytical ability. He once quipped, 'If you have an IQ of 160, sell 30 points, because you don't need that much.' As Malcolm Gladwell noted in 'Outliers,' great success requires sufficient intelligence, not necessarily genius. Buffett does not need weeks or months to reach conclusions, nor does he require a team of analysts to do calculations. He believes that not every piece of data needs to be known or considered; people are the most critical factor, and he is skilled at judging character.

Buffett has a complete philosophical framework, staying within his circle of competence and forgoing everything else. He invests only in businesses he understands and likes, focusing on seemingly mundane areas while avoiding popular companies. He can ignore opportunities that fall outside his investment philosophy, and more importantly, he can remain unperturbed when watching opportunities he missed generate profits for others. Early in his career, he adopted his mentor Benjamin Graham's 'deep value' approach, buying discarded stocks, a theory sometimes called 'cigar butt' investing.

Buffett has absolute immunity to emotional contagion. When things improve, he does not show elation; when things worsen, he does not sigh in frustration. He simply does not care whether others think he is successful or whether his investment decisions are correct. In the early 2000s, amid the tech stock frenzy, he was ridiculed as 'past his peak,' yet he stayed true to himself. He measures success by his own methods, not by the standards of the public or the media. He cares only about what he and Charlie Munger think, and about maximizing value for the company's shareholders.

Buffett is skilled at contrarian investing, even relishing it. He has observed that high-yield bonds are sometimes priced like flowers and sometimes like weeds, and he once wrote to Howard Marks, 'I prefer them priced like weeds.' A contrarian investor prefers buying things that have fallen out of favor, and Buffett is exactly that. He not only thinks contrarian but also operates counter-cyclically. During the 2008 financial crisis, he invested $5 billion each in preferred shares of Goldman Sachs and General Electric with 10% yields, and in 2009 he invested $34 billion in Burlington Northern Santa Fe Railway, a company sensitive to economic cycles. These investments, made when the environment was besieged on all sides, required great courage.

Buffett has said his 'holding period is forever' and that he 'would rather have a volatile 15% return than a steady 12%.' This allows him to stick with great investment opportunities over long periods, defer taxes, and grow his investment returns through compounding, rather than realizing gains each year and paying short-term taxes. Such a strategy not only helps him avoid short-term market fluctuations but also enables him to benefit from them. In fact, Buffett's behavior shows he prefers holding positions rather than using market liquidity to go to cash.

Buffett holds a different view on diversification, stating, 'The strategy we've adopted precludes the so-called diversification dogma, and many authorities would say our strategy is riskier than the conventional approach.' He knows that great investment opportunities are rare, so he remains highly alert and acts swiftly when they appear. He focuses on people and companies he trusts, does not hold unsettling businesses merely because others do, and refuses to engage in 'inferior diversification' just to mitigate the impact of mistakes.

Buffett is willing to remain inactive for long periods, avoiding frequent trading until a great opportunity emerges. He famously compared himself to Ted Williams, one of the greatest baseball hitters, who stood at the plate with the bat on his shoulder, waiting for the perfect pitch. He uses this analogy to illustrate his persistence in investing, striking only when an attractive opportunity appears. Few investors are willing to commit fully when they believe they are right, and many dare not buy when an investment is illiquid, controversial, or has a tarnished reputation. Buffett does not worry about being fired; his position is unassailable.

Buffett shares many traits with outstanding investors: focus, discipline, purpose, hard work, strong numerical and logical sense, and a passion for gathering broad information through extensive reading and a trusted circle of friends. Howard Marks affirms that Buffett invests because he enjoys solving the complex intellectual problems involved, with fame and money being byproducts of the process. Each of these qualities shines individually, but very few investors combine them all. How these qualities have led to Buffett's extraordinary success is elaborated in greater detail in 'The Buffett Way.'