Warren Buffett’s Favorite Book - The Intelligent Investor

In 2014, Warren Buffett explained that the net nets he bought in the 1960s helped him achieve the highest returns of his career. Download the 4 rare articles written by Warren Buffett himself that cover his highest conviction picks in the 1950s in How To Choose Deep Value Stocks Like A Young Warren Buffett for FREE right now. Click Here.

What is Warren Buffett’s favorite book?

If you have spent any time in the investing world, you probably know who Warren Buffett is. He is the CEO of Berkshire Hataway and the world's best investors. With a net worth of $86 billion, he is the fourth richest man in the world. 

Given Buffett’s success, any insight into his way of thinking is a must. The best place to start is with Warren Buffett’s favourite book which is probably not really a surprise….

Warren Buffett’s Favourite Book

In the Preface to the fourth edition of his favorite book, Buffett wrote, "I read the first edition of this book early in 1950 when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is."

Warren Buffett goes on to say, that sound investment requires no more than the proper intellectual framework for decision-making, his favorite book, "precisely and clearly prescribes the proper framework."

We help provide such a framework.

The Net Net Hunter Framework

Net Net Hunter provides that proven framework as prescribed by Benjamin Graham. Net Net Hunter focuses on the highest quality net nets available which are stocks that have growing NCAV, growing earnings, no debt, tiny Market Caps, are trading at 50% of NCAV or less, and have PEs of 10x or less. We are seeking to find dollar bills for 40 cents.

While rare, they are decidedly more profitable. It is recommended that when starting out that you hold 10-20 stocks within your portfolio and only buy these higher quality net nets. This should help to avoid buying into frauds and increase your overall returns over the long run. 

Net net investing can seem scary at first glance and contrary to all of the popular investing strategies that you have heard of and that's because it is... Well initially at least. But by following Benjamin Graham rules, your returns can be significant above that of the market. A framework gets you out of the way of yourself.

“In our view, a well-designed investment framework is formalised, structured, numerically based method that serves as a decision support tool by decomposing the problem, focusing attention on the relevant factors, hiding irrelevant factors and more objectively weighing the evidence.” -- Nicolas Sordoni, Investment Frameworks: De-biased Decision Making in Equity Investing, March 2015.

Now that the sales pitch is over, let’s dive into Warren Buffett’s favourite book.

The Intelligent Investor

If you speak with any value investor and ask them the one book that they would recommend, The Intelligent Investor would lead the way and Buffett would agree. 

 “By far the best book on investing ever written.” — Warren Buffett

It has become the bible of the investing world ever since its first publication in 1949 and transformed the investment world ever since. The book contains vital lessons from Benjamin Graham for successful stock market investing that still hold true today. Graham popularized the philosophy of “value investing”—which shields investors from substantial mistakes by focusing on the downside and teaches them to develop long-term investing strategy and focus. 

But who was the legendary Benjamin Graham? 

Ben Graham was a British-born American economist, professor, and investor. He played a pivotal role in the education of Warren Buffett and is widely known as the father of value investing. He also wrote two of the founding texts in neoclassical investing: Security Analysis with David Dodd, and The Intelligent Investor.

Graham laid out a simple yet effective strategy that can be summarised as simply buying dollar bills for 40 cents. Now there is a little bit more to his strategy which can be found here, but it is no more complex than the core idea. If a business is worth a dollar and you are able to buy it for 40 cents, something good may well happen.

As you can see, Graham’s approach is similar to ours and has been the inspiration.

Key takes aways from Warren Buffett’s Favourite Book

Warren Buffett’s favourite book is full of wisdom and to summarise it to a handful of key takeaways does not do it justice. Having said that, there are several which provide investors with the mental models for successful investing.

1. Investing is most intelligent when it is most businesslike.

When you buy a stock you are buying a fractional ownership of a business and you should behave as a business owner. It is your company after all. 

As an investor or business owner, you profit from your fractional ownership of the underlying businesses are based upon the long run economic performance. It is therefore important to buy a business and not just a legal entity, especially when it comes to net nets.

"Charlie and I hope that you do not think of yourself as merely owning a piece of paper whose price wiggles around daily and that is a candidate for sale when some economic or political event makes you nervous. We hope you instead visualize yourself as a part owner of a business that you expect to stay with indefinitely, much as you might if you owned a farm or apartment house in partnership with members of your family." - Warren Buffett, Berkshire Hathaway Owner’s Manual.

2. Take your emotions out of investing - Mr Market.

Graham introduced the analogy of Mr Market to describe how the stock market behaved day to day. You are free to take an interest in what Mr. Market has to say or you can just ignore him. One day he is wildly enthusiastic quoting higher and higher prices, the next he is manically depressed offering large discounts to fair value. The volatility of the stock market is not real risk.

“ a stock becomes more risky – not less – as its price rises, and less risky – not more – as its price falls. You should welcome a bear market as it puts stocks back ‘on sale.” ― Benjamin Graham.

By having an investing framework that is repeatable, proven, and set up to avoid human biases, you are able to achieve satisfactory results over the long term. Avoid getting caught up in the hype, don’t let your emotions dictate an investment decision, and invest only when it is based upon solid fundamentals. 

3. Margin of safety, Margin of safety, Margin of safety!

The main concept of value investing is to buy equities at a discount to their intrinsic value and sell when they reach parity. Graham stated his goal was to buy a dollar’s worth of assets for 40 cents – and he managed to achieve exactly that. Net Net investing provided Graham with a significant margin of safety and within Warren Buffett’s favorite book he provided his framework.

"To invest successfully, one doesn't need a stratospheric IQ. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework" - Warren Buffett

Books That Changed Warren Buffett’s Life

In anyone’s life, there are always significant moments that help to define and form their character. This moment happened for Buffett when he read what is now his favourite book, and he has not stopped developing since. Buffett is an avid reader and spends 80% of his time reading. He has the mindset of “Going to bed a little smarter each day” which is a good philosophy to have.

At the start of his investing career, Buffett closely followed Graham and had significant success. He looked for “cigar-butt” stocks that were trading at a deep discount to their fair price due to a temporary problem. He explained this approach in his 1989 shareholder letters:

“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the ‘cigar butt’ approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the ‘bargain purchase’ will make that puff all profit.”

All of this would however change when he read a book that fundamentally altered his investment style. The book was “Common Stocks and Uncommon Profits,” it was written by Philip Fisher and it is one of Warren Buffett’s 3 favorite books and would definitely be one of Buffett’s recommendations.

Common Stocks and Uncommon Profits -- Phil Fisher

Philip Fisher helped move Buffett away from a deep value strategy to buying wonderful companies at a reasonable price and is one of Warren Buffett's top books. Fisher described his approach in a Forbes magazine article:

“There are two fundamental approaches to investment. There’s the approach Ben Graham pioneered, which is to find something intrinsically so cheap that there is little chance of it having a big decline. He’s got financial safeguards to that. It isn’t going to go down much, and sooner or later value will come into it.

Then there is my approach, which is to find something so good–if you don’t pay too much for it–that it will have very, very large growth. The advantage is that a bigger percentage of my stocks is apt to perform in a smaller period of time–although it has taken several years for some of these to even start, and you’re bound to make some mistakes at it. {But} when a stock is really unusual, it makes the bulk of its moves in a relatively short period of time.”

Fisher ran a concentrated portfolio of his best ideas and held for the long term -- in some instances 30 years. All tenets Buffett now implements with Berkshire Hataway. Warren Buffett has said repeatedly that his investment style is 85% Benjamin Graham and 15% Philip Fisher. But with the larger sums of money now at his disposal, he seems to be becoming more and more like Fisher.

The Wealth of Nations (pub. 1776) by Adam Smith

Adam Smith’s The Wealth of Nations is a chronicle into the nature and cause of a nation's wealth. One of the insights Smith provides was that a nation’s wealth is really the stream of goods and services that it creates. We would know this today as Gross National Product (GNP). Smith argued that the way to maximise GNP was to set free the nation’s productivity capacity and not restrict it. To allow this, Smith believes that government itself must be limited.

A further theme laid out within the book was that a country’s future income depends upon its ability to accumulate capital. The more the country could then invest in better productive processes and thus the more wealth created in the future -- the early formations of Buffett’s moat and competitive advantage concept and makes it into Warren Buffett’s top books. 

Security Analysis (1940 Edition) -- Benjamin Graham and David Dodd

Buffett in the forward to the sixth edition wrote about his favourite books and mentioned that he can narrow it down to four potentials. Two of those books happen to be Security Analysis, the other two have already been discussed. 

The first is the 1940 edition which he used at Columbia, with the second being an original 1934 copy with the handwritten marginal notes of David Dodd, gifted to Buffett from Dodd’s Daughter.

This book revolutionized the investment world when it was released in 1934 and provided a completely new way to approach investing. 

"The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning in 1934 with the first edition of Security Analysis." -  Seth Klarman, Preface of Security Analysis (2008).

Like Warren Buffett’s favourite book, Graham’s original book laid the foundation of Buffett’s early framework which enabled him to return a 29% (24.5% net of fees) annualized compound growth rate in his partnership days. In 1968, when Buffett practiced a net net strategy, the Buffett Partnership returned 58.8% versus just 7.7% for the Dow, an outstanding return! A $100,000 investment in 1957 would turn into $1,719,481 by 1969, no wonder there are so many millionaires in Omaha who owe thanks to Buffett!

Buffett’s Book Recommendations 

Reading books is a common habit among most, if not all of the world’s most successful people. But what would Buffett recommend reading to compound knowledge other than Annual Reports? What is on Warren Buffett’s book list, what books would Warren Buffett recommend?

1. Benjamin Graham’s Net-Nets: A practical guide to successful deep value investing in today’s markets by Evan Bleker

While to our knowledge he hasn’t mentioned this publicly, we do think that he would strongly recommend Evan’s new net net book, Benjamin Graham’s Net-Nets, if we don’t say so ourselves. The book takes you through both theory and practice, offering a rational framework for successful net net investing. Following in the footsteps of Buffett and Graham. Buffett built his wealth investing in net nets….. A must-read for any serious investor.

2. Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger edited by Peter D. Kaufman

Poor Charlie’s Almanack is a collection of speeches, talks, and interviews by Charlie Munger. It provides a holistic compilation of Mungerisums and wisdom passed down over the years of his investing career. Rather than telling you what to think, Charlie gives you a latticework of mental models to support rational decision making. This is one of many of the books that Warren Buffett recommends.

3. MiTek: A Global Success Story by Jim Healey

This is not an easy book to find. It is not available on Amazon. You can buy a copy of it on The Bookworm if you want to read it. The Bookworm is an independent bookstore based in Warren Buffett’s hometown, Omaha. The book discusses MiTek industries, a supplier of engineered products and is one of Berkshire’s most successful subsidiaries. 

“You’ll learn how my interest in the company was originally piqued by my receiving in the mail a hunk of ugly metal whose purpose I couldn’t fathom. Since we bought MiTek in 2001, it has made 33 ‘tuck-in’ acquisitions, almost all successful.” - Warren Buffett

4. Investing Between the Lines: How to Make Smarter Decisions by Decoding CEO

Communications by L. J. Rittenhouse

Warren Buffett places a lot of emphasis on the competence of management. One way of identifying this is through their communication with shareholders. Investing Between the Lines provides a guide on how to decode CEO communications. This is one of Warren Buffett's recommendations in his 2013 shareholder letter.

5. Where Are The Customers’ Yachts? Or a Good Hard Look at Wall Street by Fred Schwed

In his 2014 shareholder letter, there was another Warren Buffett recommendation to read this book by Fred Schwed. Warren Buffett said, “This is the funniest book ever written about investing. It delivers many truly important messages on the subject.” The book highlights the hypocrisy of financial advisors who ride the subway to work advising the guy who drives a Rolls Royce on how to make money…..

6. Stress Test: Reflections on Financial Crises by Tim Geithner

Written by the former U.S. Secretary of the Treasury, the book discusses the subject of managing an organization when the going is tough and gives a first hand account of how to manage through such a time. Buffett considers this a must read book. 

7. The Outsiders by William Thorndike Jr.

Within the 2012 Berkshire Hataway, shareholder letter Buffett recommended several books that he believed everyone should read and are on Warren Buffett's book list. The Outsiders was one such book. The book highlights the patterns of success. Buffett had high praise for the book, stating, “The Outsiders is an outstanding book about CEOs who excelled at capital allocation.”

8. The Rebel Allocator by Jacob Taylor

Whilst not a Buffett recommendation Charlie Munger really enjoyed Jacob Taylor’s book, The Rebel Allocator, and telephone the author to congratulate him on his work. Capital allocation is of vital importance to the success of a business and an area of focus that both Buffett and Munger require before investing. The book follows a fictional account of a young man learning from his mentor about the world of successful capital allocation.

9. A Contender for Buffett’s Favorite Book: Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks.

When being interviewed by Bill Gates, he asked Warren what his favorite book was. Following the interview, Buffett sent Bill his pick which was Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks. The book is an insightful and engaging look into corporate and financial life in America. A potential contender to the Intelligent Investor?!?

Final Thoughts

I would imagine if you were to read all of these books there is enough material to keep you busy for the next year or so at least. 

This will undoubtedly go some way in compounding investment knowledge and make you a better investor, just as it has with Buffett overtime. It would have been easy for Buffett to call it a day when he shut his partnership in 1969, he certainly had made a fortune by this point! 

But investing is a lifelong pursuit and a profitable one at that when following a proven framework such as that set out within the Intelligent Investor and here at Net Net Hunter. 

Want to learn more? Join Net Net Hunter now and find high-quality net nets to stock your portfolio and boost your long-term returns. Enter your email address in the box below right now!

Read next: Does Warren Buffett Still Live in the House He Bought in 1958?

Article Author: Phillip Richards

Article image (Creative Commons) by Farley Santos, edited by Net Net Hunter.