Why Warren Buffett’s early advice is still essential reading

The Oracle of Omaha was ahead of his time in understanding that we teach the wrong kind of capitalism

This is a tough gig of a column. The truth is that there really aren’t very many good books on investing out there. Most money books are written by men. (I have six 8ft-long shelves in my office stacked with investing and economics books, and less than 20 are by women.) Most of these men are fund managers or ex-fund managers who outperformed the market during the careers they were lucky enough to fall into during one of the greatest equity bull markets in history. Nearly all completely fail to recognise the role of luck in their success. Even those who do tend to offer more or less the same advice to the ordinary investor anyway (as if it was exactly what they had done). You are, they say, to invest in good companies at a good price. Some 250 odd pages about what constitutes a good company and what constitutes a good price invariably follow. It’s dull stuff.

Thank heavens then for Warren Buffett, the world’s best known (and richest) money manager. I’ve gone off him over the past decade: his investment vehicle, Berkshire Hathaway, is now too big for him to stick to the investment rules he preaches to the rest of us and, to the irritation of his army of followers, its recent performance has reflected that. But go back to his earlier essays — I’m reading The Essays of Warren Buffett: Lessons for Corporate America (1997) — and you’ll find pretty much all you need to know about investing in roughly 200 well-written (sometimes even amusing) pages.

There are good bits on accounts, on value investing and on the importance of transaction costs (‘the bane of trading’). But today’s investor would be just as wise to look at the bits on corporate governance. Buffett was a decade ahead of his time in understanding that we teach the wrong kind of capitalism in modern business schools. He gets that management should not be horribly overpaid in stock options (wrong incentives); that managers should see themselves as stewards of shareholder capital rather than owners of shareholder capital (too many CEOs forget that they do not actually own the company); and that boards and directors should be chosen not because they are socially or economically prominent (this happens all too often), but because they are both ethical and competent. Business is under huge scrutiny in the UK today: anyone investing in individual companies should be looking for those with management teams that would meet with Buffett’s approval. His essays will help you find one.

If this is too dull for you to slog your way through (it isn’t exactly a one-sitting read), I strongly suggest handing your money over to a low-cost fund manager and getting your financial lessons from fiction instead. If you haven’t read Bonfire of the Vanities, you must. The lesson? Spend as much as you earn and in the end you might as well have earned nothing. Bond trader Sherman McCoy’s Park Avenue home and stunningly extravagant wife haemorrhage so much cash that his net income ends up below zero. That’s not a good thing when your life takes a wrong turn (getting out of a nasty mix of car crime, racial tension and social abandonment is easier if you aren’t broke). The same lesson comes up again and again in Dickens — in David Copperfield and Little Dorrit we are introduced to the horrors of the debtor prison and how to avoid it (‘Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery’). In Bleak House we are told of the nightmares that compound interest can bring; in Nicholas Nickleby of the horrors of speculation; and in Great Expectations that money doesn’t automatically bring happiness. All are worth re-reading.

Finally, if you have made your money already and amuse yourself with happy daydreams about the avalanche of wealth that will cascade down the family generations you must read Thomas Mann’s Buddenbrooks. It’s a generally miserable saga of financial and moral decline over four generations: the time it takes a rich and happyish family of business people to end up bitter and destitute. I bet Buffett’s read it.


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