The Warren Buffett Way Workbook

By Robert G. Hagstrom and Russell Rhoads

The Warren Buffett Way Workbook consists of over 500 questions and answers to help readers of The Warren Buffett Way reinforce and cement their knowledge of Buffett’s hugely successful investment approach. The Workbook follows The Warren Buffett Way, 3e, providing a combination of multiple choice and essay questions for each chapter in the core book. Given the depth and range of questions, a reader who masters the material in the Workbook will be equipped with the knowledge to begin to apply Buffett’s methods to his/her own investment portfolio. All answers are provided in the Workbook, including answers to the essay questions. The perfect accompaniment to The Warren Buffett Way, 3e and The Warren Buffett Way Video Course, the Workbook will provide readers with a sure path to begin investing just like Warren Buffett.

• Language: English
• Publisher: Wiley
• Release date: Sep 13, 2013
• ISBN: 9781118794166

Book preview

Preface

Despite the financial markets going through several bear markets and other changes, one constant over the past few decades has been the presence of Warren Buffett in the financial markets. His staying power can be attributed to the unchanging methods he has used to select investments for Berkshire Hathaway. The third edition of The Warren Buffett Way dives into the evolution and education of Warren Buffett that led to the methodology he uses to choose investments. In addition, the selection criteria that have been fairly constant over time are spelled out in the form of specific tenets that Buffett follows when buying a business or the shares of a public company. Several examples of investments made by Buffett are reviewed, and the psychology of how he goes about approaching the financial markets is spelled out.

Warren Buffett’s methods have been mostly unchanged over time, but they are also unorthodox relative to many in the investment field. Despite the unarguable success of Buffett’s rational methods, the majority of individual and professional investors continue to approach the financial markets in an irrational manner. Following Warren Buffett’s methods allows one to be the rational player in the financial markets where the rest of the participants are acting irrationally.

This workbook is offered as a tool to ensure that readers fully comprehend the evolution of Warren Buffett as an investor, the methods he uses to select investments, and the psychology behind being this type of portfolio manager.

This workbook is divided into two sections. The first section contains a set of multiple-choice and essay questions for each of the eight chapters of the third edition of The Warren Buffett Way. The second section contains answers and explanations for the answers. Our suggestion is for a reader to use this workbook as a self-assessment after completing each chapter. Some chapters do build on knowledge from previous chapters. Since the book progresses in that manner, using the workbook in conjunction with reading The Warren Buffett Way is strongly encouraged.

PART I

QUESTIONS

Chapter 1

A Five-Sigma Event

THE WORLD’S GREATEST INVESTOR

Multiple-Choice Questions

1. Which of the following factors contribute(s) to the growth of Berkshire Hathaway?

I. Earnings generated by wholly owned businesses

II. Fees earned from investment consulting business

III. Price appreciation of stock portfolio

A. I only

B. I and II

C. I and III

D. I, II, and III

2. Which of the following questions would an investor or purchaser of a business need to ask before investing in a company?

I. How much capital reinvestment is required to keep a company running?

II. What is the debt obligation of the company?

III. What is the track record of management?

IV. What sort of vision does management have for the future?

A. I and II only

B. II and III only

C. I, II, and IV only

D. I, II, III, and IV

3. Which of the following statements correspond(s) with Warren Buffett’s investment philosophy?

I. There should be no difference between the approach a business owner takes and the approach a purchaser of shares takes when considering an investment.

II. Special consideration should be given to a company’s competitors before investing in or buying the company.

III. When considering purchasing common stock in a company, an opinion regarding the overall stock market should come into play.

A. I only

B. I and II

C. II and III

D. I, II, and III

4. Which of the following is/are a characteristic of an investor in a company’s stock that differentiates the investor from an owner of a business?

I. Investors consider whether the stock market is in a bullish or a bearish phase.

II. An investor seeks to make money through investment in a company.

III. Investors are familiar with the financials of the company whose stock they are considering purchasing.

A. I only

B. II only

C. I and II

D. I and III

5. Which of the following terms does not apply to Warren Buffett’s approach to purchasing common shares of a public company?

A. Businesslike

B. Speculative

C. Analytical

D. Competitive analysis

6. What statement sums up the reason Warren Buffett chose to transfer from the University of Pennsylvania to the University of Nebraska?

A. He had a desire to work while taking classes.

B. He felt he should attend a university near where he would eventually settle in life.

C. The curriculum at the University of Pennsylvania was too theoretical for his taste.

D. He wanted to graduate from college quickly so he could begin his career.

7. What core concept was put forth by Graham and Dodd’s Security Analysis that appealed to Warren Buffett?

A. Relative value

B. Cash flow generation

C. Competitive advantage

D. Intrinsic value

8. In the first investment partnership established by Warren Buffett, common stocks were purchased based on intrinsic value. What other strategy was implemented in this fund?

A. Listed option overwriting

B. Cash-secured put writing

C. High-yield bonds

D. Merger arbitrage

9. Which stock did Warren Buffett end up purchasing as a result of the salad oil scandal?

A. Allied Crude Vegetable Oil Company

B. Kraft Foods

C. American Express

D. Bank Leumi

10. What was the primary business of Berkshire Hathaway before the company was purchased by Warren Buffett?

A. Auto dealerships

B. Textile manufacturing

C. Life insurance

D. Stock brokerage firm

11. Which of the following statements define the stock market in 1969 and contributed to Warren Buffett choosing to shut down his original investment partnership?

I. The stock market appeared to be very speculative.

II. He was satisfied with the returns he had achieved.

III. Investments that met the value criteria had become scarce.

A. I and II

B. I and III

C. II and III

D. I, II, and III

12. How could the success of the Bill Ruane’s Sequoia Fund trace its roots to Warren Buffett?

I. Upon closing his partnership, Buffett referred clients to Bill Ruane.

II. Bill Ruane and Warren Buffett were both students of Ben Graham.

III. Bill Ruane had been Warren Buffett’s partner in the original fund.

A. I only

B. II only

C. I and II

D. I and III

13. What was the lesson Warren Buffett learned from his experience with the Berkshire Hathaway textile company?

A. Corporate turnarounds seldom are successful.

B. Commodity-oriented businesses can be profitable if the price is right.

C. When labor and management share common goals, a business can be successful.

D. Diversification is the key to investment success.

14. What aspect(s) of the insurance business was/were very attractive to Warren Buffett?

I. The competitive advantage of owning a quality insurer

II. The ability to use an insurance company as an investment vehicle

III. The tax benefits of owning an insurance company

A. I and II

B. II and III

C. I and III

D. II only

15. Which of the following may be considered a competitive advantage for an insurance company relative to its direct competitors?

I. Patents

II. Location

III. Personnel

A. I and II

B. II and III

C. II only

D. III only

16. With respect to the efficient market theory, which of the following would be used by academics to explain the success of Warren Buffett?

A. Buffett’s success is proof that with hard work and discipline the markets can be beat.

B. It is a statistical anomaly or five-sigma event.

C. With a disciplined approach, anyone may beat the markets.

D. There is no valid explanation for his success.

Essay Questions

1. Describe the circumstances surrounding Warren Buffett’s disposition of his fortune and how it reflected his approach to investing.

2. Expand on Warren Buffett stating that he won the ovarian lottery.

3. As a child, Warren Buffett displayed a certain propensity that would serve him well in the investing world. What was this propensity, and what are some examples of this through his childhood behavior?

4. What macroeconomic event helped shape Warren Buffett, and specifically how was he impacted?

5. Describe Warren Buffett’s first experience with purchasing a stock and the lessons he learned.

6. Warren Buffett’s family moved to Washington, D.C., when he was 12 years old. What lessons did he learn during his time in Washington?

7. How did Warren Buffett’s time at Columbia University shape his career as an investor?

8. Discuss the scandal created by Allied Crude Vegetable Oil Company and the investment opportunity that Warren Buffett took advantage of as a result of the scandal.

9. Discuss the purchase of Berkshire Hathaway by Warren Buffett and the subsequent lesson learned by Buffett through this experience.

10. What is the attraction of investing in insurance companies for Warren Buffett?

11. Describe how Berkshire Hathaway is reflective of Warren Buffett’s personality.

12. Describe the meaning of Warren Buffett’s success being a five-sigma event.

Chapter 2

The Education of Warren Buffett

Multiple-Choice Questions

1. Which of the following are considered Benjamin Graham’s most celebrated works?

I. Security Analysis

II. Investment Valuation

III. The Intelligent Investor

A. I and II

B. I and III

C. II and III

D. I, II, and III

2. The first edition of Security Analysis dedicated significant attention to what issue?

A. Overvaluation in the markets

B. Short-term trading abuses

C. Corporate abuses

D. Stockholder voting rights

3. What sentence sums up the essence of Security Analysis?

A. A well-chosen diversified portfolio of common stocks, based on reasonable prices, can be a sound investment.

B. Purchasing stocks as if an investor is going to become an owner of a company is a key to investing success.

C. Investors should focus on cash flow and dividend growth when considering purchasing a stock.

D. Patience in investing until stocks appear undervalued will result in superior investment returns.

4. According to Benjamin Graham, which of the following is the definition of an investment?

A. An investment is based on the intent to make a profit.

B. Borrowing money to leverage business operations and returns is an investment.

C. Investing is centered on diversification of a portfolio.

D. An investment operation is one that, upon thorough analysis, promises safety of principal and a satisfactory return.

5. According to Benjamin Graham, investment analysis is a process of which of the following steps?

A. Analytical, subjective, and resourceful

B. Descriptive, critical, and selective

C. Focused, analytical, and selective

D. Detailed, subjective, and critical

6. What circumstance may have aided in the acceptance of Graham’s definition of investing?

A. The market crash of 1929

B. The Securities Act of 1933 and Securities Exchange Act of 1934

C. A dramatic drop in bond prices from 1929 to 1932

D. None of the above

7. After delineating the difference between investment and speculation, which of the following may be considered a second major contribution by Benjamin Graham?

A. Highlighting the diversification benefits of index investing

B. Developing a methodology where common stocks qualify as investments

C. The development of the dividend discount model

D. Developing a method of technical analysis for stock selection

8. According the Benjamin Graham, which of the following market forces contributed to the stock market crash of 1929?

I. Stock price manipulation by exchanges and brokerage firms

II. The practice of lending money for stock purchases

III. Uncontrollable optimism

A. I

B. II

C. I and II

D. I, II, and III

9. Which of the following approaches to common stock investing as described by Benjamin Graham would be equivalent to what today is referred to as index investing?

A. The cross-section approach

B. The margin of safety approach

C. The anticipation approach

D. The valuation approach

10. Which of the following approaches to common stock investing as described by Benjamin Graham would be equivalent to what today is referred to as investing in growth stocks?

A. The cross-section approach

B. The margin of safety approach

C. The anticipation approach

D. The valuation approach

11. Which of the following would be an accurate description of the margin of safety approach to purchasing stocks?

I. Purchase shares of a company when the overall market is trading at low prices.

II. Purchase stock in a company when it trades below its intrinsic value regardless of where the overall market is trading.

III. Purchase shares of stock when there are strong growth prospects on the horizon.

A. I

B. II

C. III

D. I and II

12. Which of the following stock purchasing techniques did Benjamin Graham consider the best method?

A. Identifying companies that are about to undergo a strong period of sales and earnings growth

B. Patiently waiting for a market pullback to purchase shares in quality companies

C. Purchasing shares that are trading below their intrinsic value regardless of market conditions

D. Combining A, B, and C into a methodology

13. Benjamin Graham believed the concept of margin of safety may be applied to which of the following?

I. Common stocks

II. Bonds

III. Preferred stocks

A. I and III

B. I only

C. II and III

D. I, II, and III

14. What did Graham believe is the most important factor to determine a company’s value?

A. Strength of a company’s balance sheet

B. Future earnings power

C. Quality of management

D. A combination of A, B, and C

15. Which of the following is/are true regarding a company’s intrinsic value?

I. It may be definitively determined.

II. It is distinct from the market’s quotation price.

III. It is equal to a company’s book value.

A. I

B. II

C. III

D. I and III

16. Which of the following did Benjamin Graham consider an important qualitative factor that should go into determining a company’s intrinsic value?

I. Management capability

II. Economic cycle

III. Nature of a company’s business

A. I

B. II

C. III

D. I and III

17. Since waiting for a market correction before making new investments may be a bit unreasonable, Graham set out a second approach to buying stocks that was based on:

I. Stocks that had traded down from higher prices.

II. Stocks that had a low price-to-earnings ratio.

III. Stocks that were trading below book value.

A. I and II

B. II and III

C. I and III

D.

Reviews for The Warren Buffett Way Workbook

[pratalife · Rating: 2 out of 5 stars]

I actually listened to the version narrated by Stefan Rudnicki - one of my favourite 'voice actors' - and he did a good job of bringing some life to the pages and making this somewhat tolerable.

While the book does present and illustrate the Buffet investing characteristics with enough biographical information to flesh out the story in an interesting way, in the end the book's repetitiveness got to me.

Buffet's philosophy is renowned for it's simple common sense. A great strength for investment theory, but a poison pill for someone writing on the topic. I couldn't help thinking the author really struggled to pad the material out to the requisite number of pages.

[06nwingert · Rating: 4 out of 5 stars]

The Warren Buffet Way is a comprehensive look at the investment strategies of Warren Buffet, the richest man in the world. The book was written with enough economic jargon that satiates the business-savy, but wasn't too complex for laymen. While I don't expect to become a billionaire like Buffet, I was able to gleam enough information from the book to assist me in whatever investments I make, and allowed me to glance into the mind of the world's richest man.

[waldocreed_1 · Rating: 4 out of 5 stars]

This seemed to be a great book on fundamentals of investing. However, a lot of it was over my head due to my lack of financial literacy (The WSJ Guide to Understanding Money and Investing helped that a lot). What I gained from it the most was a new perspective on life: whatever we are spending our time, money, and effort on is an investment. Analyze whether it has any real value.

[gq2000 · Rating: 4 out of 5 stars]

A good book to understand how investing should be, but those principles are hard to apply in practice, evident by the fact that there are millions of Buffett fans but only one Buffett.