How to Think Like Benjamin Graham and Invest Like Warren Buffett [Hardcover]

Lawrence Cunningham (Author)

Book Description

Publication Date: January 16, 2001

This text provides advice on how to value a business and how to think about markets and market prices. It aims to help develop a mind-set that will be the foundation to successful investing, and looks at how the reader can analyze businesses and make wise investment choices. The author reveals three things an investor needs to get from financial statements, illustrating how managers play games with numbers, oftern to the detriment of the investor. Lawrence Cunningham argues that an essential element of intelligent investing is a common-sense ability to assess the trustworthiness of corporate managers, and gives readers the tools to find business managers who are trustworthy. The book also provides valuation examples from some top companies: GE, Amazon, Microsoft and Disney.

Editorial Reviews

From the Back Cover

A Commonsense Investing Approach that Combines 21st Century Technology with the Market-Proven Strategies of Benjamin Graham and Warren Buffett

Selected by JP Morgan as a Top 10 "Must Read"

"Earnings and cash flows are... the critical link in the investment chain, and Larry Cunningham's book forges it with heat, power, and persuasiveness."

­­John Bogle, Founder, The Vanguard Group

"A much-needed work on a unique style of investing, this book puts the ABCs of common sense valuation back into the business of investing. This is the place to look for insight and guidance in the age of volatile markets and colliding ideas."

­­Alan C. Greenberg

Chairman, Bear Stearns

"Anyone desiring to be a successful investor should read this excellent book presenting the important investing principles of Graham, Buffett, Fisher, and others in a most insightful and understandable manner."

­­David J. Gottesman

Chairman, First Manhattan

"Remarkably timely. For stock players who realize they played the greatest fool in the Internet stock game, Cunningham offers a tool for rehabilitation: a guide to thoughtful investing. For earnest investors, he shows how to live profitably with the moodiness of Mr. Market."

­­David Henry

Columnist, USA Today

"While the stock market does not always behave rationally, Larry Cunningham's well-articulated and insightful views as to value investing are a refreshing reminder that, just as night follows day, a return to the principles at the core of Cunningham's common sense approach to investing is inevitable."

­­Samuel J. Heyman

Chairman of the Board and CEO, GAF Corporation

"Lawrence Cunningham explains, then debunks, most of today's acronyms, buzz words, and pop investing concepts. He gets down to the fundamentals that investors must know about companies in order to choose reliable winners in the stock market."

­­Janet Lowe

Author, Benjamin Graham on Value Investing and Warren Buffett Speaks

"Following the herd may seem rational and intelligent­­until it stampedes straight off the cliff."

­­From Chapter 1

Lawrence Cunningham possesses one of today's clearest, most distinct voices on the inherent irrationality of investors and the stock market. Renowned for his no-nonsense style and straightforward approach, he is also renowned for telling independent investors­­better than any other market observer­­how and where to find uncommon values in virtually any market environment.

In How to Think Like Benjamin Graham and Invest Like Warren Buffett, Cunningham returns to the basics­­by returning to the two legends who established, and then refined, those basics. He shatters many of today's common investing myths, replacing them with the facts and tools needed to thoroughly analyze the investment value of any business.

This remarkable book illustrates how forces that are unique to today's market­­including electronic day trading, an overvalued IPO market, and computer-based stock exchanges­­are leading to an increasingly wide gap between price and value. It then convincingly explains how to close that gap, and find underpriced stocks poised to recover their value, by using the business analysis approaches and insights of Benjamin Graham and Warren Buffett.

In a sophisticated but readable style, How to Think Like Benjamin Graham and Invest Like Warren Buffett discusses how to understand and apply the time-proven tenets of value investing:

How to value a business­­with valuation examples from top companies including GE, Microsoft, Amazon.com, and others

How to rate business managers­­a key to finding quality long-term investments

How to know when management is playing with numbers­­and understand the games they play

Unlike any financial book you have ever read, How to Think Like Benjamin Graham and Invest Like Warren Buffett wraps a lifetime of investing wisdom into one compelling, insightful, and highly accessible package. An intelligent guide to accurately analyzing and realistically valuing investment targets, it will tell you what questions to ask, what answers to expect, and how to approach every stock as an experienced, skeptical, and commonsense business analyst.

About the Author

Lawrence A. Cunningham is author of The Essays of Warren Buffett: Lessons for Corporate America, an Amazon.com best-seller for which Buffett granted exclusive publication rights of his famous letters to the shareholders of Berkshire Hathaway. Professor Cunningham is a leading expert on corporate governance, serving as the Director of the Samuel and Ronnie Heyman Center on Corporate Governance at Cardozo Law School, where he also is a Professor of Law Previously, he was an associate with Cravath, Swaine & Moore, where he practiced corporate and securities law. A frequent lecturer, he has held appointments at The George Washington University, Fordham University, and Oxford University, among others, in addition to speaking to investor groups in London, Toronto, and throughout the United States. Professor Cunningham has been featured in various media, including Forbes, Money, CNN, The News Hour with Jim Lehrer and The Motley Fool Radio Show. He graduated magna cum laude from Cordozo.

Product Details

• Hardcover: 267 pages
• Publisher: McGraw-Hill Companies; 1st edition (January 16, 2001)
• Language: English
• ISBN-10: 0071369929
• ISBN-13: 978-0071369923
• Product Dimensions: 9.2 x 5.8 x 1 inches
• Shipping Weight: 1.7 pounds
• Average Customer Review: 3.5 out of 5 stars  See all reviews (30 customer reviews)
• Amazon Best Sellers Rank: #974,495 in Books (See Top 100 in Books)

More About the Author

Lawrence Cunningham is best known to book readers as the editor of The Essays of Warren Buffett, which he prepared after hosting a conference featuring Mr. Buffett at Cardozo Law School, New York City, in 1997. Later, Cunningham wrote three other popular books about investing, one concentrating on Buffett and his mentor, Ben Graham; one on why stock markets are not efficient (Outsmarting the Smart Money); and a short, plain spoken book, What Is Value Investing? All his books are widely and well reviewed, and the one on Buffett-Graham chosen as a book of the year by JP Morgan's 2002 "Top 10 Books for Millionaires."

Besides these popular books, Cunningham, who teaches business-related courses (like accounting, business associations and corporate finance) at George Washington University, also writes teaching and practice books in those fields, along with more sophisticated and specialized analysis that appear in academic journals. He occasionally writes op-ed pieces for popular newspapers, including The New York Times and The Financial Times. Along with a dozen friends, he contributes regularly to the blog Concurring Opinions, on the topics: "the law, the universe, and everything."

Customer Reviews

Most Helpful Customer Reviews

127 of 129 people found the following review helpful:

5.0 out of 5 stars Great Distillation and Updating of Graham and Buffett, January 30, 2001

By 

Donald Mitchell "Jesus Loves You!" (Thanks for Providing My Reviews over 109,000 Helpful Votes Globally) - See all my reviews
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This review is from: How to Think Like Benjamin Graham and Invest Like Warren Buffett (Hardcover)

Although the definitive popular book on Benjamin Graham and Warren Buffett remains to be written, this excellent work is certainly the state-of-the-art in this area. For those who do not have the time or inclination to read the writings and speeches of these important investment thinkers, you get the key kernels of wisdom in action-oriented doses here. This is the first book I have read that gives the stock investor who wants to outperform the market averages a sense of what is involved in order to have a chance. The examples of how to apply these methods to companies like General Electric, Coca-Cola, Microsoft, and internet retailers are very helpful. I thought this book was much more valuable in every way than Buffettology.

Both Graham and Buffett see buying stock as being the same as buying a whole company. The analytical methods involved are similar to those used by companies thinking about making an acquisition, except there is no need to consider what the joint operating benefits of the companies will be. The strength of this approach to stock investing is that if stock values for a company fall too low another company or group of cash-flow-oriented investors will acquire the whole company. In the long run, stocks should not fall too far below their intrinsic value (a Graham concept) as cash flow generators.

The book is organized into three sections. The first looks at whether the stock market is efficient or not. If it is, you cannot beat it. If it is not, you can beat it by investing where it is not efficient. The evidence here summarized estimates that the stock market is at least 20 percent inefficient and becoming more so. I am aware of a number of studies showing other kinds of inefficiency that Professor Cunningham does not cite. My own personal view is that the stock market is not very efficient at all, but is relatively predictable within a band of probability.

A particular strength of this section is in creating a summary of many of the arguments for stock market efficiency and inefficiency. Trust me. Unless you really love reading this kind of research (which I happen to), you will be better off reading the summaries here rather than the originals.

The second section discusses how to outperform the stock market. The best part of this section is an extremely well done parable about a man who wants to sell his apple tree. He is approached by many different types of potential purchasers, and they offer wildly varying prices. You get the interior logic of how each price is arrived at in a way that allows you to see the fundamental weaknesses and strengths of each approach. Nicely done!

The heart of this section emphasizes the familiar Graham and/or Buffett (their philosophies do not coincide, but rather partially overlap) concepts of sticking to what you know well, having a margin of safety, and doing your homework. I particularly liked the detailed description of how to determine where you have a knowledge edge that allows you to potentially have an advantage as a stock investor. The cautions against overestimating what you know are very well done.

The third section looks at the role of company management and boards of directors. It debunks a lot of the popular thinking about the importance of good governance. As Warren Buffett often emphasizes in his annual letters to shareholders, you should invest only with people you "like, trust, and admire." A CEO with a weakness (particularly a lack of integrity) can quickly tank your investment before you can do anything about it. Certainly, I have been sorry a number of times when I have not followed that rule. I certainly subscribe to it now. Every management will make mistakes. Only highly focused and capable ones will notice that they have and work on rectifying the errors rather than trying to explain why there really is no problem.

If you read this book carefully, it will convince you that outperforming the stock market is a pretty hard thing to do unless you have a great deal of knowledge about public companies and unusually good access to company managements. I think describing what needs to be done is the most eloquent argument that I have seen for why the average investor should be in indexed mutual funds for the stock portion of her or his portfolio. I suggest you already read John Bogle's Common Sense on Mutual Funds. I was pleased to see that this book raises an important question of valuation for when to commit to new purchases of indexed funds. People differ on this subject; but while the S&P 500's multiple is as high as sit is now and cash flow growth is so weak, many people may benefit from holding off or buying other indexes instead. Consider the small cap value indexes instead now, for instance.

I suspect that you can learn a lot by comparing your past stock investing with the patterns described here. Are you a great investor? Great investors have "independence of thought, . . . [and] utter and profound common sense . . . ." The challenge here is that "common sense is . . . it is so uncommon." On the other hand, "those who buy stocks outside their circle of competence are gamblers, speculators, or fools." Please wear the shoe that fits you.

The most accurate prediction of future stock market conditions is that they will fluctuate. Currently, the average stock varies by 50 percent in price each year. What method of stock investing will allow you to either ignore or best take advantage of that volatility? Be sure to consider your emotions at least as much as your intellect and available time in making this determination.

Get a great return on your time and on your investments!

85 of 90 people found the following review helpful:

1.0 out of 5 stars Making the simple appear incredibly complex and illegible, May 30, 2001

By 

Noah R. Freeman "noah_freeman" (Boston, MA USA) - See all my reviews
(REAL NAME)   

This review is from: How to Think Like Benjamin Graham and Invest Like Warren Buffett (Hardcover)

I was extremely disappointed in this book. Having read Cunningham's/Buffetts "Essays on Corporate America", Grahams "Securities Analysis" and "The Intelligient Investor," I had hoped that this book would be a strong synthesis, with some modern additions, and filling in some gaps.

Instead, Cunningham takes an author, Buffett, whose ideas are fundamentally simple, and whose writing is inherently clear, and make them sound incredibly complicated while writing in a massively unclear way.

I bought this book because Cunningham did a SUPERB job synthesizing Buffetts "essays on corporate america". What I forgot when I bought this book was that Cunningham didnt write that book, Buffett did, cunningham just edited it. A man who is a great editor turns out, (in this case) to be a miserable author.

As an example of the bizarre writing style Cunningham uses, take this paragraph (quoted exactly): "In the stock market forest, the ticks of price quotes infect the unprepared fools in the same way and with simiar results. Trader obsession with price quotations spreasd the Q [quote] fever epidemic, addking gas the the fire of Mr. Market's manic depression". Wow- talk about mixed metaphors. manic depression. Ticks. Q Fever. Gas the to the fire. And the entire book is like this, paragraph after paragraph!

Buffett's ideas are inherently simple. Managers should think like owners, modern beta thinking has major flaws, etc. These are beautifully described by Buffett in "essays on corporate america", and have no need for an interpreter to stand between the priest and public. They have even less need for an interpreter as unclear as this one.

21 of 23 people found the following review helpful:

5.0 out of 5 stars The New Classic, February 19, 2001

By 

John - See all my reviews

This review is from: How to Think Like Benjamin Graham and Invest Like Warren Buffett (Hardcover)

It's the best investment book I've read in a long while. I think it should sit on every investor's book shelf. A true classic. I have positioned it on my desk next to my copy of Security Analysis (Graham & Dodd) and The Intelligent Investor (Graham) - exactly where it deserves to be. I especially liked how Prof. Cunningham touched on Chaos Theory as well as the chapter on the Circle of Competence and the Fireside CEO chapter. Of course, Part 3 of the book was so well done it is really hard to elevate one chapter over the other. Really well done. Prof. Cunningham has done the public a great favour with this book. Lastly, the satirical look at balance sheet and earnings manipulation via the fictional dotcom company was a beautiful touch! Graham would've approved and I am sure Mr. Buffett does...