Most Helpful Customer Reviews
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12 of 16 people found the following review helpful:
5.0 out of 5 stars
4 Filters to Wealth, September 7, 2008
This book focuses on the four filters Warren Buffett and Charlie Munger use when selecting a stock to purchase, namely:
1). Know the business
2). Durable competitive advantage
3). Able and trustworthy management
4). Margin of safety
And then it expands upon them.
The book quotes Buffett extensively and we read as Buffett rewords each of these filters in various speeches. This rewording was interesting to me because it helps better define what each of these four filters mean.
Mr. Labitan also twists these filters into new and interesting ways to think about them.
Most business book writers do not have a formal business education. However, I could recognize that Mr. Labitan did have a formal business education with his references to SWOT Analysis, Barriers to Entry, and his formulas in the book. In addition, we also learn about a 4-step SOAP process that is taught to medical doctors.
The book also discusses several things about Charlie Munger's Latticework, including several ways to identify a durable competitive advantage
Mr. Labitan suggests that we should read the annual reports of not only the companies we are interested in, but also those of their competitors.
The book also contains checklists of several other famous investors, including Phil Caret and Phil Fisher.
Whenever I read a book, I add some plastic flags to the edge of the paper whenever I read an important item that I would like to refer back again at a later date. Bud's book had a lot of flags.
Overall, I really enjoyed the book because it focuses on a very similar and successful way I go about selecting stocks for purchase. Reading Bud Labitan's book is like sharpening the saw - all the pertinent ideas about investment methods are relearned. He knows what he is doing.
Mr. Labitan also reviews Kraft (KFT) and provides us with his Intrinsic Value estimate.
I recommend buying this book and the audio CD. You can purchase the book at:
http://www.amazon.com/gp/product/0615241298
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1 of 1 people found the following review helpful:
3.0 out of 5 stars
Four Filters: Method for Inclusion or Exclusion?, May 30, 2009
What follows initially appeared in a monthly newsletter in November 2008 at www.rudolphfinancialconsulting.com. The author has asked me to post it here.
Behavioral finance and its role in investment policy is a fascinating topic, primarily because it is still so early in its evolution. The committee that awards the Nobel Prize advanced its cause a few years ago when it awarded its prestigious prize to Kahneman and Tversky, providing much needed exposure to ideas that had not reached many in the investment community. Bud Labitan has attempted to take a step forward by combining behavioral finance with the investment style of Warren Buffett and Charlie Munger, who have a strong track record of returns while running Berkshire Hathaway. His book is called The Four Filters Invention of Warren Buffett and Charlie Munger: Two Friends Transformed Behavioral Finance. While it is not a groundbreaking book as it relies too much on previously published material, the book makes you think. Behavioral finance has spent 2 decades telling us why we don't make good decisions and aren't good investors. Labitan tells us that behavioral finance can move beyond this to help develop investment strategies, and uses value investing as practiced by Warren Buffett as his example.
When writing to shareholders in his famous annual letters, Buffett has often described his investment philosophy in simple terms. Labitan has taken one of these descriptions and calls it the Four Filters Invention. An investment must 1) be understandable, 2) have competitive advantages into the future, 3) be managed by competent and honest people, and 4) be available at a reasonable price. It sounds pretty simple, but it's not.
Is this a methodology that can provide excess returns for investors, or does it rely on Buffett's skills? It is proactive, but perhaps not in the way that Labitan expects. It proactively filters out companies that don't meet the criteria rather than filtering in those that do. Buffett and Munger start with all companies. Then they draw a circle of competence around their knowledge. Which companies and industries do they understand? Eliminate those where you can't picture their industry into the future. This is step one. Step 2 extends this to say you need to recognize if a company has a competitive advantage into the future, often referred to by Buffett as a moat. This eliminates even more companies. For the personal investor step 3 is the toughest, as most never actually meet or are exposed to management. You have to rely on articles and impressions, but can often get a good feel for the CEO's style by reading their annual report. Make sure to find out how their incentive compensation works. And don't forget Mr. Market. He knocks on the door every day, sometimes offering more and sometimes less than the intrinsic value you have calculated in advance. Insist on a large margin of safety. It is a combination of these 4 characteristics that provide candidates for a portfolio. Few can afford to say it doesn't matter what they already own and the marginal impact on a portfolio. This often ultimately determines what company and stock is purchased.
With a famous biography of Warren Buffett recently published, it is likely that efforts to define and explain his investment style mathematically will "Snowball". Labitan has beaten the crowd, but the best part of the book is the title. It does not stand up to the Robert Hagstrom books or Poor Charlie's Almanack.
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1 of 1 people found the following review helpful:
4.0 out of 5 stars
From George at www.valueinvestingnews.com, May 24, 2009
From George at www.valueinvestingnews.com
I just want to briefly share with you my review of The Four Filters: Invention of Warren Buffett & Charlie Munger. I enjoyed reading the final version of Dr. Labitan's book. I was lucky enough to get a chance to read part of an earlier draft of his book back in March, 2008. I found it interesting to see how much further developed and more readable the final version of the book has become.
The Four Filters is ideal for readers with some basic familiarity with investing and Warren Buffett. Hardcore followers of Warren Buffett might find this book a bit basic, but many will find its focus on Buffett's core investment approach to be valuable. Labitan does a great job weaving in Buffett and Munger quotes while explaining the fundamental behavioral process that these two undertake when evaluating investment opportunities.
What are these four filters? The book lists the filters for businesses as: 1) understanding, 2) sustainable competitive advantage, 3) able and trustworthy managers, and 4) bargain price. Labitan carefully tracks the evolution of this "invention" by carefully quoting Buffett's past mentions of these criteria. The language Buffett uses has changed slightly over time, but as The Four Filters notes, the concept has remained relatively unchanged as far back as the earliest reference in the 1977 Berkshire Chairman's Letter to Shareholders. The Four Filters is well organized and carefully footnoted. Each of the four filters is discussed in a separate chapter and concluding with a summary chapter.
Labitan did a fairly good job collecting examples of how each of these four filters is used. I think he succeeded best at this in the chapter on sustainable competitive advantage. I, however, finished the chapter able and trustworthy managers knowing what they are but still having little understanding on how to evaluate ahead of time whether a manager is trustworthy. Buffett hasn't really explained how he does this except by saying he meets with a managers and knows within a short time whether they are trustworth, so this may be why this chapter wasn't as instructive. I also didn't really buy into to the use of medical S.O.A.P. process as a method for evaluating management, but that might be due to my own lack of understanding regarding this process. Finally, I think Labitan made a good decision in demonstrating several techniques for valuing companies when discussing the multiple examples in the chapter on bargain price and margin of safety.
Overall, I found The Four Filters to be a good overview of the Buffett & Munger investment process. I think this book would be great for those who haven't read too many books on Buffett and Munger, but want to learn more about how they invest.
From George at www.valueinvestingnews.com
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