The Four Filters Invention Of Warren Buffett And Charlie Munger - Book Excerpt

This is an excerpt from Bud Labitan's book, The Four Filters Invention of Warren Buffett and Charlie Munger, 2nd edition. (Lulu.com, 2014; 206 pp., paperback)

INTRODUCTION

How do we improve and optimize our investing decision making? This was the goal of the first edition of this book. Now, about 5 years later, this journey continues with more insights and examples.  We can use the Four Filters Invention of Warren E. Buffett and Charles T. Munger. Their four filters investing process helps us eliminate many inferior investing prospects. This filtering process helps us find highquality winning investments. Their steps include evaluating a business’ economics, its competitive position, its managers, and its intrinsic value. It provides us a tested and effective toolset.  How and why are these filters effective? Warren Buffett said it best:  “An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style. He or she can earn them only by carefully evaluating facts and continuously exercising discipline.” These four filters focus on the business facts about the Products, Customers, Management, and the Financial Safety given by a bargain purchase.

The Four Filters are a search for: “Understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.” In my view, Warren Buffett and Charlie Munger invented an investing formula that is underappreciated by the business and academic communities. It is an amazing intellectual achievement in both practical and Behavioral Finance. The filters are an important set of steps used by the world’s greatest investors for finding high quality investments.

As a useful guide for assessing intrinsic value and sensible price, the filters function as an effective time-tested focusing process for investing success. They help us frame our investing decision making process correctly, and help us prevent foolish and costly losses. Using this process, you and I will become better investors. We improve the way we think about businesses. This innovation uses qualitative factors as well as quantitative factors to help us find and insure a good stock or whole business for investment. It raises the odds of investing success.

The first edition received some criticism from casual readers stating that it restated many of the writings and talks of Buffett and Munger. 

Yes, it did. I tried to tell the story from their perspective. So the use of many quotations was necessary, and they were approved for use. These critical readers did not realize that I was trying to design a book as if Warren or Charlie had written it themselves. Perhaps I did not explain that clearly enough. For example, if I insert a passage like this next one by Charlie Munger, it illustrates his frame of mind:

“The way to win is to work, work, work, work and hope to have a few insights…. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.”

This book is about the intellectual collaboration and experiences of two good friends who smartly changed the world of investing and invented a thoughtful and effective process. They made a lot of money for themselves and their shareholders. There is another treasure hidden in these words: how to improve and optimize our decision making process.

This is also a story about exercising self-discipline. Look to the future and think clearly for yourself. Be open to new ideas from wise people.  Study the past, and learn from it. As Ben Graham said in the introduction of his book, The Intelligent Investor: “No statement is more true and better applicable to Wall Street than the famous warning of Santayana: 'Those who do not remember the past are condemned to repeat it'.” 

History is important to Charlie Munger as well. He said this:

“Business schools fail by teaching what is easy to teach but less useful. Going back to teaching business history as Harvard used to would be good; there’s a lot to be learned from the rise and fall of GM, or the rise and fall and rise of railroads.”

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