As a happy owner of stock in Berkshire Hathaway, I enjoyed reading your articles on Warren Buffett ["How to Make Money the Buffett Way," August 6].
But you missed the core of his methods. Buffett notes in an annual report that the secret is to use other people's money without borrowing it. The core business of Berkshire is profitable insurance, and from this he derives the float that is the use of premiums now that are taken in to pay for losses later. The second secret is to pay the minimum possible in taxes. Since Berkshire pays no dividend, there is no capital-gains tax unless one sells the stock. This is different from a mutual fund that holds a comparable array of assets and has to pass on each year to the fund holders taxable dividends and capital gains.
You quoted Buffett about index funds: "Diversification is a protection against ignorance. It makes very little sense if you know what you're doing." In The Little Book of Common-Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by Vanguard founder John C. Bogle, Buffett is quoted as saying, "A low-cost index fund is the most sensible equity investment for the great majority of investors." Since very few actively managed mutual funds will outperform the market, and Buffett's unparalleled career is drawing down, I will take his advice and consistently utilize an indexing approach.
In addition to The New Buffettology, I recommend The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market by Pat Dorsey, director of stock analysis at Morningstar ["Bringing Buffett to the Beach"]. Chapter 10 walks the reader thoroughly through the process of intrinsic value calculation.
Charles A. Weston