In May 1984, Warren Buffett laid out everything you need to know about his investing philosophy.
In a speech at Columbia Business School, later adapted into an essay, Buffett introduced what he called, “The Superinvestors of Graham-and-Doddsville.”
“The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market.”
And that’s pretty much it: Buffett doesn’t think about buying a stock; he thinks about buying a business.
Following the chaos in markets seen on Monday — when the Dow fell as many as 1,000 points before snapping back to nearly unchanged — this longer-term view on valuing companies based on their business, not the price of their stock, is worth keeping in mind.
The essay’s title “Graham-and-Doddsville” comes from Benjamin Graham — who Buffett studied under at Columbia — and Dave Dodd, with whom Graham literally wrote the book on security analysis.
In Buffett’s essay, he asks readers to consider a group of investors who outperformed the S&P 500 year in and year out.
“In this group of successful investors that I want to consider,” Buffett writes, “there has been a common intellectual patriarch, Ben Graham … They have gone to different places and bought and sold different stocks and companies, yet they have a combined record that simply can’t be explained by random chance.”
Buffett explains that the investors of Graham-and-Doddsville don’t care when they buy stocks, or worry about a stock’s beta or the “covariance in returns among securities.”
Buffett argues that these investors are businessmen buying pieces of businesses, not traders buying stocks.
And the strategy seems to be working out OK: On Monday, Class A shares of Buffett’s Berkshire Hathaway were trading right around $US200,000, and $US1,000 invested with Buffett in 1984 would have been worth $US155,301.
(Over the last year, however, Berkshire stock is down about 1% against a roughly 2.5% decline for the S&P 500.)
Since 1969, the book value of Berkshire Hathaway — which Buffett acquired in 1964 — has beaten the S&P 500 44 out of 45 years on a five-year rolling basis. Said more simply, the relative value of Berkshire Hathaway shares have been worth more than the S&P 500 collectively every year but one.
Last year, we featured a chapter from Cullen Roche’s book “Pragmatic Capitalism” which debunked the myth that “you too” can be like Buffett. You can’t, of course. But Roche’s point isn’t that Buffett’s ideas about investing aren’t sound, just misunderstood.
Many think Buffett is a simple “buy and hold” stock investor, but his investing is about way more than that — or way less, depending on how you look at it.
Because on the one hand, Buffett’s recent deal to acquire aerospace components maker Precision Castparts for $US37 billion dollars earlier this month is something almost no one else on the planet can afford to do.
On the other hand, this is an unsexy purchase that amounts to buying a big, boring, profitable company at a discount — something Buffett would probably argue is easy to do for informed, curious, and diligent investors.
Buffett concludes his essay by writing that some may wonder why he is giving away this basic investment philosophy, or what to some people’s minds might be “secret.”
“I can only tell you that the secret has been out for 50 years,” Buffett writes, “…yet I have seen no trend toward value investing in the 35 years I’ve practiced it.”
Buffett adds: “There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It’s likely to stay that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”
The whole essay is embedded below.
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