APPRECIATING GOOD VALUE
Well, I must say my original post was very intoxicating, though perhaps I drank too deeply of Nietzsche’s heady insights.. I have just made my way, therefore, through a revised edition of Benjamin Graham’s ‘Intelligent Investor: A Book of Practical Counsel’ with an updated commentary by Jason Zweig and Preface and Appendix by the Sage of Omaha, Warren Buffet. To be frank, I was most interested in Buffet’s analysis of Graham’s investment ‘philosophy’of value investment, though I’m sure Graham and Buffet would see the matter more prosaically. The whole text, nevertheless, is still a great read and Zweig’s commentary is contemporary.
As such, I’m on a new search for value. (At least, I am critically revisiting the Value Investment perspective).
TWO PARTNERS
Opening onto the value investment scene, Warren Buffet and Ben Graham know ‘very well two partners’ – Graham himself and partner Jerome Newman - who made a killing off investment in the insurer, GEICO. With $11,413 shares invested in the General Employees Insurance Company through Graham-Newman growing to $1.66M by 1972 (p 533), Buffet himself later made one of his most significant investments in the concern.
The point being, Buffet asserts in his appendix speech at UCLA, Value Investment has worked, and continues to work.. Charlie Munger, Walter Schloss and Bill Ruane, though Wall Street tyros, as long-time value investors did pretty well too. The returns are all available in another appendix and taken from Buffet’s presentation.
MOVING TO GRAHAM-AND -DODDSVILLE
Named after its most celebrated (and among its wealthiest) inhabitants, Buffet then traces the value investment approach to Graham’s lectures at Columbia Business School
Life in these parts is founded on the ‘margin-of-safety’ principle. In this way, Graham outlines his definition: an ‘investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return’ (p 35). In Chapter Five of ‘II’, Graham and Dodd advise an heuristic, general rule-of-thumb encompassing a 50-50 split between stocks and bonds, adjusted for a 25% bias toward common stock in a bear market and vice-versa. Graham and Dodd insist on high-quality corporate/municipal bonds and high quality, mid cap stock.
REAPPRAISING VALUE
Throughout the original text and associated commentary, the Investor as opposed to the Speculator is admonished to avoid being burned. Discarding the high-volume trading and dot-com frenzy surrounding the Qualcomms and Worldcoms of the investor’s world, Graham et al instruct the real investor not to pay a dollar more than is justified and personally justifiable. (Aim for the IBMs).
Buffet has no truck for high-frequency/volume or day-trading or ‘growth’ speculative bets, and casts doubt on the very foundations of the CapM Markowitz modern portfolio with its Beta. Cultivate a no-nonsense mental attitude free of enthusiasm and emotion. Manage your downside. Avoid start-ups, IPO’s and even AAA credit companies, and instead invest in the business of business-like, intelligent stock investment. Revel in bargains, but track each companies earnings and debt service capacity to build in that buffer..
A VALUABLE OUTLOOK
In the final analysis, Nietzsche’s ‘transvaluation of all value’ may well be replaced in the Value Investor’s Universe by the Search for Value.. In the end, however, both ‘philosopher’s avoid the ‘Herd’.
If you can make your way through this revised Graham-and-Doddsville classic, then you will surely acknowledge Buffet’s observation that, ‘In an area where much looks foolish within weeks or months of publication, Ben’s principles have remained sound – their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures’.
You will see, in line with ‘II’s opening quote,
‘Through chances various, through all vicissitudes, we make our way’….
Aeneid
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