The proper temperamental set
It is useful to reflect on the extent to which Buffett actually followed the precepts laid down by Graham. Terms like ‘value investing’ and ‘value stocks’ do not help our understanding. These terms have been twisted and distorted by the investment industry.
Let’s start by looking at an early purchase made by Buffett and reflect on its hallmarks.
A company on the verge of bankruptcy
The purchase by Buffett of GEICO is a good case in point. The strategy used by Buffett was to buy “a magnificent business going through a time of trouble.”
Roger Lowenstein describes in detail Buffett’s purchase of GEICO. (Lowenstein, Buffett, The Making of an American Capitalist.1995,2008) p.194. Buffett saw that in spite of its problems, GEICO had an underlying cost advantage that remained intact. As Lowenstein describes it, “Buffett’s genius was to see this even when GEICO was in total chaos and on the verge of bankruptcy.” (Lowenstein, 1995,2008) p197.
GEICO proved over time to be one of the core and most successful holdings of Berkshire Hathaway. This is not a stock that would have shown itself to be statistically cheap, but it did show intrinsic value to Buffett.
“After [Ben] Graham’s death, commentators often remarked on Buffett’s departure from Graham’s methodology. Quite obviously, Buffett evolved. He was influenced by Charlie Munger and by the writer-investor Philip Fisher, each of whom stressed good, well-managed companies as distinct from statistically cheap ones. And he was influenced by his own experience.” (Emphasis added)
Buffett analyzed companies more subjectively than Graham, and he found intrinsic value in companies, such as See’s Candies, that Graham would not have touched.
Buffett in a nutshell
Buffett puts it this way: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” (Lawrence A. Cunningham, The Essays of Warren Buffett: Lessons for Corporate America, 1998) p93 cited as (Buffett, 1998) (emphasis added)
In a word, Buffett insisted on what he called seven footers (to use his basketball metaphor)
But still faithful
But these deviations tend to obscure a larger fidelity. The very idea that a stock had an ‘intrinsic’ worth, independent of the tape, Buffett got from Ben Graham. Indeed, it is nearly impossible to imagine Buffett’s quitting the partnership at the height of the Go-Go years, or jumping back in during the 1974 market depression, had he not read Graham’s liberating parable of Mr. Market.
Buffett’s eulogy for Graham, written for the Financial Analysts Journal, emphasized the endurance of Graham’s approach:
Buffett wrote: ‘In an area where much looks foolish within weeks or months after publication, Ben’s principles have remained sound – their value often enhanced and better understood in the wake of financial storms that demolish flimsier intellectual structures.’
Some years later, Buffett admitted that the stocks he was buying were entirely different from those that Graham would buy. What he had retained from Graham was ‘the proper temperamental set’ – that is, the principle of buying value, the conservatism embedded in Graham’s margin of safety principle, and the attitude of detachment from the daily market gyrations.” (Lowenstein, 1995,2008)p.201.
Let me repeat
At risk of oversimplifying:
Graham – statistically cheap
Buffett – seven footers
Buffett retained three key things from Graham:
- the proper temperamental set
- Graham’s margin of safety principle
- detachment from the daily market gyrations
We can learn a lot from Graham, Buffett and Fisher. I haven’t discussed Fisher in this post. He is important. Perhaps another time. His investment style is described in the Motherlode. The link is below.
For readers wishing to learn more about different styles of investing and the investing process of some of the great investors take a look at the Motherlode Chapter 25. Investment styles
After an introduction, that chapter contains the following sections:
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