BUFFETT and GRAHAM – The DIFFERENCES.
There’s no doubt that the one person Buffett most admired, in terms of Investing, was his mentor, Ben Graham. After all, he was even prepared to work for him for nothing, when he graduated from Columbia, in order to gain valuable know-how and experience.
But that doesn’t mean that Buffett isn’t his own man with his own unique abilities, talents and insights.
He spent several years at Graham’s Wall Street firm, and worked alongside great Value investors, such as Walter Schloss, who schooled Warren in determining undervalued situations by having him read the financial statements of thousands of companies.
On Graham’s retirement Buffett returned to Omaha and employed his own brand of independent thinking. It was during this time that his own interrogation of companies brought the realisation that there were a few aspects of Graham’s teachings that he found troubling.
But what formed the basis of Graham’s Value Analysis ?
Back in the 30’s Graham noticed that stock pickers chased price and had little or no regard for the long term economics of businesses. Due to price frenzies, stock prices would move from one extreme to the other. It was at the insane lows that Graham saw opportunity. Graham reasoned that if he bought an oversold business below its intrinsic value, then there’d come the time that “the Market” would realise its mistake and value the stock upward. It usually did and Graham made money.
Apparently Graham wasn’t concerned about the kind of business he was buying because, in his opinion, every business had a price at which it was a bargain. He was primarily interested in whether or not a company had sufficient earning ability to get it out of the economic distress that had influenced its price downward.
He had several standards in this regard ...
1) he looked for companies that were trading at less than half of their cash holding.
2) he never bought when the P/E was greater than 10.
3) he sold if the stock’s price increased by at least 50%.
4) he ran a broadly diversified portfolio of, at times, a hundred or more companies.
5) he would sell if the price had not gone up in 2 years.
So here we have one of the first Differences between Buffett and Graham ....
Buffett saw the advantages of staying with a company that possessed a Long Term Competitive Advantage over its competitors, whereas Graham would have sold at a 50% gain, arguing that these businesses were now overpriced.
What also spurred Buffett on was the fact that he noticed that Graham’s ‘undervalued’ businesses did not always revalue upwards. Some actually went out of business. Coupled with some winners there were also losers. And some of those winners that Graham sold for a 50% profit went on to make a great deal more money over time.
Formulated out of his own independent thinking, Buffett developed his own, exclusive set of investigative tools to identify those special kinds of businesses.
Even though he had his roots in Graham’s initial Value analysis, Buffett’s own brand of analysis enabled him to determine whether the company could survive its current predicaments. It also enabled him to determine whether or not the particular company possessed that Long Term Competitive Advantage that would produce a Major Capital Gain over the Long Term.
In this regard Warren spent a lot more time and effort interrogating very relevant specifics in a company’s three financial statements, namely the Income Statement, Balance Sheet and Cash Flow Statement.
Once that was done he then put his “Equity Bond” principle to good use in determining if the Purchase was a good deal.
For those who may be interested I intend putting forward several future posts describing and summarising what that Very Unique, Very Likeable and Very Smart Investor, Warren Buffett, looks for in those Financial Statements and how he eventually determines what price to pay for a company’s stock. |
