Long sum-up post, but a happy announcement at the end to keep you reading. :)
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We're playing with words here. If anybody is saying there is nothing to learn from Graham to apply to 1998, stand up and speak. I don't think anybody is saying that, but it seems that is how it is being taken. The way I look at Graham is how I outlined it in the last post - some big ideas on which I ground everything I do. Whether I use one valuation technique or another, the thinking is the same. I value a company by some sound method and buy at a substantial margin of safety to that valuation.
Where I differ emphatically with many on this thread - and everybody on other threads - is the logic of valuation. The key is that a valuation technique has to have the downside in mind, i.e. be conservative. The question to ask is "what is the least this business could be worth?" That is the question Graham addressed, and in his own way, that is the question Buffett is addressing if you read between the lines. That is very different from what a lot of people who thing they are Buffett investors are doing.
Read the cover story of Barrons this weekend and you will find that the hottest analyst on Wall Street does no such thing. Morgan Stanley's internet analyst asks what is the most this stock could be worth if I am right about all of my assumptions. Graham asked the opposite - what is the least this stock could be worth if I am wrong about anything I don't know with certainty. If you think I am setting up a straw man here, read the article. They make her sound like the next generation Warren Buffett, looking at the long term of the business fundamentals.
I honestly see no contradiction between Graham and Buffett as I understand them, let along a "repudiation" of one by the other. I tell people "I am a Graham/Buffett investor, with a bit of Lynch." Of course I am not claiming their track record or their ability, only their intellectual influence. (I've got at least 30 years to go to prove the other two.) I see absolutely no contradiction between Graham and Buffett, in that I apply the two pretty fluidly. Its all about which valuation technique I decide to use on a given stock. Just like if you are measuring, you are going to use a thermometer for temperture and a scale for weight. The simple fact of both is that you are measuring. There are many techniques for valuing a company, but not all equal. The ones I try to apply consistently are the ones that, in Jimmy Roger's words, "look down before they look up". i.e. they take risk very seriously.
I have said this before, and I'm sure I will say it again. It is incredibly difficult for me to remember this wisdom when at every family Christmas gathering I run into a relative who has doubled his money on Dell or Amazon and wonders why I have a job in the investment business:
Buffett and Graham's fundamental rules of investment. There are only two.
First Rule: Don't lose money
Second Rule: Don't forget the first rule
I often refer to investments as "Graham investments" or "Buffett investments". For instance, in my way of categorizing, Penobscot was clearly Graham, and Ambac would be on the Buffett side. Just recognize that the same guy invested in both, under what he considers a pretty consistent philosophy. I do not wake up one day and say lets do Buffett and another day lets do Graham. These are simply two ways to value companies conservatively. Each technique applied correctly yields very few opportunities in today's market. But the bottom line is buying "things" - whether they be assets or franchises - for signficantly less than they are worth OBJECTIVELY.
And that "objectively" concept is what Twister was getting at with Sanborn at Oakmark. Sanborn is not somebody to take lightly. He has an excellent long term track record, and if you go to Oakmark.com, you will find he lays out exactly what he is doing every quarter. I have the utmost respect for him, and would eagerly look at anything I hear he is investing in. He uses a notion of private market valuation, which is incredibly difficult to do. Gabelli does the same thing.
Sorry for the long post, but I was away for a few days and missed a flurry of posts. Believe me, there would have been more if I had stayed home for the weekend.
Merry Christmas everybody, and I leave you with one question. Should your investment strategy change if your wife just told you she's pregnant with your first child? The joyous question I face this holiday season is how much CYM will I have to sell to buy a crib?
Jim |
