"I would just prefer not getting into a long discussion about whether or not buying and selling securities based on what other investors are doing falls into the category of value investing. It's too preposterous of a claim."
But, I haven't made that claim. And you know that I haven't made that claim. I explicitly stated that Birinyi is a former "Fundy" who is now a "Techie". See:
Message 7646167
As I understand it, your position is:
Graham and Dodd = Value Investing = Discounted Present Value of Future Free Cash Flow (DCF), period, end of story, now and forever.
Ergo, the implied argument has run, anything other than DCF that appears under the heading "Graham and Dodd", "Value Investing" or variants, is misrepresentation, or, in more recent versions, "preposterous", "not worth discussing", or the like.
Assuming that I am correctly characterizing your position, there are several problems with it. The most obvious of these is that carried to its illogical conclusion, this position would mean that Graham was not a Value Investor and/or that Buffett is not a resident of Graham and Doddsville.
Graham was as loathe to project earnings growth into the future as he was to employ charts and graphs to time the market. And, he had no interest in the particulars of a business or its management. Naturally, there are those who see Graham and Buffett as engaged in entirely different enterprises. But, many of us realize that Buffett's methods, however different in detail, are applications of similar thought processes and attitudes, but very different personal aptitudes, to a very different economic climate.
But, there are further, deeper problems, with the
"DCF-is-the-one-and-only-way" approach to rational investing.
At an 80th birthday celebration, Graham, only half in jest, declared that "Value Investing" is a description others gave to his work, not an attribution of his own. Indeed, he entitled his most widely read work on investing The Intelligent Investor, not The Value Investor, though he could surely have done so had he thought it advisable.
Very early on in this book, Graham notes that it contains very little about technique, but much about attitudes. If Graham thought that DCF were the one and way to intelligently invest, he would have said so. But, in fact, he never even mentioned it as a candidate. This fact alone is very telling.
>>It is a curious paradox that Graham was so much more
>>open-minded and intellectually curious than many of his
>>followers.<<
"I doubt Graham would have been very open minded about money flow analysis as it pertains to the value of anything."
The older Graham might not have, but the younger Graham might well have. I think the younger Graham had the intellectual curiosity to not dismiss out-of-hand what Birinyi is up to, given Birinyi's
track record. For example, Graham did research into the mother of all technical indicators: the Dow Theory. As it turned out, Graham found that the Dow Theory did work -- until it became widely popular. That's not the same as dismissing it out of hand.
And, this result suggests a graver problem with exclusive reliance on DCF. As this is written, computers are whirring and teams of freshly minted MBA's are pouring over the output, all of them seeking to identify discrepancies between valuations calculated by DCF and Market prices. You have the talent and resources for imitating their efforts. But, how realistic is it for the average investor, to whom Graham was writing in TII, to attempt to do so? How much in the way of excess returns is left in such methods going forward for the next 20 or 30 years? Perhaps, a lot. But, I am skeptical.
I doubt that over the past 30 years any of the contemporary imitators of Graham's exact formulas have earned the 7%+ returns that he earned over that period. Buffett also has some very shrewd imitators, like Hagstrom and Braverman. But, to my knowledge, they are not earning anything like Buffett's excess returns -- if any.
"I think Graham's followers would be best off not paying attention to that stuff at all, even if it has
some merit."
But, no one with a scientific temperament can accept that way of looking at any subject, much less the pragmatic enterprise of making money. This is the prescription of the dogmatist, not the scientist or businessman.
"I am sure Graham would have rejected it because he rejected all similar technical stuff. His number one student certainly rejects that stuff."
Graham's approach had three major characteristics: It was
rationally based, it worked, and he was comfortable with it. He
totally rejected Buffett's approach of sizing up good
managements, good businesses, and projecting earnings growth 20
years into the future. But, it works for Buffett, it's
rationally based, and he is comfortable with it. Many
commentators have emphasized the differences between the two.
But, I tend to focus on the similarities: Both were rational
pragmatists.
Graham's advice to intelligent investors was to find a methodology that was soundly and rationally based, and not too popular on Wall Street. That is a very open-minded, instead of close-minded, approach. It implicitly recognizes that there is no one way, now and forever, to earn excess returns. And it encourages innovation, rather than a rigid adherence to the methods of the past.
"Those sorts of things are timing models unrelated to business
value. They would not be effective for the investor who is
buying a business based on the present value of its
earnings power over the next 5, 10, or more years and
expects to hold it for that duration as is implied by
"investing". Money flows over the next few months are not
going to have any influence on the price of a stock I own
now in 10 years. Its EPS, ROE, and prospects at that time
will determine almost everything and ultimately the rate
of return I receive from my investment. That's what value
investing is. Buying as much future earnings and assets
now for as little as possible. Not buying the greatest
amount of money flow into a stock over the next few
months. That's called 'momentum investing'."
You just fudged over a crucial distinction by saying value investing is "buying as much future earnings and assets now". The two are not necessarily the same, at least as a practical matter, even if theory says they should be. This is precisely the dichotomy out of which it could be said Graham was not a Value Investor and Buffett is not a resident of Graham and Doddsville. But, though an intellectual case could be made for such, I think it completely counterproductive.
"I know we disagree on definition sometimes,..."
It's not just definitions. I believe we are in the "3rd Era of Value Investing", thereby requiring a third approach, differing from both Graham's 1st Era approach and Buffett's 2nd Era approach. You believe in a single approach, for all time.
"... but above all
Graham said that an investment operation should be
businesslike."
And successful businessmen are not rigidly dogmatic, at least when it comes to making money. Indeed,
they are perhaps the most pragmatic of people.
I like to think in terms of Lorenzo's Pizza
on the corner of my block. If I owned and made my living
at Lorenzo's would I care about money flows into Pizza
stocks? No chance!
I have written, but not yet uploaded, an extensive treatment of
"John's Pizza", a mythological pizza parlor across the street
from Buffett's office in Omaha. Therefore, I will not conduct a taste test between
John's Pizza and Lorenzo's Pizza, at this time.
However, if the fundamentals of the two looked similar on paper, but local bankers ducked out the back door every time Lorenzo came in to apply for a loan, at the same time that they were constantly asking John out to lunch, I would consider this relevant to an intelligent investment decision. And, regardless of whether or not Graham himself would have agreed, I think it properly within the domain of Graham and Doddsville.
As Buffett sees it, Graham and Doddsville is an "intellectual
community". As Janet Lowe (author of two books on Graham) sees
it, Graham was an investigator into economic science.
Thus, my conception of Graham and Doddsville is a never ending search for for simple, easy to explain, and easy to implement methods for earning excess returns from the securities markets. I have only a little confidence that I will succeed. That's why it's called risk. Graham's and Buffett's insights into the application of economic science are my starting point. They are not my end point. Nor is the work, however valuable, of the academic researchers and Wall Street operators who have appropriated the term "Value Investing" as their own. I am not engaged in an archeological dig, museum curating, or library science. I am seeking new insights into an ever-changing economic and financial world.
Let me give an example of what I have in mind regarding Birinyi. A number of years ago, I was reading a Barron's interview with a value investing money manager. I don't remember his name. I do remember that his valuation criteria were orthodox ones. The other thing I remember is that he said that the final step he took before making a purchase was to take a look at the charts.
His reasoning was that no matter how much research he had done, there were always people who knew more about the company's real underlying fundamentals than he did -- for example, accountants, investment bankers, lawyers, employees, suppliers, etc. When he saw the technicals of a stock falling apart, he backed off pending further investigation of what was really going on. Maybe it was becoming a better buy. But, maybe it was being revealed
as being a situation where the fundamentals were souring.
Suppose I am looking at companies ABC and XYZ. Both appear to be similarly undervalued and to have similar underlying fundamentals. However, Birinyi says that investment money is flooding into ABC, and out of XYZ. I think it would be arrogant at best, and recklessly negligent at worst, for me to ignore this information.
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