> Warren Buffett Blog: Learnt my investment style from Benjamin Graham

Thursday, September 8, 2016

Learnt my investment style from Benjamin Graham

I developed my investment strategy under Graham. I went to Columbia and learned from Graham.  With Graham’s approach, you cannot lose money over time.  It’s very quantitative in nature, and you have to do reasonably well.  On the other hand, it has less and less application as you get  into bigger and bigger companies with larger sums of money.  It’s better to buy wonderful businesses at fair prices than so-so businesses at low prices.

With the “cigar approach”, you can find a nasty cigar on the ground, with one puff left, can pick it up, light it and you get a free puff. You can keep doing this and get many free puffs. That’s one approach, that’s what I did. I looked for very cheap stocks quantitatively. After exposure to Fisher and Charlie, I started looking for better companies. Previously I was doing both. Now we are looking for good companies, not just cheap companies. Railroads are huge, and they will be good in 10 years, and 100 years from now. Burlington Northern is now earning $6 billion pre-tax, as compared to $3 billion a few years ago before we bought it.  Moving much towards Fisher now and less Ben Graham because we are working with larger sums. With smaller sums, we would be looking at better margins/cheaper stocks.

When I got out of school, I went through Moody’s manual page by page. Got to page 1433 and learned the good ones were in the back. Western insurance company in 1951 was earning $29.09 a share,  the year before $21.66.  The price of the stock had traded between 3 and 13 the previous 12 months.  The price was at 16 when I saw it, less than 1 x earnings.   A few years ago, in 2004, someone told me I should look at Korea.  I got a book from Citigroup which had 1 stock to a page. Describes all the publicly traded companies in Korea. Went through it and found about 20 companies (ex. Day-Han flower mills) it had book value, eps, and securities. Didn’t tell you anything about the share until you look at the price. Found about 20 like that in an afternoon and bought some of all of them, but didn’t know enough about all of them to load up on them. If you buy 20 stocks selling at 2 times earnings, you’re going to make money. That’s Ben Graham and you can make money doing this. 

If you’re working with bigger money, you have to do Fisher/Charlie style and buy big businesses. Berkshire now looks for large, very strong companies. Like Nebraska Furniture Mart – bought in 1983 and it’s probably earning 20 times as much now. Charlie told me – “You’re never going to disagree with me because you’re smart and I’m always right”.