Source: Minority Investments
The secret to investing is to invest when the price is well below the intrinsic value and trust that the market trend will pick up. —Benjamin Graham
Rather than saying that Graham is the “Godfather of Wall Street,” he is more synonymous with “cigarette butts stock investment.”
In the eyes of most people, the teacher of the “stock god” and the author of “Securities Analysis” is an old guy who only picks up bargains and is out of date. Buffett, on the other hand, developed his theory to make “buying a good company at a reasonable price” the best way to invest in value.
Just like that, the preconceived consensus threatened us:
Since there are more advanced theories, why should we look at old, “outdated” stuff again?
As a result, value investment was equated with fundamental analysis, and “buying a good company and growing with it” became a priority for many people.
We might as well think a little more about this:
Why is Graham, the godfather of Wall Street, unaware of the value of a good company, but is more willing to buy cheap trash? Is it simply because of the limitations of the times and lack of personal ability?
In conjunction with “Securities Analysis,” this article will take you back to the classics and analyze Graham, who has been misunderstood by most people.
Intrinsic value: Dare to be different from most people
Graham's investment philosophy is based on “intrinsic value.”
In the eyes of most people, this is just a numerical concept. Many professionals use cash flow discounts to calculate the value of a stock, and then judge the stock price based on this.
However, “Securities Analysis” doesn't mention at all how to calculate “intrinsic value”, or even bluntly saying that guessing intrinsic value is a huge mistake. Graham defined it as “value proven to be reasonable.”
He also placed particular emphasis on:
“There is no need for analysts to accurately estimate the actual value of each share in order to draw conclusions”.
There isn't even a specific algorithm, what's the point?
The key is the denial of “Mr. Market.”
Market prices reflect the unanimous expectations of most participants. Graham, on the other hand, believes that there should also be an “intrinsic value” that is different from that and has been proven more reasonable by facts. This is the sense of independent thinking: skeptical about existing consensus and daring to be different from most people.
He compared the market to a man who was emotionally unstable and made all kinds of mistakes. It was this man's irrational behavior that created good investment opportunities for us.
Investments should be supported by a reliable foundation
We are also one of the market participants, why do you say most people are irrational?
In Graham's view, daring to deny Mr. Market's motivation lies in “comprehensive and thorough analysis”. He clearly distinguished between investment and speculation, and made “evidence to rely on” as an inevitable characteristic of investment.
In his opinion:
“As long as your data and reasoning are correct, you're right”
Buffett explained this as follows:
“As long as your premise is correct, the facts are correct, and the logic is correct, you will be right in the end”.
Graham described a “reasonable recommendation” this way:
“It must not only perform well in the market, but must also be based on a reasonable reasoning process... Professional standards for securities analysis require that all recommenders clearly indicate the type of recommendation and form an analytical reasoning process for recommendation results.”
This distinguishes whether it's because you did the right job or because you were lucky.
The investment judgments made in this way are repeatable and sustainable over the long term.
Speculation on “powerful companies”
Based on strict requirements for objective facts and strict logic, Graham has always been cautious about the growth prospects of stocks. He made a clear critique of the idea that “good stocks are good investments”:
“It's probably more logical and understandable to call it 'speculation on powerful companies'. The results of this' investment 'are no different from those speculations in the past, other than the possibility of no security.”
Graham sees a trend of “double counting” among excellent companies that are generally optimistic about in the market:
“The stock price reflects the benefits brought by a good management team, as well as the gains brought by 'good management', which led to 'double counting of the same project', leading to overvaluation.”
He believes that securities analysis mainly focuses on values that can be determined by facts, rather than values that rely on expectations about the future. He classified the important facts relating to a particular security and expressed them in a consistent and easy-to-express manner.
These important facts include securities terms, industry characteristics, company operating records (capital, liabilities, profits, dividends, etc., and their management), laws and regulations, etc., and should not be based only on the past; simply extrapolating performance trends will continue.
He places more value on investments that people overlook, such as abandoned stocks or bonds, liquidation, bankruptcy, arbitrage, etc.
What has not changed is the pursuit of “certainty”
Graham's preference for “cigarette butts” is precisely because he values certainty.
The future is difficult to predict. We cannot obtain sufficient information to predict the future business situation of a high-growth company. Logical chain breakpoints and even jumps in thinking during the analysis process are unavoidable.
If we don't find any clear evidence that “most people aren't optimistic enough,” then it's more appropriate to describe it as an investment than an investment. Graham tried his best to avoid this.
Buffett developed his teacher's theory, but he still used determinism as his foundation.
He extended the “certainty” of investment to the future. This is not blind excessive self-confidence, but through the construction of a circle of ability, he has obtained comprehension skills that surpass most people in the market in individual fields. Strictly speaking, he is not a traditional secondary market fund manager, but has become an “industrial capitalist” who controls and operates many enterprises.
This is very different from most people taking good companies for granted. It is also an analogy premise that we should not ignore when we study Buffett.
From Graham to Buffett, what has changed is the superficial form of investment; what has not changed is the pursuit of certainty.