Graham is not so much the godfather of Wall Street as he is synonymous with "cigarette stock investment".

In the eyes of most people, the teacher of "Stock God" and the author of "Securities Analysis" is an old man who can only pick up bargains and is out of date. Buffett developed his theory, making "buying a good company at a reasonable price" the best way to invest in value.

In this way, the presupposed consensus surrounds us:

Since there are more advanced theories, why look at things that are old and "out of date"?

Therefore, value investment is equated with fundamental analysis, and "buy a good company and accompany its growth" has become the standard for many people.

In this regard, we might as well take one more step:

Why does Graham, the godfather of Wall Street, who doesn't realize the value of a good company, prefers to buy some cheap junk? Is it just because of the limitations of the times and the lack of personal ability?

Combined with Securities Analysis, this article will take you to review 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 will use cash flow discount to calculate the value of a stock, and then judge the stock price accordingly.

However, there is no mention in Securities Analysis about how to calculate "intrinsic value", or even to say bluntly that it is a great mistake to speculate intrinsic value. Graham defines it as "value that is proved to be reasonable".

He also stressed in particular:

Analysts do not need to accurately estimate the actual value of each share to draw a conclusion.

What's the point of not even having a specific algorithm?

The key lies in the negation of "Mr. Market".

The market price is the embodiment of the consensus expectation of most participants. On the other hand, Graham believes that there should be a different "intrinsic value" that has been proved to be more reasonable. This is a sense of independent thinking: be skeptical of the consensus and dare to be different from most people.

He likens the market to a man who is emotionally unstable and makes all kinds of mistakes, whose irrational behavior has created good investment opportunities for us.

Investment should be supported by a reliable foundation

We are also one of the market participants, how can we say that most people are irrational?

In Graham's view, the courage to deny Mr. Market lies in "comprehensive and thorough analysis". He makes a clear distinction between investment and speculation, and regards "evidence-based" as the inevitable feature of investment.

He thinks:

"as long as your data and reasoning are correct, you are right."

Buffett elaborated on this as follows:

As long as your premise is correct, the fact is correct, and the logic is correct, you will be right in the end.

Graham describes a "reasonable recommendation" as follows:

"it must not only perform well in the market, but must also be based on a reasonable reasoning process. The professional standard of securities analysis requires all referrals to clearly indicate the type of recommendation and form the analysis and reasoning process of the recommendation result. "

To distinguish whether it is because of doing the right job or because of good luck.

Only in this way can the investment judgment be repeatable and can be sustained in the long run.

Speculation on "powerful companies"

Based on the stringent requirements of objective facts and strict logic, Graham has always been cautious about the growth prospects of stocks. He explicitly criticized the view that "a good stock is a good investment":

Calling it 'speculation on powerful companies' may be more logical and helpful to understand that the results of this' investment 'are no different from those of past speculation, except that there may be no security. "

For the good companies in the market, Graham sees a tendency to "double count":

"the share price reflects the benefits of good management as well as the gains of 'good management', which leads to 'double counting of the same project', resulting in overvaluation. "

He believes that securities analysis is mainly concerned with values that can be determined by facts, rather than those that rely on expected values for the future. He classifies and lists important facts related to a security and expresses them in a consistent and easy-to-express way.

These important facts include securities terms, industry characteristics, company operating records (capital, liabilities, profits, dividends, etc.), laws and regulations, etc., and should not be based solely on the past, simply extrapolating performance trends will continue.

He pays more attention to neglected investments, such as abandoned stocks or bonds, liquidation, bankruptcy, arbitrage and so on.

What remains unchanged is the pursuit of "certainty".

Graham prefers "cigarette butt stocks" precisely because of his emphasis on certainty.

The future is difficult to predict, we can not get sufficient information to predict the future operation of a high-growth company, and the breakpoints of the logical chain and even the jump of thinking in the process of analysis are inevitable.

If we do not find clear evidence that "most people are far from optimistic enough", then the following note is more appropriate than investment. This is what Graham is trying to avoid.

Buffett developed the teacher's theory, but he is still based on certainty.

He extends the "certainty" of investment to the future, which is not blind overconfidence, but through the construction of the ability circle, he has obtained the ability to surpass the understanding of most people in the market in individual areas. 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 a far cry from the fact that most people take it for granted to buy good companies, and it is also an analogical premise that we should not ignore when we learn from Buffett.

From Graham to Buffett, what changes is the superficial form of investment, what remains the same is the pursuit of certainty.