Origins of value investing

Together with “The intelligent Investor”, the book “Security Analysis” most impacted Warren’s investment philosophy. It was written by Benjamin Graham and David Dodd in 1934, just a few years after the 1929 stock market crash. “Security Analysis” was the first book ever written on value investing and it is still used as a textbook at Warren’s alma mater, the Columbia business school.

Warren eagerly took Dodd’s class, after having carefully studied the book. In fact, he is said to have been able to quote from almost anywhere in it and to even know it better then Dodd himself. He was thus convinced of the validity and applicability of the introduced principles. You can imagine the impact this would have on an author and teacher. Needless to say, that they eventually developed a close personal friendship.

In essence, “Security Analysis” explains how the rough value of a company can be estimated by studying and correctly interpreting its financial statements. This is done by calculating a variety of key figures such as the book value or intrinsic value of a company and then determining the “margin of safety” (difference of intrinsic value and market price). This in turn would determine if any particular stock was worth purchasing. Graham and Dodd had experienced the irrationality of financial markets and realized it presented an opportunity for the patient and rational investor. Anyone serious about learning value investing, is advised to carefully study this book.

The book that changed Warren’s life

In his early years, Warren was a socially awkward and fairly introverted person. He used to be terrified of public speaking and had a difficult time dealing with people in general. To be successful in business and especially investments, it is absolutely essential to master these skills.

- How do I motivate the people working for me to excel?
- What determines the price of any security at any given time?
- How can I get the owner of company xyz to sell his/her business to me?

Buffett recognized his weakness early on. But how did Buffett overcome his anxieties and become one of the most adept business men and investors of all time? – The answer is simple. He learned from the master!

Dale Carnegie dedicated his life to find out what makes people tick and how we are best influenced. He offered courses on public speaking and eventually wrote a book so important, that it should be lie on everyone’s night stand! The book I am referring to of course is called “How to win friends and influence people”.

My favourite example of how Buffett directly applies one of Carnegie’s principles can be found in his 2006 letter to shareholders, where he states: “But the driving force behind the company’s success is Kevin Clayton. Kevin knows the business forward and backward, is a rational decision-maker and a joy to work with.” Being singled out and praised like this in a much anticipated, globally read and revered paper, is going to have a huge effect on a guy. I bet these two sentences motivated Clayton far more than any sum of money could have. If you disagree, please read the book!

Essays from the big man himself

Time and again “Buffetteers” have asked the great man to write a book on investing, seeking guidance from the master himself. Buffett however has refused to do so, stating that he would stick to what he does best (asset allocation), and leave the writing to journalists.

We do however get some consolidation from his famous annual letters to shareholders. These are available on Berkshire Hathaway’s homepage. Lawrence Cunningham cleverly selected and thematically arranged the content of those letters in “The Essays of Warren Buffett: Lessons for Corporate America” in a fashion that allows for a smooth and easy reading. Not only does this book reveal a great deal about Buffett’s investment and life philosophy but also on his thought process when faced with great challenges.

The godfather of value investing

Benjamin Graham is considered by most to be the founder of value investing and was Warren Buffett’s mentor as he was forming his investment philosophy. Buffett carefully studied Graham’s books and even attended his class at university.

Benjamin Graham liked to demonstrate the core of value investing and the craziness of financial markets by the example of “Mr. Market”. Depending on who you ask, they might tell the story a bit differently, but in all cases the underlying lesson of the analogy is the same:

Imagine a fellow, let’s call him Mr. Market, who turns up at your door every day and wants to sell you some shares of a company for a price. You can either agree to buy those shares or turn him down. In any case, you know that he will be back tomorrow attempting to sell you the same shares. Now, add to the equation, that Mr. Market is emotionally unstable. Thus he might be very optimistic today and quote a high price only to wake up depressed the next morning and thus quote a much lower price.

The lesson of this analogy is that financial markets are irrational. Investors should take advantage of this and subsequently buy shares when they are under-valued and vice versa. This obviously is highly counter intuitive, as people by nature want to fit into a group and thus let themselves be carried away by the euphoria and fears of others.

Benjamin Graham authored “The intelligent investor”. A book so important, that it is often referred to as the “bible of value investing”. Warren Buffett characterizes it as “by far the best book on investing ever written”. Anyone seeking to become a true value investor, should study this book.

The man behind the genius

To understand Warren Buffett’s success in business, it is paramount to know where he comes from, how he thinks and how his drive to succeed is fed. Only those who have extensively studied his personal life may hope to gain some insight into what it takes to become this successful.

Countless biographies have been written on Warren Buffet, many of which are incomplete or inaccurate in some way or another. The most comprehensive account on Warren Buffett’s life is called “The Snowball: WarrenBuffet and the Business of Life” and authored by Alice Schroeder. Buffett gave her unprecedented insight into his career and personal life and thus enabled her to produce the most extensive and illuminating biography on him ever written!

The main critique issued on this book is that it goes too much in detail on personal issues, which are seemingly unrelated to his investment success. I strongly disagree with that view, as much of what appears to be random side notes at first glance, turns out to be most important in shaping his decisions along his path to riches.

I urge each and everyone inspired by Mr. Buffett, to read this book. It is very illuminating and an absolute must for every Buffett fan!

What inspired me to whisper

Hi folks!

Welcome everyone to my first post!

He is known as the “Oracle of Omaha” – and that for good reason. Warren Buffett’s wealth is currently estimated at roughly 45 billion USD, all of which he earned from exceptionally adept investment decisions and the magic of compounding!

Chances are that you are reading this blog, because you are inspired by Warren Buffett’s long list of investment successes and seek to imitate his style. While I will not go so far as to proclaim that anyone can copy his principles and successes, I do strongly believe that studying his life and principles will make us more adept investors.

Warren Buffett became one of my idols early on. I obsessively studied his life and investment style for many years and read every book I could lay my hands on in the process. This has made me somewhat of an expert on books written about Warren Buffett and I want to share my knowledge with you. Please do note that affiliate links are imbedded in my articles.

Let the whispering begin.