From Graham To Buffett To Graham Again - Two Years of Value Investing

[freedom]

on the qualitative part, I tend to agree with juno.

how many average investors can really spend the time, have the knowledge and understand the qualitative part? It is not just about how many annual reports you have read, how much accounting knowledge you have, etc. These are probably just necessary conditions, not sufficient conditions to follow the qualitative method.

[Drizzt]

the longer i play this the long i feel if u go down this road, it is better to have the skills of a business manager than an investor.

[KopiKat]

A summary of the people who'd influenced my Investing Learning Journey,

Warren Buffett
I was inspired by his being able to become one of the richest man in the world through Investing. I only really started reading and learning more about Investing Approach after that.

Benjamin Graham
Even though my mind just go blank most of the time whenever I try to read his books, his concepts of Margin of Safety and Intrinsic Value rings a bell with me. I learn to be 'kia-su' and 'kia-si', the more so if I'm looking at higher risk stocks + I run very fast at the 1st sign of trouble for such stocks. It also provide the cornerstone for me to do arm-chair research and analysis, relying mainly on the internet, as I have little luxury to even attend AGMs.

Peter Lynch
The strongest influence on my Investing Philosophy (if you can call that). I learnt to classify my stocks into different categories and adopt different approach to each. I also learnt to look at my P/L based on entire portfolio rather than individual stocks ie. it's ok to have loss making stocks (we are not perfect - learn from it and move on, don't cling on to false hopes) but the profitable ones in the portfolio must out-weigh the losses. Lastly, focus on biz that we are familiar with, starting with those that we have interactions with in our daily lives (for me, that means SPH - Newspapers, SingPost - Postal Services, Transport - SBS, SMRT, Comfort,..) + those that are within our Job Expertise.

Philip Fisher
He showed the way to the meaning of,

More Effort = More Knowledge = Better Odds of Making $$ = More Confidence (to Invest or Not)

His approach involves more legwork and talking to the different people (Key Mgmt, Competitors, Suppliers,...). With the advent of the Info Age and the internet, I have the luxury of doing some of these tasks sitting on the armchair (although nothing beats an eyeball-to-eyeball kind of info gathering exercise).

Warren Buffett
Full circle for me, back to him again. His approach is Graham + Fisher + Charlie Munger + John Keynes (?). The key is, we have to find the combo that's best for our own temperament and adapt to our our unique environment.

Perhaps I'm slow as I'm not Accounting / Finance trained. Since buying my first stock more than 2 decades back, I'm still learning and evolving my strategies / methodologies.... Ya, but the ride had been fun + profitable so far!

[shanrui_91]

I think that there's really no fix method of investing whether it is Buffett or Graham's style. Both are really value investing, just that the former is based on future earnings while the latter is more focus on the current earning and book value.

Methods will always change based on experience as well as what you have read and believed in. I believe mine is still very raw as it has been constantly changing and I know that it will remain so. However, my framework and investment belief are still rather intact despite all the tweaks to how I screen for stocks and the kind of numbers that I am looking for. The du pont financial ratio, followed by ROIC, followed by net cash flow, all of them have quite a huge impact on how I look at a stock.

Drizzt, i do agree with you on the part of the skill of a business manager, since buying a stock is like buying a business, how can we understand stock if we don't understand business. I learn about this through reading the book by the founder of shareinvestor.com

[yeokiwi]

To summarize:
1) I no longer believe that detailed fundamental analysis will benefit investors more than let's say buying a group of stocks bound by 2 - 3 criteria.
2) There are considerable investment opportunities among companies below 200$ million market cap.
Admittedly I have not strayed far from Benjamin Graham and his ideology, and your mileage may vary accordingly.
Cheers

There are many factors that affect the performance of a stock. Some are known to to investors and some are not.
And sometimes, the difference between value stock A and B may not differ much and why is there a necessity to compare and eliminate one of them?
For myself, I rather take both than select the better one

By doing so, I have increased my stock count in my portfolio to more than 30(since stock A, B, C, D, E... are all undervalued..). Some will consider that as unmanageable and difficult to outperform the market since the mediocre ones will drag down the outperformers.
But, in practice, it does not seem like that. The portfolio seems to do rather well and especially good at catching delisting offers than before.
The occasional delisting offer(at least one per year for the last few years) does improve the overall portfolio performance significantly.

Is it difficult to manage more than 30 stocks? Well, I am not those that will or can analyse all stocks to the last detail. So, it is still manageable for me .

[camelking]

Like you said, each investor has to come to terms with what his own intentions and interests are. As long as an investing methodology is based on sound principles, it should earn an adequate return. My only concern is that people who adopt a Buffett like investing approach may underestimate the amount of work he puts in and his sheer intellectual capacity that plays a big part in his returns.

Hear, hear. Graham hit the nail on the head when he declared that an investor's worst enemy is himself. As with many other things in life, people tend to look for shortcuts. So they seek out stock tips and magic formulas in the hope of obtaining big profits with minimal (or zero) work. Sadly, many learn the hard way that investing, like other things in life, seldom works that way. Some never learn.

Some hear "PE" and say, OK, as long as the stock we like has a PE below 10 (or 8 or 6 or whatever) we can buy it because we have a "margin of safety". So they buy property developers at the top of the market when they report record profits, just in time to participate in the bust that follows the boom. Or they buy companies whose profits were boosted by one-time events like property revaluation, asset disposals or debt forgiveness.

Some hear "dividend" and say, OK, as long as the stock we like pays us 5% more than the bank interest we have a "margin of safety" and have created a "retirement income". So they buy shipping trusts which are overleveraged and dealing with weak customers, just before the trusts are forced to cut payouts and seize ships from defaulting customers.

Some hear "P/B" and say, OK, as long as the stock we like sells for less than book value, we have a "margin of safety". So they buy manufacturing companies with obsolete machinery, just before the companies report heavy losses and take a massive writedown of the machinery to scrap value.

I could go on. But I think the point has been made. The quality of analysis done by the average investor is abysmal. Graham's principles as laid out in The Intelligent Investor are not hard to follow in theory for anyone of at least average intelligence and discipline. But in practice they prove a bridge too far for the average investor who has to juggle a career and family in addition to looking after his money. It is an unusual investor who is willing to apply Graham's principles and accept "not lousy" returns, even though in practice he is likely (but not guaranteed) to get "good" returns.

As usual, YMMV.

Well said.

[juno.tay]

Thanks for all your responses guys. Like everyone said, there's no one way of earning money.

I think Seth Klarman best summarized the evolution of Buffett's style.

Seth says that Warren Buffett went from:

1. Cigar butts and getting the last few puffs
2. Buying great businesses and good prices
3. Buying and holding great businesses at ‘so-so’ prices.
4. Buying weird securities at below market prices, like BAC warrants.

That being said, I just want to emphasize that all things equal, I would rather purchase a great business at a great price. Alas such opportunities rarely turn up and so I gravitate towards (1) more. That being said, when the fat pitch comes along, as it does from time to time, I do swing for it. It's just that such opportunities are rare and hard to find.

At the end of the day, it's like Graham said. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

Cheers!

[dreamybear]

I think my post ( https://www.valuebuddies.com/thread-9243...#pid168519
) is more suited for this 10 year old thread, unfortunately no permission to delete and move it here.

Upon reflection and having paid various tuition fees to the market, personally I am more or less convinced the intended approach of value investing is as what Seth Klarman described : earnings power & growth possibilities. Along the way, I learnt that the approach is as demanding as a full-time job.