Warren Buffett started his investing life as a value investor in the mould of Benjamin Graham, the author of The Intelligent Investor – the definitive book for any value investor.
Buffett read the book in 1949 (the year it was first published) at the age of 19, and a few years later, in 1951, he studied under Graham at Columbia Business School.
He also worked for Grahams’ investment partnership, Graham-Newman Corp, for a year in 1955.
Buffett certainly started his investing life as a dyed-in-the-wool value investor, but to call him a value investor in the classic sense is no longer correct and probably hasn’t been since the 1960s.
In fact, these days when Buffett suggests a book one should read in order to become a better investor, he goes for Common Stocks and Uncommon Profits by Phil Fisher, first published in 1957.
Further, at the latest Berkshire Hathaway annual general meeting (AGM) held on the first Saturday of May, Buffett commented that “Graham was not scalable.
Graham had $12m he was working with and was tiny and not scalable. He didn’t care, because he wasn’t interested in making a lot of money for himself.
The utility of chapter 8, looking at stocks as business, and chapter 20 about the margin of safety are of enormous value and not complicated.”
If anything, these days Buffett is a growth at reasonable price (GARP)-style investor, a phrase credited to Peter Lynch (author of another great book to read – One up on Wall Street).
My style of investing would also be considered GARP. You want great companies with great potential, but you want to pay reasonable prices for those businesses.
There are three difficult parts to this concept.
First, above-average growth is not that easy to spot. Sure, all companies grow, and in hindsight spotting the above-average growth is easy.
But, looking forward, how do you know if a stock’s growth will continue to be well above average?
This is going to depend on the many moving parts of a business, and ultimately all growth slows – even if only due to scale.
We need to spot an impressive rate of growth that also has the potential to continue – but to do so really requires a good understanding of what drives the growth.
It’s also important to study the metrics: Does the business have superior margins, a solid moat, and is it in a growing sector?
A key theme for my investments has been a global emerging middle-class consumer who has more disposable income to spend, creating opportunities for well-positioned businesses.
The second part would be deciding on what constitutes a reasonable price, which translates into giving you a margin of safety. Here there are almost as many different methodologies as there are investors.
I keep my methodology very simple because I do not believe that complexity leads to improved results. An investor just needs a process that determines when to buy and when to hold.
I use a seven-year average price-to-earnings ratio (P/E) and am happy to buy when the forward P/E is below this average. It is far from perfect, but it gives me very clear points on when I should sit and when I can buy.
The third part (and perhaps the hardest) is to sit and do nothing for long periods while you wait for the reasonable price to arrive.
At times, I will spend years not buying any shares in one of my favourite companies while I wait for a price I like. I manage this in part by hopefully having other shares that meet my criteria.
As I discussed recently, doing nothing is a very important skill in investing (see the 10 May 2018 edition or visit https://bit.ly/2GcLNZR).
Then, in closing – do read the three books I mentioned. Even if they are dated, they all offer great insights from top investors who we can learn a lot from.