Benjamin Graham Warren Buffet

1
Benjamin Graham Warren Buffet

• Security Investment

2
Benjamin Graham

• Father of Fundamental Security Analysis
• Author of Graham and Dodds SECURITY ANALYSIS
• 1894 - 1976
• Buy a dollar for 0.50
• Margin of Safety
• In his day, a quantitative investor

3
Graham Principles (?)

• Focus on Balance Sheet
• FiltersDebt/equity lt 50Price/book lt
  1.2Current ratio gt 2.0Quick ratio gt
  1.0Price/NWC lt1.0
• These were clearly signs of the times and do
  not always apply (i.e., dont use them)

4
Graham Principles (Yes)

• Be an investor, not a speculator. (Dont try to
  profit from market moves.)
• Is the company worth the asking price?
• Rummage the market for bargains. (Dont be proud
  - buy a good deal)
• Regard published corporate numbers with
  suspicion.
• Do not fret about precision, a good Margin of
  Safety works
• Diversify across asset classes and securities (30
  or more equities)

5
Graham Principles (Yes)

• When in doubt, stick to quality (quality
  earnings, steady dividend payouts, low debt,
  reasonable P/Es) and Buffet would add QUALITY
  MANAGEMENT
• Defend your shareholder rights
• BE PATIENT. Be prepared for poor results in the
  short term.
• THINK FOR YOURSELF. Be independent and never stop
  THINKING.

6
Warren Buffet

• Born 1930
• Early interest in investing
• Mentor was Ben Graham at Columbia
• Carries on Grahams approach to value being
  related to future free cash flows
• But has come to focus on why a given firms free
  cash flows might be better, and more certain,
  than other firms.
• AN EXTREMELY SUCCESSFUL INVESTOR WITH OPINIONS
  THAT DESERVE CAREFUL ATTENTION
• He is not a typical Professional Investment
  Manager

7
Buffet Investment Principles

• Consider stocks as small pieces of a business,
  not a stock trade
• Market fluctuations are good, give the
  opportunity to buy cheap
• DEMAND A MARGIN OF SAFETY FROM INTRISIC VALUE

8
Buffet Filters

• Is this a business I can understand
• Does the company have a competitive advantage
• What is the opportunity cost of the investment
• Is management composed of quality people
• WHAT IS THE MARGIN OF SAFETY

9
Buffet and Modern Portfolio Theory

• If you know the business well, diversification is
  not required
• Risk is not volatility of returns
• Risk is that something disastrous will occur
• Beta is meaningless as a risk measure

10
Buffet Munger Filters

• Is this a business we can understand(need to be
  able to see 10 plus years into the future)
• Does the company have a substantial competitive
  advantage
• What is the opportunity cost of the investment
• Is the management composed of quality people

11
Changes in Philosophy

• Type of companies willing to consider
• Graham would buy cigar butts
• Today Buffet invests in quality firms, with
  simple products and strong brand images (mind of
  the consumer)