Graham Buffett Investing

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Graham - Buffett Investing
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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

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Graham Principles (?)

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

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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)

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Graham Principles (Yes)

• When in doubt, stick to quality (quality
  earnings, steady dividend payouts, low debt,
  reasonable P/Es) and Buffett 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.

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Warren Buffett

• 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

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Buffett 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

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Buffett 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

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Buffett 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

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Buffett 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

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Changes in Philosophy

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