The title is very provocative. Warren Buffett is known as one of the greatest investors of today and maybe the best ever. Buffett is also a very famous personality. Seth Klarman and Joel Greenblatt are both phenomenal investors who are largely unknown outside the investment world . However, Warren Buffett is a name that the average American knows, and Buffett is admired by many both inside and outside the investment world.
I have been piecing these thoughts together for a while in my head but I did not come to think of writing an article until this past friday. This past Friday I spoke to a colleauge who graduated from Columbia’s value investing school, runs one of the most popular value blogs http://www.grahamanddoddsville.net/ and works in a value investment firm. I was speaking about Warren Buffett with him and he stated that Warren Buffett has never given away his exact method of valuing a company and determining whether it has a sufficient margin of safety. At that point it finally hit me to write this column.
Dozens of books have been written about Warren Buffett. A lot is known about his life and there are wonderful biographies written about Buffett such as The Snowball by Alice Schroeder. In addition dozens of books of excellent books have been written over the years that analyze Warren Buffett’s investment style. Many books do a good job but none really has been able to figure out what Warren Buffett’s real “secret formula” of investing is.
Warren Buffett has claimed that he is 85% Benjamin Graham and 15% Philip Fisher. I am highly skeptical of this claim. I am not sure whether he is only 5% Graham or 50% but he definately is not 85% Graham. If Graham were around he would not be buying companies like Coca Cola and Proctor and Gamble. Graham would be buying obscure boring companies that you probably have never heard of. Fisher would much more likely be buying Coke then Graham. Therefore I would be more inclined to inverse the claim and state the Warren Buffett is 85% Philip Fisher and 15% Benjamin Graham. Buffett has stated that stocks of his such as Coke he would hold on to even if they went above their intrinsic value. How in the world is that at all similar to Benjamin Graham’s investment philosophy or buying with a margin of safety.
There are many who claim that Charlie Munger showed Buffett the advantages of Philip Fisher’s style of investment and over the years he has adapted to this style of investing. This is largely true with one big caveat; it is entirely due to forces of circumstances. Buffett has stated that if he had $1 million he could return 50% a year. This is not because he would be investing in Coca Cola or he would be buying Graham net-nets or some other deep and obscure securities. So maybe when Buffett means he is 85% Graham he means at heart. But in reality he is a far cry from Benjamin Graham today.
Another point to ponder is no one really knows what Buffett looks for in investments. Yes, he looks for moats and companies that are easy to understand and have high returns on equity etc. Then of course he looks for a stock which is trading below its “intrinsic value” . But why does Buffett own Coke and not Mcdonalds? Fine Coke has a secret formula so it is different but how is Proctor and Gamble or Dairy Queen a better buy then Mcdonalds. Mcdonalds has a large moat, is easy to understand, has been increasing its earnings, and has a product that gets consumed quickly(very quickly might I add). It also seems to be trading at a value not dissimilar value to other companies he owns?
On a similar note Buffett many times completely rejects these criteria and invests large portions in companies that miss every single one of them. Wells Fargo has no moat neither does ConocoPhillips or Exxon Mobil. If either of the later two companies did did he would have bought only one of them since they are competitors. I know Buffett loves Wells Fargo because it has excellent management and a low cost of capital, but banks are some of the hardest businesses to understand and have practically no moat.
I have not thrown out the idea that maybe now Buffett is almost entirely growth investor. Growth investing is not a dirty word like many value investors believe. Some of the greatest investors ever including Sir John Templeton were growth investors. The problem is that you need to be really good at it to succeed. Most growth investors under perform the market, but a few exceptional ones like Templeton have produced amazing track records. However value investing is more about temperament and forcing yourself to invest contrary to human nature. It is a lot easier to outperform the market as a value investor. Maybe Buffett has been forced to evolve from a value investor to a growth investor due to the massive amount of money he manages.
So is Warren Buffett Benjamin Graham? Is he Philip Fisher? Is he a combination of both? Is he Charlie Munger? Or is Warren Buffett just Warren Buffett his one unique investor, and one of the best ones ever?
Note: This article is not a criticism whatsoever of Warren Buffett. It is only an examination of one of the greatest investors(and businessmen ever). I admire Buffett very much, I only examined what his investment style really is.