Richard Rooney, President and CIO of Burgundy Asset Management Ltd., delivered the following presentation at the London Value Investor Conference on May 22, 2014.
The value investing tent is inhabited by several different tribes: the Orthodox, the Bears, the Gold Bugs and the “Buffetteers.” These groups are united by a common admiration for Ben Graham, the first and still the greatest proponent of the philosophy, but far from unanimous on some other things.
The largest group, and the original inhabitants, practise the orthodox statistical-value method of scouring the markets for the dollar bill trading for 50 cents, and owning a diversified portfolio of cheap securities. This is a reliable way to invest with a margin of safety and produce good returns over the long term. Most of these value investors look to the masters of this approach for their methods. Ben Graham, William Ruane, Walter Schloss and Peter Cundill are their models, though almost all of us lack the flexibility and creativity of these exceptional investors. Please recognize that I am not using the idea of orthodoxy as a pejorative; rather, it is the mainstream from which the others derive.
As the name implies, the bears approach the market with characteristic pessimism. Usually espousing the doctrine of statistical cheapness, but overlaid with macroeconomic disaster scenarios and a healthy dose of Oswald Spengler, these folks never find a market cheap enough to be fully invested. Any crisis is assumed to be a prologue to catastrophe; and therefore, even better values always wait. As a consolation prize for never being fully invested, bears have an acute sense of absurdity, which makes them among the most penetrating and hilarious critics of a business that can always be relied upon to create fresh absurdities. And, as part of the old saying goes, bears do make money.
The Gold Bugs
Gold bugs are usually also accorded a section of the value tent. It is entirely understandable that people obsessed with value should worry about the value of their units of account. As we all know, Ben Graham was disturbed by the tendency of governments to debase the currency and several times presented his idea of the ever-normal granary to congressional committees. So, this concern with monetary integrity has deep roots in our philosophy. The deep concern for permanence and inflation protection means gold bugs can have unique insights and, like the rest of the tent, make money.
Finally, there is a group that the others tend to look upon with a certain suspicion. These investors own equities that often trade at multiples of book value, and whose balance sheet accounts rarely support the market valuations of their investments. They incorporate some assumptions about future earnings into their valuation work. They tend to own concentrated portfolios of high-quality companies with low turnover. These are the investors that I label Buffetteers, and among whom I number myself.
A large number of value investors are conflicted about Warren Buffett’s legacy. They cannot deny his closeness to Benjamin Graham, since he was literally Graham’s student at Columbia, and the only student to whom Graham ever gave an A+ in his course; he was an employee of Graham-Newman, that incubator of great value investors; and he was a lifelong associate and admirer of Mr. Graham. He is also the most successful investor of all time, and the only one who became one of the world’s richest people mainly by compounding capital in the public securities markets. So certainly nobody wants to disown him.
But Buffett’s methods are very different from those outlined by Graham and Dodd. They are so different that some more orthodox value investors find them rather suspicious, and tend to treat Buffett as a one-off – a brilliant but wayward disciple whose methods were peculiarly suited to one specific place and time, rather than as the exemplar of a legitimate branch of value investing. I was trained in a deep-value Graham shop, but migrated later to the quality-value approach, so I have always sought ways to reconcile the statistical- and quality-value camps.
I do not speak for Mr. Buffett in any way. I have attended his annual meeting in Omaha on eight occasions, but he doesn’t know me from Adam.
And our capabilities are not remotely comparable. In fact, one of the titles I considered for this topic was “Trying to Invest like Warren Buffett when you’re not Warren Buffett.” But then, all of us are trying to live up to the giants of our field and few, if any of us, will measure up. My task today is to present what I consider to be the principles of the quality school of value investing, and to show its line of descent from the teachings and experience of Benjamin Graham and Warren Buffett.