Ben Graham & Warren Buffett: Investment Philosophy by Value Edge
Recently, I came across this tribute video to the Legacy of Ben Graham by Columbia Business School. Whilst the key takeaway were the concepts Ben Graham left behind, I felt that another major point highlighted (by Buffett himself) was the key difference between Ben Graham and Buffett.
While Buffett was praising his mentor he subtly mentioned how his investment route has deviated from Graham’s original philosophy. Essentially the point he was driving at was that Graham’s philosophy was more about buying cheap average companies and diversification while himself, he took on more concentrated positions in quality companies at reasonable valuations.
He was not looking at all for the great business, he was looking for mediocre to a little bit better than that..businesses that were selling very very cheap..and it worked very well. But, of course the irony is that the shareholders of Graham made more money out of Geico which is the antithesis of the company that he would normally invest in.
Between Graham and Buffett, both are legendary investors in their own aspect. However, the question most investors, myself included would ask would be:
Which investor’s philosophy should I follow? Graham’s philosophy of buying average businesses selling at cheap valuations or Buffett’s philosophy of buying quality businesses at reasonable valuations.
My thoughts on the matter:
For Ben Graham, it was just a numbers game. Buffett, on the other hand preferred a more qualitative approach when analysing companies. He would visit companies, understand the business model and the economic moat it creates, talk to management and consider the potential of the company in the next 5 to 10 year horizon. The difference between Graham and Buffett would be that the former felt that such qualitative analysis was useless and at times counterproductive.
The beauty of investing would be that we need not swing at every pitch. We can keep waiting for that one perfect pitch before deciding to swing our bat and there’s no umpire who would call you out. Buffett is someone who is constantly waiting for that home run pitch. Whereas Graham, was just concerned about hitting base hits after base hits. While I have not been investing for a great number of decades, in my few years of investing, I am fortunate enough to have met various investors who may advocate either a Graham’s or Buffett’s -styled investment philosophy. Through this, I have definitely learned a lot – reading their investment analysis on companies and trying out each style, seeing what best fits me.
Warren is brilliant. There is nobody that has ever been like him, and there never will be anybody like him. We cannot be like him.
This is not to say we should not continue our strive to invest like Buffett. From Buffett’s partnership letters and interviews, he has a tremendous amount of investing knowledge that us investors can learn from. However, the caveat here would be we should understand our own strengths when it comes to investing. The skill set Buffett has is something innate and difficult to replicate – not impossible but difficult. Someone who is able to would probably be that one in a million. While with Graham, his investment philosophy and style is something much easier to copy. Essentially, he wanted to create a strategy that anyone would be able to replicate easily.Given simple mathematics and a focus mindset, any average joe would too be able to emulate aspects of his investing methodology.
To sum it up, both philosophies are proven strategies that work. The crux would be understanding that us as an individual, what are our strengths and playing to it. For me personally, I know that I am more of a Graham/Schloss guy. While I do look at companies qualitatively, it is only after conducting an extremely Graham-style screening process. One might even say that if I just stopped at the screening process, I would probably still outperform the markets. Perhaps over the years as my experience towards industries and companies deepen, my investment philosophy would too start tending towards Buffett. However, as of now, I place a greater emphasis on getting those base hits secured. As many backtests have shown, with Graham’s valuation technique, it not only worked during his time, Buffett’s earlier years but a strategy that will work today and in times to come.