1. Why is Buffett’s speech titled this? Because this article begins with the most common attack on value investing, attackers believe that efficient market theory exists, making value investing itself a darts game. In fact, the reason why Buffett can find good investment targets is precisely because of the failure of the market, and the reason why the market fails is precisely because efficient markets do exist. This is actually Hegel's dialectics in philosophy, that is, any "I" At the same time, they naturally show the essential characteristics of "me" in the evolution to "not-me" attributes (note by Larry Lu);
2. Buffett cited several successful value investors that he is familiar with. ——"If you find that all 40 winners come from a very unique zoo in Omaha. Then you will definitely go to this zoo to find the zookeeper to find out.";
3. Point out value investment Core: Investors who follow Graham and Dodd only care about two variables - value and price;
4. Then discussed 9 investors in detail. Please note that their characteristics are different;
5. Finally, there are the basic principles of value investing, which may be the most important content of this article.
Every value investor's investment performance comes from taking advantage of the difference between a company's price in the stock market and its intrinsic value - Buffett
The value investing strategy ultimately comes down to Benjamin -The thoughts of Benjamin Graham. At the end of 1934, he collaborated with David Dodd to complete his long-gestating "Security Analysis". This epoch-making work marked the birth of the securities analysis industry and the idea of ??value investing. This masterpiece has been published in five editions over the past 70 years and is known as the "Bible" for investors.
The New York Securities Analysts Association emphasized that Graham "is as important to investment as Euclid is to geometry and Darwin is to biological evolution. Graham "gives this amazing city He drew the first map that could be relied on, the city where he hesitated, and he laid the methodological foundation for value investing. Before that, stock investment was almost indistinguishable from gambling. Value investing without Graham is like communism without Marx-principle will no longer exist. "It is usually believed that Graham established the principles of security analysis, so Graham is revered as the father of modern security analysis.
In 1984, a memorial ceremony was held at Columbia University to commemorate the work co-authored by Graham and Dodd. During a celebration of the 50th anniversary of the publication of Security Analysis, Buffett, the only student to whom Graham gave an "A" in his investment class at Columbia University, gave a lecture in which he reflected on It is an indisputable fact that Graham's followers have continuously defeated the market using value investment strategies for 50 years. Summarizing the essence of value investment strategies, it can be said that it has great influence in the investment community. It can be said that you understand it. Buffett's speech can capture the essence of value investing and clarify the connotation of value. Let's listen to the speech of Buffett, the greatest value investing master of our time.
Text of the speech: Is value investing obsolete? (By Warren Buffett 1984) Is Graham and Dodd's security analysis method of "looking for value with a significant margin of safety relative to price" obsolete? Professors have made the latter assertion in their large textbooks. They repeatedly claim that the stock market is efficient, which means that stock prices reflect all information about the company's development prospects and economic conditions. These theorists claim that, Because smart stock analysts use all available information to run analytical judgments that keep stock prices at reasonable levels, there are no stocks that are undervalued by the market year after year. Investors are just the lucky few who win consecutive lottery prizes. One professor wrote in his now popular textbook: "If stock prices fully reflected all available information, these investment techniques would be useless. usefulness. ”
Haha, maybe so. But I want to introduce you to a group of investors who beat the S&P 500 stock index year after year. Their experience irrefutably shows that the idea that they consistently beat the market The simple view of just chance is difficult to establish. We must delve into the root causes. One key fact is that these stock market winners are all very familiar to me and have long been recognized as super investors. The person who became famous the latest also became famous 15 years ago. If this is not the case, I just recently searched thousands of investment records and selected a few people with outstanding performance to introduce to you here. , you can drive me away by hearing this. I will add that their investment performance records have been rigorously audited. Also, I will add that I also know many investment managers who choose these. The investment returns they have received over the years are fully consistent with the public investment performance records of these investment managers.
National Coin Toss Contest
Before we begin to explore the mystery of these investment masters' continuous victory over the market, I would like to invite everyone here to watch an imaginary game with me. National Coin Flip Contest. Suppose we mobilize 225 million people in the United States to bet $1 tomorrow morning on whether a tossed coin will land heads or tails. The winner will win $1 from the loser. The losers are eliminated each day, and the winners put all their winnings into the next day's bet. Over ten mornings of competition, approximately 220,000 Americans will have won in a row, each winning just over $1,000.
The human nature of vanity will make these winners start to feel a little complacent. Although they want to appear as humble as possible, at cocktail parties, in order to attract the favor of the opposite sex, they will brag about their achievements in How to be extremely skilled at tossing coins and how to be a genius.
If the winner gets the corresponding bet from the loser, in ten days, (there will be 215 winners who have guessed the heads and tails of the coin correctly 20 times in a row, through this series of competitions) each of them Won as much as $1 million with $1. 215 winners won $225 million, which also means the other losers lost $225 million.
This group of big winners who have just become millionaires will definitely be so happy that they will probably write a book - "How I Only Worked 30 Seconds a Day to Use 1 in 20 Days" Earn $1 million in U.S. dollars.” What's more, they may fly around the country to participate in various seminars on the magical skills of coin tossing, taking the opportunity to laugh at the doubtful university professors: "If this kind of thing can't happen at all, how can we Did these 215 big winners fall from the sky? ”
In this regard, some professors from the School of Business Administration may become angry and point out with disdain: Even if 225 million gorillas participate The same coin tossing contest had the same results, except that the winner was the 215 arrogant gorillas who guessed correctly 20 times in a row. But I beg to differ. The winners in the cases I describe below did have something distinctly different about them. The case I am talking about is as follows:
(1) The 225 million orangutans participating in the competition are roughly distributed across the country like the population of the United States;
(2) After 20 days of competition, There are only 215 winners left;
(3) If you find that 40 of the winners are all from a very unique zoo in Omaha. Then, you will definitely go to this zoo and ask the keepers to find out: what food they feed the orangutans, whether they have any special training for these orangutans, what books these orangutans are reading, and other things you think are possible reason. In other words, if there is an unusual concentration of successful winners, you want to know what unusual factors are causing the unusual concentration of winners.
Scientific exploration generally follows exactly the same pattern. If you were trying to analyze the cause of a rare cancer, say there are 1,500 cases in the United States every year, and you found that 400 of them occurred in a few mining towns in Montana, you would look very closely at it. local water quality, occupational characteristics of infected patients, or other factors. Because you know very well that the occurrence of 400 cases in a small area cannot be accidental. You do not need to know what the cause of the disease is from the beginning, but you must know how to find possible causes of the disease.
The Graham and Dodd Value Investing Tribe
Of course, I agree with you that, in fact, there are many other factors besides geography that make winners very unlikely. concentrated. In addition to geographical factors, there is another factor that I call the intellectual factor. I think you will find that the numerous big winners in the investment world are disproportionately all from a small intellectual tribe - the Graham and Dodd tribe. This concentration of winners cannot be explained by chance or randomness. Sexuality can ultimately be attributed to this unique intellectual tribe.
There may be some reasons why this concentration of winners is actually just a mundane thing. Perhaps the 100 winners simply imitated a very convincing leader's approach to guessing heads and tails of a coin toss, and when the leader guessed heads, 100 followers chimed in. If this leader is one of the 215 winners, then it makes no sense to think that 100 of them who just echoed the words won because of the same intellectual factors. You are just taking 1 One success story was mistaken for 100 different success stories. Similarly, imagine that you live in a society dominated by strong patriarchs. For convenience, let's assume that each American family has 10 members. We further assume that the dominance of parents is very strong. When 225 million people go out to run the competition on the first day, every family member will obey their father's orders. Whatever the father guesses, the family members will guess. Then, after the 20 days of competition, you will find that the 215 winners are actually from 21.5 different families. The naive ones will say that this situation shows that the success of coin guessing can be explained by the strong power of genetic factors.
But this statement is actually meaningless, because the 215 winners are not all different. In fact, the real winners are 21.5 randomly distributed and different families.
The group of successful investors I want to study have a unique intellectual patriarch—Benjamin. Graham. But when these children grow up and leave this intellectual family, they run investments according to very different methods. They live in different areas and buy and sell different stocks and companies, but their overall investment performance is by no means due to the fact that they made exactly the same investment decisions based on the instructions of the patriarch. The patriarch only provided them with the ideological theory of investment decisions. Each student decided in their own unique way how to apply the theory.
The common intellectual core shared by investors from the "Graham and Dodd tribe" is to find the difference between the value of the enterprise as a whole and the market price of the stock that represents a small part of the enterprise. Differences, in essence, they exploit the differences and pay no attention to the issues that efficient market theorists are concerned with - whether stocks should be bought on Monday or Tuesday, in January or July, etc. wait. In short, entrepreneurs acquire businesses in the same way that Graham and Dodd investors buy outstanding stock—and I highly doubt that many entrepreneurs will be particularly specific in their acquisition decisions. Emphasize that the trade must run during a specific month of the year or a specific day of the week. If it doesn't make any difference whether an entire acquisition of a business runs on a Monday or a Friday, then I can't understand why academics would spend so much time and effort studying how the difference in trading hours for a stock that represents a small portion of the business would have on investment performance. What impact. Investors who follow Graham and Dodd will not waste their energy discussing beta, the capital asset pricing model, or the covariance between the returns on investment in different securities. They are not interested in these things at all. In fact, most of them don't even understand the definitions of these terms. Investors who follow Graham and Dodd only care about two variables-value and price.
I am always surprised to find that so much academic research is in the same vein as technical analysis, focusing on stock price and volume behavior. Can you imagine buying a business outright just because its price increased significantly in the first two weeks. Of course, the reason for the proliferation of research on price and quantity factors is the widespread use of computers. Computers have produced endless data on stock prices and transaction volumes. These studies are unnecessary because they are useless. These studies have emerged. The reason is simply that there is plenty of data readily available, and academics have painstakingly learned advanced mathematical techniques for playing with the data. Once people master those skills, they will feel guilty if they don't use them, even if the use of these skills has no effect at all or even has negative effects. As a friend once said, to a man with an axe, everything looks like a nail.
Stan﹒ Stan Perlmeter's investment performance record. He graduated from the Art Department of the University of Michigan and is a graduate of Bozer. Co-owner of Bozell & Jacobs advertising agency. His office and mine happened to be in the same building in Omaha. In 1965, he found that the investment industry I was engaged in had better prospects than the advertising industry he was engaged in, so he left the advertising industry. With Li Ke﹒ Like Gurian, Stan. Within five minutes, Permita fully embraced the concept of value investing.
Stan﹒ The stocks held by Permita are the same as those held by Walter. Unlike Skorows and Bill's stock holdings, their investment records show that they each ran separate stock investments independently, but Stan. Every time Permita bought a stock, he was convinced that the return he would get from selling it in the future was greater than the price he paid to buy it. This was the only factor he considered. He doesn't care what the company's quarterly earnings forecast is, nor what the company's earnings forecast is for next year. He doesn't care what day of the week the trading time is, nor does he care what any institution's investment research report evaluates the stock. He cares about the stock price momentum. (momentum), trading volume and other indicators are not interested at all. He only focuses on one question: what is the value of this company.
8. The Washington Post Company's Pension Fund
The investment performance records belong to the two pension funds in which I participate. They are not from the two pension funds in which I participate. Among more than a dozen retirement funds selected, his is the only two retirement funds whose investment decisions I can influence. In these two funds, I guided them to transform into value-oriented investment managers. There are only a very few funds that run investment management based on value.
Table 8 is the investment performance record of the Washington Post Company Retirement Fund. A few years ago, they entrusted a large bank to manage the fund, and I later suggested that they hire a value-oriented fund manager, which would lead to better investment performance.
As you can see in the investment record, since they changed fund managers, their overall investment performance has been among the best among all funds.
The Washington Post Company requires fund managers to keep at least 25% of their funds invested in bonds, and bonds may not be an investment choice for fund managers. Therefore, I also included their bond investment performance in the table, and these data show that they have no special bond expertise, and they have never boasted about it, although 25% of the funds are invested in their They are not good at bonds, which has dragged down their investment performance, but their fund management performance level is still among the top 100. The Washington Post Co. Retirement Fund's investments, while not weathered by a lengthy market downturn, still serve as evidence that many of the three fund managers' investment decisions were not made with the benefit of hindsight.
9. FMC Corporation Retirement Fund
The investment performance belongs to FMC Corporation Retirement Fund. I have not managed a penny of this fund, but I did influence them in 1974. decisions to convince them to choose value-oriented fund managers. Until then, they selected fund managers in the same way as other large corporations. After they switched to a value investing strategy, their investment performance now ranks No. 1 in the Becker survey of pension funds, outperforming other similarly sized funds. In 1983, the fund had eight fund managers who had served for more than one year, and seven of them had cumulative investment performance exceeding the S&P Index. During this period, the net return difference between the FMC fund's actual performance and the fund's average performance was $243 million. FMC attributed this to their unique tendency to select fund managers, which may not necessarily be my personal choice. , but they all have the same characteristic, which is to select stocks based on value.
The above nine investment performance records are all from the investment winners of the Graham and Dodd tribe. I did not select these from thousands of investors with the benefit of hindsight. 9 big winners, and not reading out a list of lottery winners who I didn’t even know before they won.
Many years ago, I selected them to conduct research based on the structure of investment decisions. I know what kind of investment education they have received, and I also have a certain understanding of their intelligence, quality and personality during the contact, which is very important. It is important to note that this group of people is often assumed to take far below average risk, and note their track record in years of weak stock markets. Although their investment styles are different, their investment attitudes are exactly the same - buying businesses rather than stocks. Some of them sometimes buy the business in its entirety, but more often than not they only buy a small interest in the business. Whether they are buying the entire business or a small portion of the business, their attitude is exactly the same. Some of them have dozens of stocks in their portfolios, others are concentrated in a handful, but each's investment performance comes from taking advantage of the difference between a company's stock market price and its intrinsic value.
Value investing has lower risks but higher returns
I am convinced that there are many inefficiencies in the stock market. The reason why these "Graham and Dodd tribe" investors Success lies in the difference between price and value created by their use of market inefficiencies. On Wall Street, stock prices are greatly affected by herding, and when the most emotional, greedy, or frustrated people determine the highs and lows of stock prices, it’s hard to believe that market prices are rational. In fact, market prices are often ridiculous.
In value investing it is exactly the opposite. If you buy a dollar bill at 60 cents, the risk is greater than buying a dollar bill at 40 cents, but the expected return is higher. A value-based investment portfolio has less risk and much higher expected returns.
Let me give you a simple example: In 1973, the total market value of the Washington Post Company was $80 million. At that time, you could sell its assets to any one of ten buyers on any day. And the price will not be less than 400 million U.S. dollars, or even higher. The company owns the Washington Post, Newsweek, and several television stations with important market positions. These assets now have a market value of up to 2 billion U.S. dollars. Therefore, it is willing to pay 4 Billion-dollar buyers are not crazy.
If the stock price continues to fall now, and the company's market value drops from US$80 million to US$40 million, its Beta value will increase accordingly. For those who measure risk in terms of beta, the lower the price falls, the greater the risk becomes. This is really an Alice in Wonderland myth. I will never understand why using $40 million to buy $400 million is riskier than using $80 million to buy $400 million. In fact, if you can buy several worth of If you are a severely undervalued stock and are proficient in company valuation, then buying $400 million worth of assets for $80 million, especially buying 10 assets worth $40 million each at $8 million each, is basically worthless. Risk free. Because you cannot personally manage $400 million in assets, you hope and are confident that you can find honest and capable managers to manage the company with you. This is not a difficult task.
At the same time, you must have the knowledge to enable you to roughly and accurately assess the intrinsic value of a business. You don't need a very precise assessment of the value. What you need is what Graham said is the margin of safety formed by the value greatly exceeding the price. You don't have to try to buy an $83 million business for $80 million, you want to give yourself a large margin of safety. When you build a bridge, you make sure the bridge can carry a load of 30,000 pounds, but you only allow trucks carrying a load of 10,000 pounds. You should follow the same margin of safety principle when investing.
Value investing will continue to beat the market in the long term
Those of you who are more business-savvy may wonder what the motivation is for my high-minded talk, so that more people can turn to value. Investing will inevitably make the gap between price and value smaller, which will give me less chance of getting my own investment. I can only tell you that value investing strategies were made public as early as 50 years ago when Ben Graham and Dodd wrote the book "Security Analysis". However, I have practiced value investing for 35 years and have never found any The trend of the public turning to value investing seems to have some stubborn nature in humans to make simple things more complicated. Ships will forever circle the Earth, but the Flat Earth Society will still thrive. There will continue to be a wide gap between price and value in the stock market, and investors who believe in the Graham and Dodd value investing strategy will continue to achieve great success.