This article appeared in the New Haven Register on June 11, 2017.
Last of four parts on legendary investors.
The fourth and final entry in my survey of legendary investors brings us full circle, back to Benjamin Graham, “The Dean of Wall Street.” Graham’s most successful and most famous student is Warren Buffett, “The Oracle of Omaha.”
Buffett, 86, founder and chairman of Berkshire Hathaway, became the world’s richest man in 2008, and has remained in the top three ever since. (Forbes’ annual list of “The World’s Billionaires.”)
Buffett, a lifelong proponent of value investing, became interested in entrepreneurship and investment as a young child. He earned a Master of Science degree in economics from Columbia University, where Graham was one of his teachers. He joined Graham’s partnership a few years after graduating, as a securities analyst. When Graham retired, Buffett struck out on his own. (Biography.com, Investopedia, Forbes)
Graham’s ideas formed the foundation for Buffett’s investing career, although Buffett added his own principles over the years to form what’s known as “The Buffett Way.” Graham created an objective approach to investing based on disciplined analysis and a search for companies whose stock price sits below its true value, known as “value investing.”
Like Graham, Buffett only invests in companies that he knows and understands. He also subscribes to Graham’s principle of studying individual businesses rather than watching the economy or the overall stock market for guidance. Like Graham, Buffett is a long-term investor who avoids selling as much as possible. Other aspects of Buffett’s philosophy include:
Look for Lasting Value. Before investing, Buffett will decide whether he believes, based on analysis, the company is likely to thrive for a decade or more. He has famously avoided investing in today’s trendy Internet companies, stating that it’s too difficult to predict future value.
Evaluate Management Quality. Buffett looks at the history of management, emphasizing whether the company’s leaders have wisely reinvested profits and returned some profits to shareholders, among other measures of “management rationality.”
Determine Financial Health. Buffett looks at a number of technical measures including return on equity, and looks for companies with low leverage and high profit margins.
Locate the “Moat.” Buffett came up with this term to describe an intangible advantage enjoyed by a company that protects it against a loss of market share to competitors. Examples might be patents or access to low-cost materials.
On a more personal note, Buffett is a well-known exponent of living below your means in order to build wealth. With a net worth now exceeding $70 billion, he continues to live primarily in a modest Omaha house he bought in 1958. Additions have increased the size of the house to 6,570 square feet, but it’s not a mansion by any means. He also owns a vacation home in California, which has been on and off the market in recent years.
Let’s finish this series on legendary investors with a nugget of contrarian wisdom from Buffett:
“Be fearful when others are greedy. Be greedy when others are fearful.”