“If at all I have been able to see any further, it is because I have stood on the shoulders of giants,” said Sir Isaac Newton. He was spot on given that most of the big things we do in our lives are generally inspired by someone else – someone we idolize, or someone who trains us.
In my career and life of the past eight years, I have come across several giants – people who have lent their helping hands in training me in investing and stock market research.
But my best teachers all these years have been three people, whom I have never met personally, but have seen them through books written by/on them.
These teachers are – Benjamin Graham, Philip Fisher, and Warren Buffett – the legends in the field of value investing. While Graham and Fisher are no longer alive, Buffett continues to amaze me with his wit and wisdom on investing and how he handles his investments.
This lesson is a dedication to these three legends. It also discusses briefly the one big idea (each) that has come to be the hallmark of their investing philosophies.
Benjamin Graham (1894-1976)
The legend: Graham is also known as the father of value investing. His biggest contribution to the investing world has been his two books that were published almost eight decades ago. The first – Security Analysis – was published in 1934.
As the name suggests, it was meant for people who wanted to understand the quantitative analysis part of buying an investment, whether a stock or a bond.
Graham’s second book – The Intelligent Investor – came out in 1949. Now this is the most widely acclaimed book on value investing and has been described by Warren Buffett as ‘by far the best book on investing ever written’.
Graham wrote this in extremely simple manner, so that the man on the street can understand it, and incorporate the learning in his investing.
Graham’s big idea: The investing world sums up in three simple words – margin of safety. These are also the three most important words for an investor. We studied the concept of margin of safety in lesson eight of this series on Value Investing for Smart Investors. So I won’t go in much detail again.
But in simple terms, margin of safety is the difference between the intrinsic value of a stock and its market price. It is like paying Rs 50 for a stock that is worth Rs 100, so that even if the actual worth is Rs 80, your buying price of Rs 50 is still much less and won’t lead into trouble if the stock were to fall.
Anyways, margin of safety was not the only big idea that came from Graham. He is inarguably called the father of vale investing. And just like any devoted father, this man has contributed a lot the founding and development of this field of sensible investing.
And you can grasp all his learning by just reading The Intelligent Investor, and also by following Safal Niveshak where we will discuss a lot about the man, and his ideas.
Let’s now turn to another doyen of the value investing field, Philip Fisher.
Philip Fisher (1907-2004)
The legend: Though not as widely known as Graham, Fisher has also contributed remarkably towards the development of value investing. He is best known for dispelling his learning through his famous book – Common Stocks and Uncommon Profits – that is a must-read for all value investors and those who are trying to learn the art.
While Graham was more of a quantitative investors – deeply analysing the numbers before buying his stocks – Fisher add the tinge of qualitative aspects to the field. Graham, for instance won’t buy a stock trading at a P/E higher than 15 times, no matter what the quality of the company was.
Fisher, on the other hand, was all for paying a higher price (though not very high!) for a quality business.
Fisher’s big idea: He called it ‘scuttlebutt’. Simply explained, it means keeping your mind, eyes, an ears open while studying a company. This involves meeting the company’s management, its competitors, buyers and suppliers to take an all-round view of the company. XYZ
Warren Buffett (1930)
The legend: Buffett is inarguably the best practitioner of the value investing ideas laid out by Graham and Fisher. He in fact calls himself ‘85% Graham and 15% Fisher’! While not much information is available regarding the investment returns and wealth of Graham and Fisher, Buffett’s story is an open book.
Adhering to the value investing principles that he learnt from these two masters, Buffett has grown his wealth at an average annual rate of over 20% during the past 45 years. While this number might not mean much at first, it is enough to grow every Rs 100 invested into Rs 3.6 lac over a 45 year period. This is unmatched by any other investor, living or dead.
Buffett’s big idea: While most of Buffett’s ideas are what he learnt from Graham and Fisher, the simplicity with which he has passed on these ideas to generations of investors is what is his biggest idea. Buffett’s annual letter to the shareholders of his company Berkshire Hathaway are considered a must read for any investor, analyst, or fund manager just starting out.
These letters that come out at the end of February each year (here’s the latest letter), contain a wealth of investing ideas and how Buffett practices them to invest his company’s money. These letters are the ultimate epitome of selflessness from the man who has been the most generous in passing over his legacy to the investing world.
With this, we come to the end of this educational series on value investing. I hope ‘Value Investing for Smart Investors’ has really made a worthwhile and easy reading for you.
Value investing is a very vast field and I will not claim to have covered all aspects of it through this series.
But it has been my sincere effort to include all the major ideas from the field that can be part of every sensible investor’s toolkit.
P.S.: Got here via a link from a friend, or a forwarded email? This is the nineteenth lesson of the 20-lesson free email course on the essential pillars of becoming a successful investor, Safal Niveshak-style. We talk about simple investing strategies that will work for you, and make you a smarter and successful investor.
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