Among the many speeches Warren Buffet, the sage of Omaha, has delivered over the years, the most significant is The superinvestors of Graham and Doddsville, delivered to the students of Columbia Business School in 1984. The speech was delivered at a seminar marking the 50th anniversary of the publication of Benjamin Graham and David Dodd's all-time classic, Security Analysis.

Graham and Dodd, through their book Security Analysis, brought structure to the field of investments by creating an intellectual framework on which an investor could base his investment decisions. Before this book was authored, investment was an extremely disordered and muddled area.

Warren Buffet was a student of Graham and over the years, has remained committed to Graham's philosophy of 'value investing'.

In the speech he delivered at the Columbia Business School in 1984, he said, "The common intellectual theme of investors from Graham and Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market".

In the same speech he gives the example of the Washington Post Company, which in 1973 was selling for $80 million in the stockmarket. At the same point of time, the assets of the company were worth not less than $400 million. So, the price of the business was much less than its value. And that made it a good buy.

The stockmarkets are not efficient i.e., the price of a stock does not reflect everything that is known about the company's prospects, in particular, and the state of the economy, in general. Given this, there are stocks which sell at a price less than the price they should be actually selling at. So, the only thing that the value investor is bothered about is the worth of the business.

As Buffet points out in the speech, regarding the value investor, "He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume or anything. He's simply asking: What's the business worth?"

The answer to this question obviously depends on the level of understanding the person has of that particular business. As Buffet points out about value investors in the speech 'While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.'

The time of entry into a stock is also not important for a value investor. As Buffet remarks in the speech, "He doesn't worry about whether it's January, he doesn't worry about whether it's Monday, he doesn't worry about whether it's an election year.

He simply says if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me". At the same time, Buffet admits that the idea of value investing does not go down well with people.

As he points out, "One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn't take at all. It's like an inoculation. If doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference".

Posted by toughiee on Tuesday, January 03, 2006 at 12:00 PM | Permalink