I’m a bit of a Warren Buffett freak. His performance statistics require no commentary: had you invested $1,000 in Berkshire Hathaway when Buffet took control in 1965, you’d have more than $5 million today (had you instead purchased an S&P 500 index fund, you’d have about $500,000–still not that shabby).
Buffet’s mentor was Benjamin Graham, author of a book called The Intelligent Investor. Buffett first read it as a senior at the University of Nebraska. After Harvard Business School denied him admission, Buffett went to Columbia (where Graham was a professor) to earn a masters in economics. Upon graduation, Buffett went to work at Graham’s investment firm. After Graham retired, Buffett launched his own business. Graham, Buffett says, influenced his life more than “any other man except [his] father.”
On that basis alone, The Intelligent Investor is worth reading (I like the fourth edition, which includes helpful commentary by Jason Zweig).
In particular, Buffett partially explains his investment performance as the result of two primary steps: first, developing a coherent decision-making system; second, preventing emotional highs or lows from “corroding” that framework. Graham’s book is the foundation for Buffett’s value investment framework.
To paraphrase Zweig, Graham’s strategy is based on a number of central principles:
- Stocks represent ownership in a business; underlying value is not necessarily directly related to share price.
- Markets constantly fluctuate between periods of excess enthusiasm (where prices rise to unsustainable levels) and irrational cynicism (where prices fall to much cheaper levels). Intelligent investors (a category which hopefully includes venture capitalists) take advantage of this trend.
- The future value of an asset is directly related to its current price. Paying more today, then, guarantees a lower return.
- There is no surefire method of eliminating all possible mistakes. Instead, Graham recommends that investors keep a “margin of safety.” Essentially, this means avoiding overpaying for purchases, regardless of how enticing or alluring the given investment might seem.
Simple enough in theory, but often hard to consistenly apply in practice. That said, the book contains little specific direction for how or when to buy securities; instead, the text is more about Graham’s notions of a proper investment attitude and mindset. If you’d like to become a better investor, it’s worth a read.
Here’s Buffett’s current portfolio:
Finally, I have copies of all of Buffett’s annual reports from 1957-1970 (originally via Brad Feld–thanks). They’re spectacular; if you’d like a copy, let me know and I’ll send them to you. Unfortunately, I was asked not to post them publicly, though I’m told that emailing is OK.
Interesting how few technology is on there.
Left by Mark Milligan on January 5th, 2006