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The Evolution of the Idea of “Value Investing”: From Benjamin Graham to Warren Buffett

February 17, 2013 | About:

Note: I believe that this study has been previously posted in the GuruFocus forum several years ago, and I think that is how I became aware of it:

The Evolution of the Idea of “Value Investing”: From Benjamin Graham to Warren Buffett

by Robert F. Bierig, Duke University, Durham, North Carolina, April 2000

http://econ.duke.edu/uploads/assets/dje/2000/bierig.pdf

A couple of excerpts:

'...the writings of investor Philip A. Fisher affected Buffett’s evolution. As Buffett readily admits, “I am leagues ahead richer than I would be if I hadn’t read Phil.” Fisher’s first two books, Common Stocks and Uncommon Profits and Conservative Investors Sleep Well, stressed the importance of avoiding excessive diversification and the advantages of owning high quality businesses for the long-term. “Much like Ben Graham,” wrote Buffett after meeting Fisher, he “was unassuming, generous in spirit and an extraordinary teacher.”'and,

'Throughout his career, Buffett has stuck to one overriding mission: to search for companies selling for less than their “intrinsic value.” Attempting to carry out such a mission would be impossible if not for the belief that “price is what you pay; value is what you get.” This notion is absolutely central to the Ben Graham intellectual system. And it remains absolutely central to Warren Buffett’s updated, modern approach.

Many pundits have called attention to Buffett’s metamorphosis away from Ben Graham, noting Buffett’s supposed change from a “value” investor to a “growth” investor. This sort of pigeonholing misses the point. To Buffett, the entire growth/value distinction is a fallacious one. In his mind, the growth potential of a business represents a component of its value in the same way that its assets are a component. “At a price, Coca-Cola’s potential represents good value; at some higher price, it does not.”'

In the study's conclusion the author writes:

A naive observer of Buffett today would find it difficult to see the Ben Graham influence in many of his activities. However, that influence remains at the core of Buffett’s investment model. Buffett continues to think about stocks as fractional ownership interests in underlying businesses, he continues to operate under the assumption that there is a distinction between price and value, and he continues to search for the largest discrepancy between those two items. In other words, he continues to be a “value investor.”


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