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Mark Lin
Mark Lin
Articles (212) 

Why the Classic Graham School of Value Investing Appeals to Me

April 29, 2013

Value investing is not easily defined. Charlie Munger says that "All intelligent investing is value investing." Bruce Greenwald, in his book "Value Investing," divides value investing into three main schools: the classic Benjamin Graham style, the contemporary style led by Warren Buffett and the mixed style which includes anything in between Graham and Buffett.

My value investing hero is Martin Whitman and I personally see myself as a mixed-style value investor. But if I had to choose between Graham and Buffett, I have no doubts that the classic Benjamin Graham style of value investing would be my choice.

Ugly is good, less is more

Academics, traders and investors know something in common: the more people that use any strategy, the less effective it will be. According to my conversations with fellow investors and reading of fund managers' investing philosophies, the majority of investors out there are 'Buffett' followers (or at least they claim to be) who shun ugly stocks that the Graham strategy would recommend. In today's world, both net-nets and franchise stocks are 'well-known.' But franchise stocks are typically priced to perfection, while net-nets are only appreciated by long-term, patient individual investors with no market capitalization and liquidity bias.

If you can't replicate it, it may not be so useful

In the Walter Schloss interview with Ronald Chan in the book "The Value Investors," he acknowledged that many people are trying to be like Warren Buffett, but he knew his limitations and would rather invest in the way in which he is most comfortable. Most investors following Benjamin Graham's approach would pick similar stocks, but I can't say the same thing about the Warren Buffett style. Moats and franchises (and their sustainability) are highly debatable and most investors would argue about the presence (or absence) of moats in any single company till the cows go home. There is a greater amount of individual judgment that comes into play with respect to picking Warren Buffett-style stocks. In summary, you can pick Graham stocks with a screener, but it is not so easy with Buffett stocks.

Lazy is not a crime

There are only 24 hours in a single day and most of us hold full-time jobs not related to value investing. The Buffett style of value investing demands a lot of effort. Most value investors want to achieve annual returns of 20% on their portfolios, but are unwilling to spend their weekends reading annual reports. In addition, value investing should not be treated as a hobby, but as one of several wealth management tools used to protect one's nest egg against inflation. I want to earn a decent return on my investments, but I also want a life like Walter Schloss, one of the most successful practitioners of the Graham school of value investing. Walter Schloss lived beyond 100 years old and did a 40-hour work week.

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Mark Lin

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