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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

Warren Buffett's Other Teacher

Benjamin Graham taught Buffett how to invest, but he learned even more from this investor

January 07, 2019 | About:

Warren Buffett (Trades, Portfolio) is widely considered to be the best investor alive today, and it is widely known and understood that his investment philosophy has been shaped by the ideas first published by Benjamin Graham, his teacher and mentor.

But there is one other character in the history of Warren Buffett (Trades, Portfolio) that is almost always overlooked.

The other teacher

Buffett's investment strategy today is far more reflective of this overlooked investor than that of Graham. Granted, the Oracle of Omaha's investment strategy has changed significantly over the past few decades. It used to be very similar to the approach first performed by Graham.

However, as the number of Graham-style opportunities has disappeared, Buffett's investment strategy has changed and adapted to the different environment. His investment strategy now looks more like that of Phil Fisher.

Buffett on Fisher

If you don't know who Fisher is, I highly recommend you go out and buy his book, "Common Stocks and Uncommon Profits," which was first published in 1958.

Fisher's investment strategy was very similar to the one Buffett uses today. He was looking for undervalued growth stocks and stocks that had a hidden competitive advantage. When he found the right opportunity, he would then buy and devote a significant portion of his portfolio to the company. Diversification was not something he advocated.

We know Buffett learned a lot from this approach because he has said previously that Fisher's way of investing significantly influenced his own style. He even wrote an article praising the investor in Forbes.

"What Can We Learn From Phil Fisher" was first published in October 1987 and was written by Buffett and Thomas Jaffe.

"When I first met him," Buffett wrote, "I was as impressed by the man as by his ideas. Much like Ben Graham, Fisher was on unassuming, generous in spirit and an extraordinary teacher. From him, I learned the value of the 'scuttlebutt' approach: Go out and talk to competitors, suppliers, customers to find out how an industry or company really operates."

The Oracle of Omaha continued, "A thorough understanding of the business, obtained by using Phil's techniques, combined with the quantitative discipline taught by Ben, will enable one to make intelligent investment commitments. I am an eager reader of whatever Phil has to say, and I recommend him to you."

I think this is, without a doubt, one of the most misunderstood parts of the Buffett story. Yes, Graham and his investment strategy have been responsible for a large part of Buffett's success, but more often than not people overlook the impact Fisher had on his style.

The Scuttlebutt Method

The critical difference between Graham and Fisher's style is the Scuttlebutt Method. While Graham advocated concentrating on a company's financials only, shunning conversations with management in favor of rigorous fundamental analysis, talks with the company, its staff, customers, suppliers and all other stakeholders were a critical part of Fisher's process. It is easy to see the merits of this approach when combined with Graham's rigorous analysis of the numbers.

In his book, Fisher provided a comprehensive list of questions to ask during the Scuttlebutt approach and believed that the amount of time you get from crucial management is often determined not just by the size of financial interests but also by the competence of the individual investor.

Some of the questions he proposed investors should be asking included, "How effective are the company’s research and development efforts in relation to its size?" and "How good are the company’s cost analysis and accounting controls?" As you can see, these are designed to determine far more than the numbers alone ever could.

"Common Stocks and Uncommon Profits" contains invaluable advice from one of history's most significant investors that is often overlooked.

Disclosure: The author owns no share mentioned.

Read more here: 

Asset Allocation: Is the 60-40 Portfolio Worth It? 

A Lesson From GE: Don't Chase Dividends 

Buffett's 2 Tips for Surviving Sell-Offs 

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

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