As part of my research process for another article, I recently re-read Warren Buffett (Trades, Portfolio)'s now-famous essay, The Superinvestors of Graham-and-Doddsville.
Even though the article was written nearly four decades ago, it still contains plenty of valuable information for value investors today. Most noticeable is the concept that it is possible to outperform the market if you think differently from the rest of the market participants.
Even though Superinvestors concentrates on value investing and those value investors who Buffett believed had the best records at the time, the underlying message is that of contrarianism and fundamental analysis.
To put it another way, Buffett was trying to get across the idea that as long as you act differently from the rest of the market, you have a good chance of outperforming the market by moving in the opposite direction to the rest of the herd. This lesson is just as valuable today as it was in 1984.
Price and value
As Buffett wrote in his essay, "In this group of successful investors that I want to consider, there has been a comment intellectual patriarch, Benjamin Graham ... The patriarch has merely set forth the intellectual theory for making coin-calling decisions, but each student has decided on his own manner of applying the theory."
It went on say, "The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of the business and the price of small pieces of that business in the market."
Here we have a fact that rings true to this day. Even though equity markets around the world have changed substantially since Buffett first penned Superinvestors, the process of finding an undervalued opportunity remains the same. The only difference is, today, it is much harder to find these opportunities because there are so many more people searching for them. Investors have to work harder to find value and price discrepancies.
At the same time, we have to understand our own strengths and weaknesses and use these to help build an individual investment strategy. That's precisely how the Superinvestors of Graham-and-Doddsville made their strategies -- as Buffet explained in his essay, these investors took the lessons they had learned from Benjamin Graham and then applied them to the real world in the best way they saw fit.
All of the investors profiled in the article followed similar but different strategies. All of the approaches are based around rigorous fundamental analysis and the principle of buying a stock for less than its intrinsic value, but there the similarities end.
For example, the first investor profiled was Walter Schloss, who was quite comfortable owning over 100 stocks in his portfolio at any one time, as long as they all traded at a deep value multiple.
Then there was Tweedy, Browne Partners. As Buffett wrote, these investors "occasionally bought control of businesses" that they thought were substantially undervalued, something Schloss would never endeavor to do. The same is true of the Buffett Partnerships. Buffett was quite happy to buy a controlling stake in businesses and instigate change to unlock value, although he would never borrow money.
Charlie Munger (Trades, Portfolio), on the other hand, was not afraid to borrow money. According to stories of his partnership years, Munger seemed perfectly comfortable borrowing vast amounts of money and investing his whole partnership portfolio in just one position to make as much money as possible. This worked well for Munger, but it didn't work well for Rick Guerin, who, according to Buffett, "wanted to get rich too fast."
Growing experience
It is always fascinating going back through old articles such as The Superinvestors of Graham-and-Doddsville because there is always something new you can learn.
As information compounds and your latticework of mental models grows, reviewing old articles with a fresh perspective or new information about the rest of the world can yield fascinating, previously unseen insights. On this occasion, it is the insight that there is much more to Buffett's Superinvestors essay than first meets the eye.
The article is not just about value investing, but also building an investment strategy that you are comfortable with, based around the idea of value and fundamental analysis.
Disclosure: The author owns no share mentioned.
Read more here:Ă‚
Compounding Should Be at the Heart of All Investment StrategiesÂ
John Bogle's Greatest Lesson for InvestorsÂ
Some Thoughts on Market TimingÂ
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