The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market...Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses.
While the influence of Graham and Dodd is significant, these successful investors put the theory to work in very different ways. It's no secret (and it's been covered on this blog more than a few times) that Warren Buffett and Charlie Munger prefer portfolio concentration over diversification.** Well, Walter Schloss, one of the "superinvestors", was known to diversify a whole lot and has an incredible long-term record. So each investor finds what works (or doesn't) for them even if they've built upon ideas that have a common origin.
Buffett contrasted the investing style of Walter Schloss with his own in "Superinvestors":
Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that's all he does...He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do -- and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him.
Most successful investors are independent thinkers. Buffett further made this point:
[Stan] Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth?
In my view, two of the big benefits of owning shares in fewer businesses ideally for a very long time is: 1) surprises become less likely as familiarity grows, and 2) there's less chance of getting the value very wrong.
Yet there's clearly many other ways that work. Each investor has to find their own independent "recipe" that fits them. That's why I happen to think that no investor in marketable stocks should buy something just because some other investor -- even someone who has a very good track record -- has bought it.
The specific approach put into practice (and the specific stocks bought and sold) matter much less than the common theme here:
Buying shares when they happen to sell at a price comfortably below one's own appraised per share value of a business.
Mason Hawkins, Chairman and Chief Executive Officer Southeastern Asset Management, recently answered questions for readers of GuruFocus. He had this to say:
Because of the short investment time horizons in the markets today, we often get the chance to buy businesses that we have previously owned. Generally, companies and managements that we have lived with successfully in the past come with fewer unknowns and therefore less appraisal risk.
I think jumping in and out of too many stocks can lead to mistakes that wouldn't otherwise get made but, whatever the approach, it all gets back to sound judgment of value and always paying a meaningful discount to it.
* The "superinvestors" mentioned by Warren Buffett include: Walter Scloss, Tom Knapp (Tweedy Browne), Ed Anderson (Tweedy Browne), Bill Ruane (Sequoia Fund) , Rick Guerin, Stan Perlmeter and, of course, Charlie Munger.
** The Berkshire Hathaway (BRKa) equity portfolio itself is, to this day, very concentrated. Yet as Berskhire has grown in size and complexity it has become impossible for them to concentrate the entire portfolio (i.e. including all the operating businesses they control). Their equity portfolio frequently has 60-70 percent and, at times, even more allocated to just five stocks. It remains roughly constructed that way.
The Superinvestors of Graham-and-Doddsville