book.chapter Principles of value investing

Charlie Munger and Warren Buffett are renowned globally as perhaps the most successful proponents of the value investing strategy, originally put forward by Ben Graham. Their unwavering commitment to Graham's four core principles of value investing forms the foundation of their investment decisions. Understanding these principles is essential to grasp the rationale behind their actions. Charlie Munger once said, "The best thing a human being can do is help another human being know more," highlighting the importance of knowledge in investing. To fully understand Charlie Munger's investment strategy, one must first be familiar with the four value investing principles outlined by Ben Graham, a professor of business. Munger believes that being a proficient investor also enhances one's business management skills, and vice versa. He emphasizes the importance of understanding a business's operations before investing in it, suggesting that investors should approach stocks as if they were buying the entire business. This approach involves calculating the business's intrinsic value and understanding the basis of this valuation. Graham's followers, akin to detectives rather than speculators, employ a bottom-up approach to valuation, focusing on the business's fundamentals rather than attempting to predict future cash flows. Jason Zweig of the Wall Street Journal once remarked, "A stock is not just a ticker symbol or an electronic blip; it's an ownership interest in an actual business, with an underlying value that does not depend on its share price." Consequently, Graham investors do not dwell on current economic conditions or market sentiment, focusing instead on understanding the business's value. Graham's philosophy also includes the concept of a margin of safety, which Munger and Buffett have perfected. This principle involves buying a business at a price significantly lower than its intrinsic value, based on its future cash flows, thereby increasing the likelihood of a successful investment. This approach requires patience, as such opportunities are rare. Munger and Buffett's investment strategy is characterized by their selective investment approach, waiting for opportunities that offer a substantial margin of safety. Ben Graham introduced the metaphor of "Mr. Market" to describe the stock market's bipolar nature, which can lead to significant buying opportunities when the market is pessimistic. Munger believes that while the stock market is mostly efficient, discrepancies between stock prices and intrinsic values can create lucrative investment opportunities. Warren Buffett famously advised to "be fearful when others are greedy, and greedy when others are fearful," emphasizing the importance of contrarian thinking in investing. Rationality, objectivity, and dispassion are key components of Graham's value investing approach, with Munger attributing his and Buffett's success to their ability to make rational investment decisions. They rely on checklists and systematic processes to ensure their decisions are well-founded. Munger has criticized the reliance on projections and forecasts, advocating instead for a focus on companies' track records. While acknowledging the merits of Graham's "cigar-butt" investing strategy, Munger and Buffett have evolved their approach to focus on acquiring shares in high-quality companies at a discount. This shift reflects their belief in the importance of balancing quality and price in investment decisions. Munger has stated, "The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price." This philosophy has guided their investment strategy for over fifty years, with Buffett summarizing it as preferable to buy a wonderful business at a fair price than a fair business at a wonderful price.