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May 04, 2009

Re-Reading Buffett on Superinvesting

Catherine New
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Nearly 35,000 people — including a group of students from Columbia Business School — descended on Omaha this weekend for the Berkshire Hathaway Annual Meeting. This year’s gathering — commonly known as the “Woodstock of Capitalism” — was under especially close scrutiny after the company’s net worth shrank by 9.8% in 2008. However, according to Professor Bruce Greenwald, those losses are somewhat “fictitious” over the next five to seven years. Greenwald, gave his view on Buffett’s annual letter on CNBC on March 2 (see video), says that Berkshire Hathaway did “surprisingly well” in a tough environment on the investment side.

But what lies at the core of Buffett’s investment strategy?

In an article written in 1983 for Hermes, and republished this year in celebration of the 75th anniversary of Security Analysis, Warren Buffett ’51 profiled nine “superinvestors.” In his own words, Buffett describes the investment principles that so heavily influenced him:

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. Essentially, they exploit those discrepancies without the efficient market theorist’s concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc. Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the medium 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. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.

Keep reading the complete article in the Spring 2009 issue of Hermes, or download a PDF of the original here.