• Angus Crennan

Investing from the shoulders of giants

Anthony Robbins has a great saying. It goes something like ‘if you want to be slim, copy someone who is slim. Do what they do, and you will be slim.’

Reading Warren Buffett it’s amazing how much he attributes his success to the lessons of Ben Graham. The ‘Superinvestors of Graham-and-Doddsville’ lecture he gave to Columbia Business School in 1983 is a must read for any investor and can easily be found on the net. It’s over 30 years old and as relevant today as it was then.

Can we do what he does and be like him? Anthony Robbins says we can.

Without looking up the lecture the stand out quote from Buffett goes something like this:

‘I love buying $1 bills for 40 cents.’

What of course he is referring to is intrinsic value, a concept he learned from Ben Graham and David Dodd, and he uses intrinsic value as a marker post to look for financial assets priced well under what is appropriate.

Balmoral Asset Management recently offered a Patties Foods case study talking about the virtues of that company and offering the view it was probably worth around 13x its earnings. We have publically declared its own funds invested in the company.

However returning to lessons from the masters the question can be asked why that valuation? Why would we say 13 times is appropriate (and potentially higher)?

Investors rightly ask this exact question: how to derive precision in valuation. Is there is some arcane mystery which can only be learnt after being an apprentice analyst? How do we know our forecasts are accurate?

Well here is what the great master himself, Ben Graham, wrote about precision in valuation:

“The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish either that the value is adequate (Graham’s italics) – e.g., to protect a bond or to justify a stock purchase – or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient. To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight.”

As investors we only need to establish that value is adequate. The freedom that statement gives us as investors looking to copy Graham is enormous. It’s worth thinking about the psyche of this investor when he deliberately writes something which presumably is provocative and even potentially insulting to his peers. The answer to this question is he is thinking like an accumulator, a concept not of trying to double finite capital but rather getting the best use of a growing pool of excess assets.

Let’s take this willing inexactness in our valuations a small step further. Let’s say you are not sure if a company’s earnings will grow 2% or 4% on average over the next X years and the difference in your hypothetical present day valuation was $5 to $6 depending on which scenario you adopted as your central case.

What Graham is saying is you are wasting your time trying to figure out the detail when, for example, our hypothetical company’s share price is $3.

This is what Buffett meant when he said he loves buying $1 bills for 40 cents in his 1983 lecture we mentioned above. At 40c the purchase price has a wide margin of safety.

Now clearly $1 bills are not always going to be available for 40 cents. Sometimes demand means the price of $1 is $1, or even more than $1. And it’s those times when experience and judgement matter. Fortunately if we look hard enough most market conditions still offer valuation dispersions which allows us to pick up bargains no matter the general market valuation or sentiment.

Anthony Robbins is exactly right. Modelling the greats makes perfect sense. And the J.P Morgan or our day, Warren Buffett, is a great place to start.

Buffett’s 1983 lecture, and the Ben Graham quote from Security Analysis first printed in 1934, are as relevant today and they were then.

May we all find $1 bills on offer for 40 cents.

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