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Berkshire Hathaway Inc. Message Board

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  • Novalis_97 Novalis_97 Jun 26, 1998 9:06 AM Flag

    Graham vs. Buffett

    I think Buffett's way is better. By selecting
    companies that are both selling at a discount AND have
    excellent long-term prospects, Buffett is not only getting
    a price jump due to a margin of safety but also
    long-term price appreciation resulting from a company's
    excellent performance over time. Why just limit yourself to
    one price jump? In addition, Robert Hagstrom wrote in
    "The Warren Buffett Way" that Buffett ran into a
    problem by seeking only undervalued stocks regardless of
    a company's other qualities: when it came time to
    sell those stocks, there were hardly any buyers
    because of a lack of any other redeeming, attractive
    qualities of those stocks. Warren Buffett's methods are not
    only appropriate to rich people but also to individual
    investors -- since all investors have the same goal of
    maximizing their wealth.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • Thanks to Elias, Iggy and Novalis for responding.
      You all three seem to agree. My problem is all the
      good companies I can find have high P/E so I cannot
      buy with a margin of safety. I can find many (ok,
      maybe just some) companies that are undervalued that
      are not great cos. like KO G etal. but are not dogs
      either. To me diversifying into these is safer at this
      point than diving into KO or G. I know I will have to
      watch these cos. more closely and get out when they
      become properly valued but I don't think there is as big
      of potential downside.

      Would not a strategy
      like this work (beat the market) until the great cos.
      come at a discount?

      • 2 Replies to saltmakr
      • All I know is that most of time that I get away
        from doing the kind of investing that Buffett
        recommends, I regret it. I got my head handed to me today on
        a company that I did not understand near as well as
        I thought I did. It was down 28% today and is so
        far down to about half of what I paid for it. This
        keeps happening. It is not that I don't know what to
        do, it is that I simply don't do it.

        If you
        are a real life long term investor, it really doesn't
        matter if you pay 10 or 20 percent to much for a great
        company. If you buy at $10 and it goes to $50, your profit
        is only a little more than if you buy at $12 and it
        goes to $50. The important thing is to buy the
        companies you think are so good that they will go up 10
        times or so. Buffett is a freak in that he has the
        patience to wait for just the right time. Most of us, and
        certainly I, can't do that. All of this is IMHO of course.

      • Check out Nucor and GATX, both of which have been
        outstanding long term performers, and both of which are
        selling at significant discounts to their fair market
        values. PEs on forward earnings less than 15 on both
        stocks and yields of 1% Nucor, 3% GATX. ljh

    • <<<I think Buffett's way is better. By
      selecting companies that are both selling at a discount AND
      have excellent long-term prospects, Buffett is not
      only getting a price jump due to a margin of safety
      but also long-term price appreciation resulting from
      a company's excellent performance over time. Why
      just limit yourself to one price jump? In addition,
      Robert Hagstrom wrote in "The Warren Buffett Way" that
      Buffett ran into a problem by seeking only undervalued
      stocks regardless of a company's other qualities: when
      it came time to sell those stocks, there were hardly
      any buyers because of a lack of any other redeeming,
      attractive qualities of those stocks. Warren Buffett's
      methods are not only appropriate to rich people but also
      to individual investors -- since all investors have
      the same goal of maximizing their wealth.
      >>>

      That's all right, but... The relevant question, would
      this approach work for everyone?

      Do not forget
      that it is not easy to identify these "excellent"
      companies, at times when they are cheap. You have to
      understand the business that they are in and how exactly
      they make money. This sounds a lot easier than it
      actually is. I admire those who can do it.

      Buying
      "cheap" companies is much easier than the above because
      investors confine themselves to simple accounting based
      criteria.

      In the end, investing in what is called "value"
      companies in some academic circles (low PE, high book to
      market) has been shown to outperform the market indices.
      Which is not bad if you ask me.

      The worst
      results, I think, will be achieved by those who think that
      they can identify great companies after applying
      superficial criteria that someone (Hagstrom etc) told them to
      apply, and then getting really burned after overpaying
      for what loses its competitiveness later down the
      road.

      And, even if they can identify great
      companies, it is all too easy to make a valuation mistake
      and overpay.

      ignoramus

 
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