Nach dem Artikel
Purchase-Price
Accounting Adjustments and the „Cash Flow“ Fallacy, in dem Warren Buffett
das Konzept der Owner Earnings beschreibt, folgt heute ein weiterer Essay aus
der Feder des Großmeisters des Investierens. Es handelt sich um die Abschrift
einer Rede, die Buffett anlässlich des 50. Geburtstags von Benjamin Grahams und
David Dodds Security
Analysis (von vielen als die Bibel des Value Investings bezeichnet) 1984 an
der Columbia University hielt.
Die
Original-Abschrift stammt von Hermes (Columbia
Business School Magazine). Eine deutsche Version findet sich beispielsweise
in der deutschen Übersetzung des Buches The
Intelligent Investor oder hier
(valueinvesting.de).
The Superinvestors of Graham-and-Doddsville
By Warren E. Buffett
Is the Graham
and Dodd “look for values with a significant margin of safety relative to
prices” approach to security analysis out of date? Many of the professors who write
textbooks today say yes. They argue that the stock market is efficient; that
is, that stock prices reflect everything that is known about a company’s
prospects and about the state of the economy. There are no undervalued stocks,
these theorists argue, because there are smart security analysts who utilize
all available information to ensure unfailingly appropriate prices. Investors
who seem to beat the market year after year are just lucky. “If prices fully
reflect available information, this sort of investment adeptness is ruled out,”
writes one of today’s textbook authors.
Well, maybe. But
I want to present to you a group of investors who have, year in and year out,
beaten the Standard & Poor’s 500 stock index. The hypothesis that they do
this by pure chance is at least worth examining. Crucial to this examination is
the fact that these winners were all well known to me and pre-identified as
superior investors, the most recent identification occurring over fifteen years
ago. Absent this condition - that is, if I had just recently searched among
thousands of records to select a few names for you this morning — I would
advise you to stop reading right here. I should add that all of these records
have been audited. And I should further add that I have known many of those who
have invested with these managers, and the checks received by those
participants over the years have matched the stated records.
Before we begin
this examination, I would like you to imagine a national coin-flipping contest.
Let’s assume we get 225 million Americans up tomorrow morning and we ask them
all to wager a dollar. They go out in the morning at sunrise, and they all call
the flip of a coin. If they call correctly, they win a dollar from those who
called wrong. Each day the losers drop out, and on the subsequent day the
stakes build as all previous winnings are put on the line. After ten flips on
ten mornings, there will be approximately 220,000 people in the United States
who have correctly called ten flips in a row. They each will have won a little
over $1,000.
Now this group
will probably start getting a little puffed up about this, human nature being
what it is. They may try to be modest, but at cocktail parties they will
occasionally admit to attractive members of the opposite sex what their
technique is, and what marvelous insights they bring to the field of flipping.
Assuming that
the winners are getting the appropriate rewards from the losers, in another ten
days we will have 215 people who have successfully called their coin flips 20
times in a row and who, by this exercise, each have turned one dollar into a
little over $1 million. $225 million would have been lost, $225 million would
have been won.
By then, this
group will really lose their heads. They will probably write books on “How I
turned a Dollar into a Million in Twenty Days Working Thirty Seconds a
Morning.” Worse yet, they’ll probably start jetting around the country
attending seminars on efficient coin-flipping and tackling skeptical professors
with, “If it can’t be done, why are there 215 of us?”
By then some
business school professor will probably be rude enough to bring up the fact
that if 225 million orangutans had engaged in a similar exercise, the results
would be much the same — 215 egotistical orangutans with 20 straight winning
flips.
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I would argue, however, that there are some important differences in the
examples I am going to present. For one thing, if (a)
you had taken 225 million orangutans distributed roughly as the U.S. population
is; if (b) 215 winners were left after 20 days; and if (c) you found that 40
came from a particular zoo in Omaha, you would be pretty sure you were on to
something. So you would probably go out and ask the zookeeper about what he’s
feeding them, whether they had special exercises, what books they read, and who
knows what else. That is, if you found any really extraordinary concentrations
of success, you might want to see if you could identify concentrations of
unusual characteristics that might be causal factors.
Scientific
inquiry naturally follows such a pattern. If you were trying to analyze
possible causes of a rare type of cancer — with, say, 1,500 cases a year in the
United States — and you found that 400 of them occurred in some little mining
town in Montana, you would get very interested in the water there, or the
occupation of those afflicted, or other variables. You know it’s not random
chance that 400 come from a small area. You would not necessarily know the
causal factors, but you would know where to search.
I submit to you
that there are ways of defining an origin other than geography. In addition to
geographical origins, there can be what I call an intellectual origin. I think
you will find that a disproportionate number of successful coin-flippers in the
investment world came from a very small intellectual village that could be
called Graham-and-Doddsville. A concentration of winners that simply cannot be
explained by chance can be traced to this particular intellectual village.
Conditions could
exist that would make even that concentration unimportant. Perhaps 100 people
were simply imitating the coin-flipping call of some terribly persuasive
personality. When he called heads, 100 followers automatically called that coin
the same way. If the leader was part of the 215 left at the end, the fact that
100 came from the same intellectual origin would mean nothing. You would simply
be identifying one case as a hundred cases. Similarly, let’s assume that you
lived in a strongly patriarchal society and every family in the United States
conveniently consisted of ten members. Further assume that the patriarchal
culture was so strong that, when the 225 million people went out the first day,
every member of the family identified with the father’s call. Now, at the end
of the 20-day period, you would have 215 winners, and you would find that they
came from only 21.5 families. Some naive types might say that this indicates an
enormous hereditary factor as an explanation of successful coin-flipping. But,
of course, it would have no significance at all because it would simply mean
that you didn’t have 215 individual winners, but rather 21.5 randomly
distributed families who were winners.
In this group of
successful investors that I want to consider, there has been a common
intellectual patriarch, Ben Graham. But the children who left the house of this
intellectual patriarch have called their "flips" in very different
ways. They have gone to different
places and bought and sold different stocks and companies, yet they have had a
combined record that simply cannot be explained by random chance. It certainly cannot be explained by the fact that they are all
calling flips identically because a leader is signaling the calls for them to
make. The patriarch has merely set forth the intellectual theory for making
coin-calling decisions, but each student has decided on his own manner of
applying the theory.
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.
I always find it
extraordinary that so many studies are made of price and volume behavior, the
stuff of chartists. Can you imagine buying an entire business simply because
the price of the business had been marked up substantially last week and the
week before? Of course, the reason a lot of studies are made of these price and
volume variables is that now, in the age of computers, there are almost endless
data available about them. It isn’t necessarily because such studies have any
utility; it’s simply that the data are there and academicians have worked hard
to learn the mathematical skills needed to manipulate them. Once these skills
are acquired, it seems sinful not to use them, even if the usage has no utility
or negative utility. As a friend said, to a man with a hammer, everything looks
like a nail.
I think the
group that we have identified by a common intellectual home is worthy of study.
Incidentally, despite all the academic studies of the influence of such
variables as price, volume, seasonality, capitalization size, etc., upon stock
performance, no interest has been evidenced in studying the methods of this
unusual concentration of value-oriented winners.
I begin this
study of results by going back to a group of four of us who worked at
Graham-Newman Corporation from 1954 through 1956. There were only four — I have
not selected these names from among thousands. I offered to go to work at Graham-Newman
for nothing after I took Ben Graham’s class, but he turned me down as
overvalued. He took this value stuff very seriously! After much pestering he
finally hired me. There were three partners and four of us at the
"peasant" level. All four left between 1955 and 1957 when the firm
was wound up, and it’s possible to trace the record of three.
The first
example (see Table 1) is that of Walter Schloss. Walter never went to college,
but took a course from Ben Graham at night at the New York Institute of Finance.
Walter left Graham-Newman in 1955 and achieved the record shown here over 28
years. Here is what ‘Adam Smith’ — after I told him about Walter — wrote about
him in Supermoney (1972):
He has no
connections or access to useful information. Practically no one in Wall Street
knows him and he is not fed any ideas. He looks up the numbers in the manuals
and sends for the annual reports, and that’s about it.
In introducing
me to (Schloss) Warren had also, to my mind, described himself. ‘He never
forgets that he is handling other people’s money, and this reinforces his
normal strong aversion to loss.’ He has total integrity and a realistic picture
of himself. Money is real to him and stocks are real — and from this flows an
attraction to the ‘margin of safety’ principle.
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 doesn’t worry about whether it it’s January,
he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s
an election year. 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.
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The second case
is Tom Knapp who also worked at Graham-Newman with me. Tom was a chemistry
major at Princeton before the war; when he came back from the war, he was a
beach bum. And then one day he read that Dave Dodd was giving a night course in
investments at Columbia. Tom took it on a noncredit basis, and he got so
interested in the subject from taking that course that he came up and enrolled
at Columbia Business School, where he got the MBA degree. He took Dodd’s course
again, and took Ben Graham’s course. Incidentally, 35 years later I called Tom
to ascertain some of the facts involved here and I found him on the beach
again. The only difference is that now he owns the beach!
In 1968, Tom
Knapp and Ed Anderson, also a Graham disciple, along with one or two other
fellows of similar persuasion, formed Tweedy, Browne Partners, and their
investment results appear in Table 2. Tweedy, Browne built that record with
very wide diversification. They occasionally bought control of businesses, but
the record of the passive investments is equal to the record of the control
investments.
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Table 3
describes the third member of the group who formed Buffett Partnership in 1957.
The best thing he did was to quit in 1969. Since then, in a sense, Berkshire
Hathaway has been a continuation of the partnership in some respects. There is
no single index I can give you that I would feel would be a fair test of
investment management at Berkshire. But I think that any way you figure it, it
has been satisfactory.
Table 4 shows
the record of the Sequoia Fund, which is managed by a man whom I met in 1951 in
Ben Graham’s class, Bill Ruane. After getting out of Harvard Business School,
he went to Wall Street. Then he realized that he needed to get a real business
education so he came up to take Ben’s course at Columbia, where we met in early
1951. Bill’s record from 1951 to 1970, working with relatively small sums, was
far better than average. When I wound up Buffett Partnership I asked Bill if he
would set up a fund to handle all of our partners, so he set up the Sequoia
Fund. He set it up at a terrible time, just when I was quitting. He went right
into the two-tier market and all the difficulties that made for comparative
performance for value-oriented investors. I am happy to say that my partners,
to an amazing degree, not only stayed with him but added money, with the happy
result shown here.
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There’s no
hindsight involved here. Bill was the only person I recommended to my partners,
and I said at the time that if he achieved a four point per annum advantage
over the Standard & Poor’s, that would be solid performance. Bill has
achieved well over that, working with progressively larger sums of money. That
makes things much more difficult. Size is the anchor of performance. There is
no question about it. It doesn’t mean you can’t do better than average when you
get larger, but the margin shrinks. And if you ever get so you’re managing two
trillion dollars, and that happens to be the amount of the total equity
valuation in the economy, don’t think that you’ll do better than average!
I should add
that, in the records we’ve looked at so far, throughout this whole period there
was practically no duplication in these portfolios. These are men who select
securities based on discrepancies between price and value, but they make their
selections very differently. Walter’s largest holdings have been such stalwarts
as Hudson Pulp & Paper and Jeddo Highland Coal and New York Trap Rock
Company and all those other names that come instantly to mind to even a casual
reader of the business pages. Tweedy Browne’s selections have sunk even well
below that level in terms of name recognition. On the other hand, Bill has
worked with big companies. The overlap among these portfolios has been very,
very low. These records do not reflect one guy calling the flip and fifty
people yelling out the same thing after him.
Table 5 is the
record of a friend of mine who is a Harvard Law graduate, who set up a major
law firm. I ran into him in about 1960 and told him that law was fine as a
hobby but he could do better. He set up a partnership quite the opposite of
Walter’s. His portfolio was concentrated in very few securities and therefore,
his record was much more volatile but it was based on the same
discount-from-value approach. He was willing to accept greater peaks and
valleys of performance, and he happens to be a fellow whose whole psyche goes
toward concentration, with the results shown. Incidentally, this record belongs
to Charlie Munger, my partner for a long time in the operation of Berkshire
Hathaway. When he ran his partnership, however, his portfolio holdings were
almost completely different from mine and the other fellows mentioned earlier.
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Table 6 is the
record of a fellow who was a pal of Charlie Munger’s — another non-business
school type — who was a math major at USC. He went to work for IBM after
graduation and was an IBM salesman for a while. After I got to Charlie, Charlie
got to him. This happens to be the record of Rick Guerin. Rick, from 1965 to
1983, against a compounded gain of 316 percent for the S&P, came off with
22,200 percent, which probably because he lacks a business school education, he
regards as statistically significant.
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One sidelight
here: it is extraordinary to me that the idea of buying dollar bills for 40
cents takes immediately to people or it doesn’t take at all. It’s like an
inoculation. If it doesn’t grab a person right away, I find that you can talk
to him for years and show him records, and it doesn’t make any difference. They
just don’t seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal
education in business, understands immediately the value approach to investing
and he’s applying it five minutes later. I’ve never
seen anyone who became a gradual convert over a ten-year period to this
approach. It doesn’t seem to be a matter of IQ or academic training. It’s
instant recognition, or it is nothing.
Table 7 is the
record of Stan Perlmeter. Stan was a liberal arts major at the University of
Michigan who was a partner in the advertising agency of Bozell & Jacobs. We
happened to be in the same building in Omaha. In 1965 he figured out I had a better
business than he did, so he left advertising. Again, it took five minutes for
Stan to embrace the value approach.
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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?
Table 8 and
Table 9 are the records of two pension funds I’ve been involved in. They are
not selected from dozens of pension funds with which I have had involvement;
they are the only two I have influenced. In both cases I have steered them
toward value-oriented managers. Very, very few pension funds are managed from a
value standpoint. Table 8 is the Washington Post Company’s Pension Fund. It was
with a large bank some years ago, and I suggested that they would do well to
select managers who had a value orientation.
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As you can see,
overall they have been in the top percentile ever since they made the change.
The Post told the managers to keep at least 25 percent of these funds in bonds,
which would not have been necessarily the choice of these managers. So, I’ve
included the bond performance simply to illustrate that this group has no
particular expertise about bonds. They wouldn’t have said they did. Even with
this drag of 25 percent of their fund in an area that was not their game, they
were in the top percentile of fund management. The Washington Post experience
does not cover a terribly long period but it does represent many investment
decisions by three managers who were not identified retroactively.
Table 9 is the
record of the FMC Corporation fund. I don’t manage a dime of it myself but I
did, in 1974, influence their decision to select value-oriented managers. Prior
to that time they had selected managers much the same way as most larger
companies. They now rank number one in the Becker survey of pension funds for
their size over the period of time subsequent to this “conversion” to the value
approach. Last year they had eight equity managers of any duration beyond a
year. Seven of them had a cumulative record better than the S&P. All eight
had a better record last year than the S&P. The net difference now between
a median performance and the actual performance of the FMC fund over this
period is $243 million. FMC attributes this to the mindset given to them about
the selection of managers. Those managers are not the managers I would
necessarily select but they have the common denominators of selecting
securities based on value.
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So these are
nine records of “coin-flippers” from Graham-and-Doddsville. I haven’t selected
them with hindsight from among thousands. It’s not like I am reciting to you
the names of a bunch of lottery winners — people I had never heard of before
they won the lottery. I selected these men years ago based upon their framework
for investment decision-making. I knew what they had been taught and
additionally I had some personal knowledge of their intellect, character, and
temperament. It’s very important to understand that this group has assumed far
less risk than average; note their record in years when the general market was
weak. While they differ greatly in style, these investors are, mentally, always
buying the business, not buying the stock. A few of them sometimes buy whole
businesses far more often they simply buy small pieces of businesses. Their
attitude, whether buying all or a tiny piece of a business, is the same. Some
of them hold portfolios with dozens of stocks; others concentrate on a handful.
But all exploit the difference between the market price of a business and its
intrinsic value.
I’m convinced
that there is much inefficiency in the market. These Graham-and-Doddsville
investors have successfully exploited gaps between price and value. When the
price of a stock can be influenced by a “herd” on Wall Street with prices set
at the margin by the most emotional person, or the greediest person, or the
most depressed person, it is hard to argue that the market always prices
rationally. In fact, market prices are frequently nonsensical.
I would like to
say one important thing about risk and reward. Sometimes risk and reward are
correlated in a positive fashion. If someone were to say to me, “I have here a
six-shooter and I have slipped one cartridge into it. Why don’t you just spin
it and pull it once? If you survive, I will give you $1 million.” I would
decline — perhaps stating that $1 million is not enough. Then he might offer me
$5 million to pull the trigger twice — now that would be a positive correlation
between risk and reward!
The exact
opposite is true with value investing. If you buy a dollar bill for 60 cents,
it’s riskier than if you buy a dollar bill for 40 cents, but the expectation of
reward is greater in the latter case. The greater the potential for reward in
the value portfolio, the less risk there is.
One quick
example: The Washington Post Company in 1973 was selling for $80 million in the
market. At the time, that day, you could have sold the assets to any one of ten
buyers for not less than $400 million, probably appreciably more. The company
owned the Post, Newsweek, plus several television stations in major markets.
Those same properties are worth $2 billion now, so the person who would have
paid $400 million would not have been crazy.
Now, if the
stock had declined even further to a price that made the valuation $40 million
instead of $80 million, its beta would have been greater. And to people that
think beta measures risk, the cheaper price would have made it look riskier.
This is truly Alice in Wonderland. I have never been able to figure out why
it’s riskier to buy $400 million worth of properties for $40 million than $80
million. And, as a matter of fact, if you buy a group of such securities and
you know anything at all about business valuation, there is essentially no risk
in buying $400 million for $80 million, particularly if you do it by buying ten
$40 million piles of $8 million each. Since you don’t have your hands on the
$400 million, you want to be sure you are in with honest and reasonably
competent people, but that’s not a difficult job.
You also have to
have the knowledge to enable you to make a very general estimate about the
value of the underlying businesses. But you do not cut it close. That is what
Ben Graham meant by having a margin of safety. You don’t try and buy businesses
worth $83 million for $80 million. You leave yourself an enormous margin. When
you build a bridge, you insist it can carry 30,000 pounds, but you only drive
10,000 pound trucks across it. And that same principle works in investing.
In conclusion,
some of the more commercially minded among you may wonder why I am writing this
article. Adding many converts to the value approach will perforce narrow the
spreads between price and value. I can only tell you that the secret has been
out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis,
yet I have seen no trend toward value investing in the 35 years that I’ve
practiced it. There seems to be some perverse human characteristic that likes
to make easy things difficult. The academic world, if anything, has actually
backed away from the teaching of value investing over the last 30 years. It’s
likely to continue that way. Ships will sail around the world but the Flat
Earth Society will flourish. There will continue to be wide discrepancies
between price and value in the marketplace, and those who read their Graham
& Dodd will continue to prosper.
