In 1994, during a tribute celebrating the 100th anniversary of Benjamin Graham’s birth, Warren Buffett spoke about the ideas of value investing: seeing investment as ownership of a company, Mr Market and margin of safety.
“I think those three ideas 100 years from now will still be regarded as the three cornerstones, essentially, of sound investment. And that’s what Ben was all about. He wasn’t about brilliant investing. He wasn’t about fads and fashion. He was about sound investing. And what’s nice is that sound investing can make you very wealthy if you’re not in too big a hurry. And it never makes you poor, which is even better” – Warren Buffett
Benjamin Graham always points that when buying a company’s shares, we should always see it as a full ownership of the company. We should model our thinking in such a way that the company will feed us for the rest of our lives and our livelihood depends on the profits of the company. In that way, we will apply due diligence when buying into a company. “Investing is most intelligent when it is most businesslike”, wrote Graham. He insisted that a stock should not be viewed as a piece of paper bought and sold based on price, but as a share of ownership in a real company. Graham focused on the company, not the stock; the value, not the price.
The theory of Mr Market was discussed in my previous post.
Margin of safety is always essential before investing in a company. If our deduction of the company is wrong or if our quantitative analysis is skewed, at least there’s a safety margin to mitigate any mistakes made. Always ask yourself, “What’s the worst that could happen?”, before investing in any business. Also, when we “buy a dollar for 50 cents”, a portfolio with strong margin-of-safety companies offers strong opportunity for asset appreciation.