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By Gielie Fourie*
INTRODUCTION: Warren Buffett, CEO of Berkshire Hathaway, describes himself as 85% Benjamin Graham and 15% Phil Fisher. He has often said that they were the two people who have had the most influence on his investing style. Who are Benjamin Graham and Phil Fisher? In what regard is Buffett 15% Phil Fisher, and would it be wise for us to emulate Buffett?
BENJAMIN GRAHAM: Graham (1894 – 1976) is known as the “Father of Value Investing” and was the mentor of Warren Buffett. Buffett knew Graham very well. Graham’s book, The Intelligent Investor, is described as the definitive book on value investing. It is regarded as the stock market bible ever since its original publication in 1949. According to Buffett it is the best book on investing ever written, and chapter 8 of the book is the best essay on investing ever written.
PHIL FISHER: Fisher (1907 – 2004) is lesser known. He authored the book, Common Stocks and Uncommon Profits, in 1958. Buffett met Fisher only once, but Fisher had an enormous impact on Buffett’s investment style. Fisher was one of the early proponents of the growth investing strategy. Warren Buffett said of Fisher: “I sought out Phil Fisher after reading his book. I am an eager reader of whatever Phil has to say, and I recommend him to you. Using Phil’s techniques enables one to make intelligent investment commitments.”
CHARLIE MUNGER: It was Charlie Munger, vice chairperson of Berkshire Hathaway, who really liked Fisher’s style, and he preached the Fisher doctrine to Buffett. Buffett explains: “I met Charlie in 1959, and Charlie was sort of preaching the Fisher doctrine to me. So, I was sort of getting it from both sides (a combination of value investing and growth investing). It made a lot of sense to me. Fisher’s basic investment style was to invest in a small number of companies with tremendous outlooks and do nothing.” This is how the mixture of the investment styles of Graham and Fisher (value investing and growth investing) developed. Charlie Munger coined the catchphrase: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
VALUE AND GROWTH INVESTING: Deep value investing is based on Graham’s theory of Margin of Safety. Margin of safety is a principle of investing in which an investor only purchases securities when their market price is significantly below their net asset value (NAV). In other words, when the market price of a security is significantly below your estimation of its NAV, the difference is the margin of safety. Cigar Butt investing is similar. You buy a company that is ridiculously cheap, but you think there is one good puff left in it. Buffett commented: “Though the stub might be ugly and soggy the bargain purchase would make the puff all free.” Value investing suggests that you buy low and sell high, but these companies normally needed to be turned around. They required too much time, energy and resources. Buffett discarded this strategy. Following Fisher’s advice, Buffett gave more attention to growth potential, and management. He favoured buying a wonderful company at a fair price and then holding it for a long time. “If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes”. Graham would hold a stock for a year or two.
DISCOUNT TO NET ASSET VALUE (NAV) VS GROWTH: Fisher wrote: “The reason why growth stocks do so much better is that they seem to show gains in value in the hundreds of percent each decade. The cumulative effect of this simple arithmetic should be obvious. In what other line of activity could you put $10,000 in one year and ten years later…be able to have an asset worth from $40,000 to $150,000? In contrast, it is an unusual bargain that is as much as 50% undervalued.” Fisher’s strategy was to accept less on the value side and more on the growth side. In other words, rather buy a stock trading at 0.6x of its NAV than one trading at 0.4x of its NAV if you think the former stock is going to grow at 6% or more per year while the second stock will grow at 4% per year.
BOTTOM LINE: A strict Benjamin Graham value strategy, of buying a stock trading at the sharpest discount to NAV with no heed to whether it is expected to grow and selling it after a year, worked well during the Great Depression. Over time, Buffett gravitated towards lower maintenance stocks. He combined Graham’s ideas with Phil Fisher’s strategy of investing in a small number of companies with tremendous outlooks and keeping them for the long run with minimal interference. Aside from the fact that following Graham’s strategy subjects you to more taxable events and can keep you very busy, value investing is not nearly as self-propelling as buy-and-hold growth stocks. Stocks like Reinet, Remgro, Old Mutual and Growthpoint are good examples of stocks that you can buy-and-hold. They trade at discounts to their NAVs, but they also have good growth potential and good management. If you are interested in investing, contact one of our highly qualified consultants for a consultation.
*Gielie Fourie, Research and Analysis, Director, Overberg Asset Management.
- All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
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