The Wizard of Omaha (Pt.I)

Every culture has its icon. Even though you may not know much about the culture, you can certainly “put a face” to it. In tennis, there is Roger Federer, in beauty, there is Audrey Hepburn, in jazz , there is Miles Davis. In technology and design, there is Steve Jobs (well, for all you Apple skeptics out there, I will say Bill Gates for the sake of your cynicism).

And in finance and investments, there is Omaha’s Mr.Warren Buffett.

Buffett’s private life is not much of an excitement to many; however, it is his doctrines that have proven to be historically essential. So, my focus will be on Buffett’s first art of value investing.  As for Warren’s private biography, let us leave that to the screenwriters who are preparing for the next made-for-TV biopic on Warren, shall we? (if one would ever be made).

Warren’s Mentor: Benjamin Graham

Prior to Buffett’s entrance to the stock market, Wall Street was considered largely as a casino where gamblers or speculators placed massive bets on the direction of stock prices. The speculative buy-sell frenzy was consistent during the roaring 20s. However the bull market did not last long. In 1929, the stock market crashed, and stock prices hit rock bottom. Line-ups to the hottest and latest jazz clubs were competing with lines at the soup kitchens.

In the early 1930s, a bright young analyst by the name of Benjamin Graham spotted a trend on wall street: Most traders were oblivious to the long-term economics of the businesses that were traded. According to Graham’s observations, stock prices were driven up to surreal levels as a result of speculative frenzies. The prices did not reflect the realities of these businesses. On the other hand, prices were also surreally low at certain times, and similarly did not reflect the business’ long term prospects.

Graham realized that he bought these stocks incorrectly valued at low prices. The market would eventually acknowledge the long term value of these companies. The prices will be revalued, and Graham could sell them at a profit.

Buying a Dollar for 50 cents

Graham did not care about what kind of businesses he was buying. It did not matter to him. He believed that in any industry, any business had a price which would make it a bargain. He was focused on finding value companies that traded at less than what they held in cash or other assets. “Buying a dollar for 50 cents”” was a term coined by Graham. Building upon on the above doctrine, he would never pay more than ten times a company’s earnings, and would sell the stock if it was up by half or 50 percent. If the stock did not go up within two years, he would sell it anyway.

Although Graham did not care about where the company would be in twenty years, it was relatively longer compared to the Wall Street speculators.

In the 1950s, a hopeful student at Columbia University by the name of Warren Buffett worked for Graham in his Wall Street firm. He learned how to spot undervalued companies by reading thousands of financial statements.  As he spent more time reflecting upon Graham’s doctrines and methodologies, he noticed one thing:

Not all of Graham’s undervalued businesses were ever revalued upward; some even went into bankruptcy.

(To be continued)



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