Tag Archives: Value Investing

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.

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