This is how Value Investing started. Since then, Value Investing has been split into two distinct school of thoughts. Here's an overview of the differences and how choosing the wrong path can potentially reduce your returns.
Let’s go on to the Story of Value Investing. And of course, the icon of Value Investing is nonetheless Warren Buffet.
Warren Buffet said that, if you want to learn about the Value Investing there are 2 books that you should read. One of them is The Intelligent Investor and the other is the Common Stocks and Uncommon Profits.
The Intelligent Investor is of course written by the renowned father of Value Investing Benjamin Graham.
Warren Buffet have lot of admiration for this man such that he actually enroll into Columbus School of Business just learn from Benjamin Graham himself.
And thereafter, he worked for Graham in his analyst firm for a few years before starting out on his own.
And alongside Warren Buffet, there are many successful Graham disciples such as Walter Schloss.
But few people know about him even though he has very remarkable investment returns. Because, in this society, we’ll only remember the number one guy.
And the number one guy in Value Investing is of course Warren Buffet, who averages about 19% per year for 50 years. While, Walter Schloss had managed a 15.3% per year for 45 years which is very remarkable record.
For Common Stocks and Uncommon Profits, the author is Philip Fisher. And Philip Fisher also had a lot of influence on Warren Buffet’s investment philosophy, but it was only in the later stage of his career.
And the key figure was actually Charlie Munger, who was able to influence Warren Buffet to switch his investment philosophy towards something more like Philip Fisher.
The Warren Buffet today, in my opinion is a lot more Fisher then Graham.
And asking you to read 2 books with very different investment approach would usually confuse the reader.
So, to help you understand the differences, we will separate the Value Investing in 2 schools of thought. The first one being Benjamin Graham.
His philosophy, if simply put is buying stocks below its current value.
So, let’s say a stock is worth $1 today and the stock price is 50 cents. Which means you are able to get a discount or in Benjamin Graham terms, margin of safety of 50%.
Walter Schloss is someone who has always been following Benjamin Graham method for 45 years and he was able to achieve 15.3%.
So, let’s move on to Philip Fisher. His investment philosophy is about valuing a stock based on its future potential, and the current value is not as important to Fisher as compared to Graham.
So for example, let’s say the value of a stock is 50 cents and the price is $1.
To Graham, this stock is grossly overvalued.
But, if Fisher is able to ascertain in the future, this stock is going to be worth $2 in future, it is a very good buy based on the growth prospect and the increase in earnings that will result in higher share prices in future.
If you remember the 2 examples that we have went through previously, the Ashton kind of stocks versus the Ernest kind of stocks.
We would say that Graham approach is more similar to the Ashton kind of stocks where they are asset backed and you are able to buy these assets at a discount.
Whereas for the Philip Fisher kind of stocks are the Ernest kind of stocks. The value of these stocks are highly depended on the future earnings that the company is going to earn.
And I always believed that the return investor is better of investing based on the Benjamin Graham philosophy then the Philip Fisher.
Even though, you know that the financial industry has always been harping on earnings and earnings and earnings but actually most people including the experts are very bad at predicting future earnings.
So for retail investors with limited time and resources, it is much better and easier to invest with the Benjamin Graham approach.
And taking Walter Schloss’ track record of 15.3%, it is already good enough for retail investors compound your wealth.