Graham and Dodd’s approach: look for values with a significant margin of safety

The common intellectual theme of the investors who use Graham and Dodd’s approach is: they search for discrepancies between the value of a business and the price of small pieces of that business in the market.Those investors don’t use beta, capm, covariances in returns, volume, price movement, charts… They even have difficulty in defining them. They simply focus on two variables: price and value.

Walter Schloss with no college education working for Graham’s firm knows how to identify securities that sell at a conceivably less than their value to a private owner. He compounded money from 1956 to 1984 at 21.3%.

Tom Knapp working for Graham compounded at 20% from 1968 to 1983. 
Warren Buffett compounded at 29.5% from 1957 to 1969.

Bill Ruane who took Graham’s course at Columbia compounded with at 18.2% from 1970 to 1984.

Charlie Munger, who was a lawyer and changed to investing career after talking to Warren, compounded at 19.8% from 1962 to 1975.

Rich Guerin, who was an IBM salesman and turned into investing after talking to Munger, compounded at 32.9% from 1965 to 1983.The idea of value investing, buying a dollar for 40 cents, either grabs you instantly or never. Rich Guerin immediately understood the value approach.

Stan Perlmeter, who was in advertising and in the same building as Warren Buffett in Omaha, understood the value approach instantly, left his advertising career, compounded money at 23% from 1965 to 1983.

The above investors worked independently and didn’t own the same thing as others. They bought a stock because they would get more for their money that what they paid for. They didn’t look at quarterly earnings, projections, next year’s earnings, investment researches, price momentum, volume, or which day of the week was. They simply asked: “What is the business worth?”

They follow Graham’s principles:

  1. Think of yourself as owning a business and not buying something that wiggles around in price.
  2. Your attitude toward the market.
  3. The margin of safety. Don’t try to drive a 9800 pound truck over a bridge that says “Capacity: 10000 pounds.” Go down the road and find one that says “Capacity: 15000 pounds.”


Posted by Hoan M Do

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