Warren Buffett by Robert G. Hagstrom

Author:Robert G. Hagstrom [Hagstrom, Robert G.]
Language: eng
Format: epub
ISBN: 9781119714644
Publisher: Wiley
Published: 2021-03-09T00:00:00+00:00

CHAPTER 4

Business‐Driven Investing

“Investment is most intelligent when it is most businesslike.”1

That's Ben Graham in his landmark book, The Intelligent Investor.

“These are the nine most important words ever written about investing.”2

That's Warren Buffett, Graham's most famous pupil.

Although we have moved past Graham's methods for valuing stocks, his counsel for how to think about stocks as businesses is both enduring and invaluable.

As far back as 1917, when Graham wrote his first article for The Magazine of Wall Street, he held a steadfast belief that there was a better way to think about investing, and it was not speculating about what the next fellow was going to do with his shares. At the heart of Ben Graham's approach was an appreciation that, in the world of investing, the temperament of a businessperson was far superior to that of a speculator. Having said this, he was dismayed to “see how many capable businessmen try to operate in Wall Street with complete disregard of all sound principles through which they have gained success in their own undertakings.”3

Graham believed that someone who purchased common shares in a company had earned “double status” and that it was their choice to decide which action to take. They could view themselves as a “minority stockholder in a business” whose fortune was “dependent on the profits of the enterprise or on a change in the underlying value of its assets.” Or they could see themselves holding “a piece of paper, an engraved stock certificate, which could be sold in a matter of minutes at a price which varies from moment to moment—when the market is open, that is—and often far removed from the balance‐sheet value.”4 That is, they have to choose between being a business‐owner or a stock speculator.

The tug‐of‐war between those points of view was a matter of deep concern for Graham. Throughout his life, he made note of the losing battle. “The development of the stock market in the recent decades,” he wrote in 1973, “has made the typical investor more dependent on the course of the price quotations and less free than formerly to consider himself merely a business‐owner.”5 It seemed to him that the news of the moment—any moment—obscured the more important financial data that would determine one's long‐term prospects. “The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings,” he wrote, “is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all [italics mine], for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”6

It should come as no surprise that Warren Buffett, Graham's most famous student, adopted the same thinking. “Stocks as businesses” has been the cornerstone of Warren's investment approach for 65 years. A stock market, he once said, “is by no means essential; a prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on World Book or Fechheimer,” two of Berkshire's wholly owned businesses.

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