I want you all to read this blog when you are relaxed and have sufficient time to reflect on what I am saying and share your thoughts. So get a cup of coffee or tea and let me take you on ride to the history of value investing. It is more about how we at Valueoperations have evolved as one of the powerful tool in value investing.

I know there are many value bloggers and others who are a big fan of Ben Graham. Many of you might also be practising Ben Graham model to calculate intrinsic value. But we don’t. Let me explain you why.

I am feeling little nervous to write this blog as we are advocating against the strict approach of Ben Graham’s investment theory. I know there are many who are big fan of Ben Graham as we are, so we will use a reference and our understanding of quotes said by Ben Graham and present our plot.

In the 1940 Ben Graham (who passed away in 1976) was regarded “as a sort of intellectual dean of Wall Street, (and) was one of the most successful and best known money manager in the country” [1].

Warren Buffett regarded Ben Graham book ‘security analysis’ as the best text book ever written on stock market and was always found recommending that book to all the investors. The other great piece by Ben Graham was ‘the interpretation of financial statements’ which is one of my favourite.

Buffett always advocates Ben Graham’s ‘market allegory’ and ‘margin of safety’. We will talk in detail about both the concept later. The first person to raise questions against strict approach of Ben Graham that I am aware of was Charlie Munger, partner of Buffett and Berkshire Hathaway.

To find bargains in market, Ben Graham always advocated mostly or purely to use quantitative approach. He always asked to buy businesses trading at discount to its net current asset values. Later this concept was referred as ‘net-nets’. You will find many articles by analyst written on such concept. I recently found one written here.

This method was very successful for Graham and also for his students. The tradition of this approach was taken further by Buffett, Walter Scholas and Tom Knapp. But this approach didn’t attracted Charlie Munger. Ignorance of quality and future prospects of business by Graham as per Charlie Munger was “where just madness”, as “they ignored relevant facts” [2].

But Munger agreed to the basics of Graham that buying and selling should be motivated by intrinsic values and not by price momentum. But he noted, “ Ben Graham had blind spots; he had too low of an appreciation of the fact that some businesses were worth paying big premiums for” and “ the trick is to get more quality than you pay for in price”. [3] The reference to quality by Munger in above quote was likely to what today sophisticated investors or analyst talk about company’s assessment of its strategic position to proper estimation of intrinsic value.

In 1972 we had evidence that Buffett left using net-nets approach with the help of Munger when they bought ‘See’s candies’ by paying price 3 times to its book value.

Buffett noted, “Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. This was the real impact he had on me. It took powerful force to move me on from Graham limiting view. It was the power of Charlie’s mind. He expanded my horizon”[4] and “ … my guess is the last big time to do it Ben’s way was in ’73 or ’74, when you could have done it quite easily.” [5]

It was during that time it was confirmed for all those investors who were advocating Ben Graham approach that there is a superior method exist to invest and that was with Buffett, “boy, if I had listened only to Ben, would I ever be a lot poorer.”[6]

Time in the US was changing and investors who were investing for decades have to evolve as Charlie and Buffett did during those times. In twentieth century manufacturing sector dominated, example textile and steel making in USA. These businesses were loaded with hard asset that can be valued easily by what trade buyer might pay for whole business or for its assets.

But somewhere between 1960 and 1980 many retail and service industries emerged, that instead of buying assets preferred to lease them. Had fewer hard tangible assets than intangibles like brand and distribution network and systems.

To stay world beating, the investor had to evolve, Valueoperations did. Buffett again, “I evolved … I didn’t go from ape to human or human to ape in a nice even manner.”[7]

Many investors cling to Graham approach to investing even when Graham’s best students have moved on decades ago.

If you are still reading it and want to take an approach of value investing, I am pretty sure that your examination of various approaches will take you to the traditional Graham approach to value investing.

We support Ben Graham’s revered status on what he says on a subject of investment. But we also believe that, if he had access to a computer and would have got a chance to test his all ideas then he may not have reached the entire same conclusion.

There are many things that Ben Graham said makes sense but is also a great contribution to investment thinking. Indeed they have become seminal investment principles. These are the things Valueoperations holds firm and recommends all investors who believe in our idea and investment philosophy.

Ben Graham authored the Mr Market allegory and also left three important words in value investing Margin of safety. These are the two concepts that value investor hold dear and which have, in many different ways have become formal part of Valueoperations investing framework.

Here is the speech made by Warren Buffett about Ben Graham on both the subject:

“You should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains…

“Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow.

Transactions are strictly at your option…But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you.

“It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”

There is also third important lesson to be learned from Ben Graham. His observation which is fascinating and equally important to the above two lessons. His lesson was paraphrased by Buffett in 1993:

In the short run the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long run, the market is a weighing machine

With the help of computers and information available we can show you that this piece of advice still is relevant in today’s world.

As a professional investor I have observed that in short run market is a popularity contest which is also fuelled by media by talking about them every time and also price diverge is significant by the economic performance of the business. But in long term, prices eventually converge with intrinsic values which by themselves follow business performance.

Let me prove you that here that it even works for Indian markets:

Reliance Industries

The red line in above table is intrinsic value of business based on economic performance. Reliance Industries is rated as B1 Company in regards to quality and performance rating.

Now sit back and look at the chart very closely. In the year 2009 before split it was trading in range of Rs 1200 and Rs 1000. Before split the intrinsic value of the business was Rs1192. After split it was Rs 596. For March 2011 intrinsic value for Reliance was Rs 825 and it was trading around Rs1000 levels. People were talking about 1200 and 1500 figure very soon to be achieved. Today when I am writing this it is trading at Rs 786 and forecast intrinsic value for 2012 is Rs 850. The margin of safety in this business is 8%.


What does this chart tells you? Infosys is rated as A1 company in its quality and performance rating done by Valueoperations. The best time to buy Infy was in mid of 2008 up to almost end of 2009. Recently when it was trading at 2190 was a good chance to buy. There was margin of safety of 12%. Today it is trading at 8% premium to its forecast March 2012 intrinsic value.

Bharti Shipyard

Bharti Shipyard is rated as B2 Company. From last 4 years companies’ performance as well as quality is deteriorating. Many brokerage firms and analyst talk about buying opportunity within this stock. It is trading at below net asset value as mentioned by Ben Graham but is missing the quality as mentioned by Charlie Munger.

We acknowledge that there are critics of the approach to intrinsic value we follow. But like me, you should be delighted there are. The critics are necessary. Not only they help to refine our ideas but without them how would we be able to buy Infy at 2190, ONGC at 250 and how would have we avoided Bharti Shipyard, Reliance Industries and many other stocks.

We took all the good things of all the three legendary investors and designed our model based on them.

Our model tells to invest only in best quality businesses (A1 Businesses) when you see sufficient margin of safety. Our model updates intrinsic value of nearly 1500 companies trading on National stock exchange and also forecast intrinsic value of businesses for next 3 years (A1 service). It will change the way people invest in stock market. It is simple, amazing and fascinating. If you have not registered as blogger then please do it and you will get a chance to become the founding member of that service and will gain all the benefits of founding member.

[1] Damn Right. Janet Low. John Wiley & Sons 2000 pg 75

[2] Damn Right. Janet Low. John Wiley & Sons 2000 pg 77

[3] Damn Right. Janet Low. John Wiley & Sons 2000 pg 78

[4] Ibid

[5] Robert Lezner, “ Warren Buffett’s idea of Heaven” Forbes 400, October 18 1993 pg 40

[6] Carol J Loomis, “ the inside story of Warren Buffett” Fortune, April 11 1988 pg 26

[7] L.J. Davis, “Buffett takes stocks” New York Times magzine April 1 1990 pg 61