Ben Graham’s legacy – a tonic for investors
As you know, at Montgomery we believe that the secret of our modest outperformance to date is to always remain the student. Once you start thinking you know it all, hubris kicks in and inevitably you fall. You can’t walk around with your nose pointing to the sky and expect to avoid tripping.
Ben Graham and his legacy remain as important to investors today as he (and it) did so many decades ago.
Thanks to David H who wrote to me with a link to this terrific 15 minutes of footage that includes some rare original film of Ben Graham teaching.
Given the nonsense we are yet again seeing in the market over the last month or two (and which we simply cannot explain) a dose of Ben may just be what the doctor ordered.
Watch here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Andrew Legget
:
It is hard to talk about Ben Graham without talking Buffett. I am not sure if this is a sad thing as ben has a great legacy himself or whether it is actually a sign of just how good of a teacher he is that someone that studied under him became such a huge name in investing.
I think ben graham laid some great foundations for people in undestanding value investing. When it comes to analysis and company picking though, i am more Buffett than Graham.
Ben Grahams biggest gift and legacy to the investing world i believe is not his valuation tachniques and screens (as i do not necessarily follow them) but his discussions on market psychology. This is what i remember from him, and what i believe is the biggest lesson people can learn when reading the teachings of Graham.
Price and value are two different things, a new price will come up every single day and change over the short term based on what type of mood the market is in. This has no real basis in reality in the most part so opportunities can and will arise when Mr Market is feeling a bit depressed. In the long run, the company will reflect the underlying value of the business.
For one to be a successful investor, i believe the disconnect between market noise and fact based analysis and decision making is a pretty big skill to have.
His cigar butt investing approach was like cigars and cigarettes themselves, just never appealed to me as i always believed that there is unseen value not on the balance sheets that drive exceptional performance and this is unlikely to be found when looking at companies from an almost liquidation value approach.
As i said, Ben will always be seen as a legendary figure, his thoughts on market psychology i believe are some of the most important lessons an aspiring investor can learn and will be relevant for as long as markets exist.
Gurkamal Kanwar
:
Hi Roger and team
I enjoy reading your blogs and watching your interviews and appearances on TV. It is insightful and educational.
I have few questions that I have been meaning to email for a very long time.
Multiplier table in Valueable
I bought the Buffett Step by Step: an investor’s workbook and I couldn’t find the Multiplier selection when a company retains 100% of its earnings table anywhere in the book. Where did you get the table from and do you know how are the multipliers are calculated? Surely you don’t take the numbers as gospel and there is a science behind this. I would like to know the calculations behind the multipliers. Are you able to help?
Your Inner scorecard
I have followed your progress for a long time. I like your investment record and I believe in your investment philosophy. As you know Warren Buffett is quite open about admitting his mistakes and he has proven again and again that he is a man of integrity. I already invest in your fund and I would like to invest my families’ money in your fund as well. I would like to know, have you made any major mistakes and have you admitted your mistakes on any investments in public.
Also how is your inner scorecard? Are you a person of integrity? You seem like a good investor (even though I don’t know your long term track record) however I just don’t have a firm conviction on your inner scorecard or your moral compass.
Technical Question on Buying 100% of the Business
As you know Buffett recently announced the Heinz acquisition. It was valued at approximately $28B. I was curious about debt and equity structure on a 100% acquisition of a business.
I will provide an example. If an investor is looking at acquiring a whole business and values the business using your valuation method at say $10. The business has $3 of debt on the balance sheet.
My question is, taking that in consideration, is the total valuation of the business $13 ($10 Equity plus $3 Debt owed to debt holders) or is the valuation still $10 (which will include $7 equity paid to existing shareholders and $3 debt paid to debt holders) Can you please shed some light on which valuation is correct? If you were to buy the whole business will you be writing a cheque for $13 ($10 to existing share holders and $3 to debt holders) or $10 ($7 to shareholders and $3 to debt holders). Maybe you can write an article about how debt is considered in full 100% acquisition.
Metrics to measure quality scale
In your article ‘Is Apple AN A1’ you made the following statement:
“As you may know I rate companies on a quality scale from A1 to C5, using metrics designed for bank credit departments. Apple is an A1, and that A1 has been consistent for several years. Microsoft, by comparison, is an A2, but its performance has recently been declining.”
What are your metrics to determine quality scale. Are you able to list all of them in your blog and rate one of the stocks as an example. I guess I am after a detailed checklist that I can apply and rate the stocks myself. I can guess some of the metrics may use. Which are ROE greater than 20%, debt to equity below 40% etc…
Fund Manager in UK
I am currently in London and would like to invest with a fund manager in the UK. Do you know anyone here that follows Warren Buffett’s and/or your philosophy of value investing that you can recommend. It would be good if you can provide some names that I could research myself and decide.
Career as an Equity Analyst.
Finally I would also like to become an equity analyst. I am a qualified accountant and I have worked in commercial finance for the past ten years. Do you have any suggestions how I can change my profession and move into equity analysis? I am also thinking of stating my CFA very soon, which I believe, will be very useful.
Would love to receive your feedback on my questions above.
Kind Regards
Gurkamal Kanwar
Roger Montgomery
:
Great stuff. Send us your CV and covering letter addressed to Tim Kelley. The address is GPO Box 3324, Sydney NSW 2000
Daniel Falster
:
Hi Roger,
Like Gurkamal, I also wanted to know about the multiplier table in Valueable. I enjoyed the book immensely and learnt a lot, but as a mathematician I was disappointed to find no equations (this suits most readers so i understand why you didn’t include them) . Could you provide some mathematical detail on the adjustment to Intrinsic Value for companies with different payout ratios? From memory the book says something like “we adjust them, but it’s a bit complicated, see Graham for more detail”. If you publish a revised addition of Valueable, I would suggest including these details in an appendix, for interested readers.
With best regards,
Daniel
Roger Montgomery
:
I’m considering an advanced Value.able for professional investors right now.
John Antoniadis
:
That was great Roger.Thank you for all your teachings on investing.