The Statement
Buffett starts the article with a rebuttal of a popular academic opinion that Graham and Dodd's approach ("look for values with a significant margin of safety relative to prices") had been made obsolete by improvements in market analysis and information technology. If the markets are efficient, then no one can beat the market in the long run; and apparent long-term success can happen by pure chance only. However, argues Buffett, if a substantial share of these long-term winners belong to a group of value investing adherents, and they operate independently of each other then their success is more than a lottery win; it is a triumph of the right strategy.
Buffett then proceeds to present nine successful investment funds. One is his own Buffett Partnership, liquidated in 1969. Two are pension funds with three and eight portfolio managers; Buffett asserts that he had influence in selecting value-minded managers and the overall strategy of the funds. The other six funds were managed by Buffett's business associates or people otherwise well-known to Buffett. Seven investment partnerships have demonstrated average long-term returns with a double-digit lead over market average. Pension funds, bound to more conservative portfolio mix, showed 5% and 8% lead.
| Fund | Manager | Investment approach and constraints | Fund Period | Fund Return | Market return |
|---|---|---|---|---|---|
| WJS Limited Partners | Walter J. Schloss | Diversified small portfolio (over 100 stocks, US$ 45M), second-tier stock | 1956–1984 | 21.3% / 16.1% | 8.4% (S&P) |
| TBK Limited Partners | Tom Knapp | Mix of passive investments and strategic control in small public companies | 1968–1983 | 20.0% / 16.0% | 7.0% (DJIA) |
| Buffett Partnership, Ltd. | Warren Buffett | 1957–1969 | 29.5% / 23.8% | 7.4% (DJIA) | |
| Sequoia Fund, Inc. | William J. Ruane | Preference for blue chips stock | 1970–1984 | 18.2% | 10.0% |
| Charles Munger, Ltd. | Charles Munger | Concentration on a small number of undervalued stock | 1962–1975 | 19.8% / 13.7% | 5.0% (DJIA) |
| Pacific Partners, Ltd. | Rick Guerin | 1965–1983 | 32.9% / 23.6% | 7.8% (S&P) | |
| Perlmeter Investments, Ltd | Stan Perlmeter | 1965–1983 | 23.0% / 19.0% | 7.0% (DJIA) | |
| Washington Post Master Trust | 3 different managers | Must keep 25% in fixed interest instruments | 1978–1983 | 21.8% | 7.0% (DJIA) |
| FMC Corporation Pension Fund | 8 different managers | 1975–1983 | 17.1% | 12.6% (Becker Avg.) |
Buffett takes special care to explain that the nine funds have little in common except the value strategy and personal connections to himself. Even when there are no striking differences in stock portfolio, individual mixes and timing of purchases are substantially different. The managers were indeed independent of each other.
Buffett made three side notes concerning value investment theory. First, he underscored Graham-Dodds postulate: the higher the margin between price of undervalued stock and its value, the lower is investors' risk. On the opposite, as margin gets thinner, risks increase. Second, potential returns diminish with increasing size of the fund, as the number of available undervalued stocks decreases. Finally, analyzing the backgrounds of seven successful managers, he makes a conclusion that an individual either accepts value investing strategy at first sight, or never accepts it, regardless of training and other people's examples. "There seems to be a perverse human characteristic that likes to make easy things difficult... it's likely to continue this way. Ships will sail around the world, but the Flat Earth Society will flourish... and those who read their Graham and Dodd will continue to prosper".
Read more about this topic: The Superinvestors Of Graham-and-Doddsville
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“The new statement will comprise the skepticisms, as well as the faiths of society, and out of unbeliefs a creed shall be formed. For, skepticisms are not gratuitous or lawless, but are limitations of the affirmative statement, and the new philosophy must take them in, and make affirmations outside of them, just as much as must include the oldest beliefs.”
—Ralph Waldo Emerson (1803–1882)