"Have not the investors and security analysts eaten of the tree of knowledge of good and evil prospects? And by so doing, have they not permanently expelled themselves from that Eden where promising companies, at reasonable prices, could be plucked off the bushes?" (Author Unknown)
Nowadays, the majority of "value investors" explicitly recommend picking stocks by picking great companies. They are disciples of Philip Fisher who advocated a system called "scuttlebutt". The "scuttlebutt" approach to investing involves talking to company managers, employees, customers, suppliers, and knowledgeable people in the industry in order to identify able managers of companies with extraordinary growth prospects.
Or they are followers of Peter Lynch’s approach. Lynch, for example, used to purchase a company's stock based on the CEO’s impressive grasp of retailing facts and figures. This is Peter' s so called Principle Nr.14, which says if you liked the store, chances are you would love the stock.
In short, most "value investors" nowadays are obsessed with finding the next great moat company that will turn out to be a tenbagger.
The Virtue of Knowing What Kind of Investor You Really Are
But would the time of the majority of investors not been better spent by firstly studying the simple rules and the framework to investing outlined by Graham and Dodd? And than to look inside themselves, trying to figure out what kind of investor they really are? Because it is an eminent mark of wisdom, and a precondition for long- term success in value investing, that an investor is always like himself. That he knows the rules to value investing and he knows himself.
Value investing is a very big tent often squatted by value pretenders. Investors that keep a thrifty table, and lavish out upon their building. The ones that are stingy at home but dissipative abroad.
Such diversity of an investor's character is vicious. Because the effect is a dissatisfied and uneasy mind. The wise value investor, on the other hand, lives by rules, is self-aware, knows what he is looking for and acts according to that knowledge when dealing with Mr. Market.
It is my conviction that investors who studied the framework to value investing outlined by Graham and Dodd, gain knowledge about who they are as a value investor, live and act according to that knowledge will walk through their investments instead of being carried by them like a straw in the river.
Unfortunately, most investors have no design at all when it comes to investing. They are tossed with tempestuous passions when dealing with fellow investor's opinions and Mr. Market's mood swings. They are assaulted by terrible monsters one day. And tempted by sirens the other.
The Value Investing Vanguard's Simple Wisdom
The wisdom taught by the old guards of value investing was mainly a certain quantitive framework toward stock selection. What to look for in a financial statement and what to dismiss.
It is a simple framework. And it is my belief that the majority of value investors are much better off in that simplicity. Because as a great many of so called "value investors" started to talk about that there is more to value investing than just the numbers, many fellow investors came to the conclusion that more has to be learned and done. So they grew less careful about whom they are as an investor and their circle of competence.
The simplicity of value investing, and its plain and open virtue outlined by the old masters, is nowadays often dismissed and turned into a dark and complex science. The new masters of value investing tell their fellow investors to think about moats and to discount the distant cash- flow into the present by using dubious discount rates like the WACC. They are preaching that it is worth paying up for wonderful business. Or even worse, to dismiss the price being paid for a business at all and concentrate solely on the quality of the business itself.
There is no doubt that the argument it takes more than just the numbers to identify a great company is justified as far as it goes. But such arguments are wicked. Because more often than not are they taken too far. They are wicked because they lead fellow investors to focus their attention on the company way too much, and dismiss the cheery price paid too easily.
Furthermore, do these "value investors" forget to tell their fellow investors that as long as wickedness was simple, simple remedies also were sufficient against it. But as complexity has taken root and spread through the value investing community, the need to make use of stronger remedies increased too.
The Art of Squaring The Actions in Value Investing
The framework of Graham and Dodd is simple but not easy. More importantly, is the framework, like any other, worthless to those investors who do not know themselves. It is also worthless to those who do not have an independent opinion about a stock in question. Is the stock in question a cigar- but investment? Is it a compounder? Or is it something in between?
In order to come up with a satisfactory conclusion the value investor must scrutinize potential investments one by one. He must examine them not on the ground of what they are called by fellow investors, but what they truly are.
It makes no sense to set a high esteem upon wide moat, great management, etc, if the investor does not first know what old-fashioned value investing really is about. Because this investor will never learn about the nuances of value investing. The nuances of a stock fulfilling one or more parameters of value, or a stock having a great many of them. They will never grasp how those stocks differ.
The framework to value investing outlined by Graham and Dodd is of great importance, even for “scuttlebutt” investors. And a few useful and simple rules at hand do more toward succeeding in value investing than whole volumes of complex ones.
The salutary precepts of value investing and getting to know oneself should be the value investor's daily meditation. Because they are the foundations by which the value investor ought to square his actions in stock market investing.
Frances and Henry Hazlitt; The Wisdom of the Stoics; University Press of America 1984