How to Think Like Benjamin Graham and Invest Like Warren Buffett

YourCircleofCompetence 111

as war, trade disputes, oil price spikes, and earthquakes. This calls
for a delicate balance.
Graham advised that “there are other factors outside the control
of the company that are perhaps equally important in their influence
on the value of its securities. The outlook for the industry, general
business and security-market conditions, periods of inflation or de-
pression, artificial market influences, the popular favor of the type
of security—these factors cannot be measure din terms of exact ra-
tios an dmargins of safety. They can only be ju dge dby a general
knowledge gained by constant contact with financial and business
news.”^3
Buffett appreciates this too but emphasizes selecting businesses
that will prosper despite these things, and never indulging the fan-
tasy of being able to see into the crystal ball:

We will continue to ignore political an deconomic forecasts,

which are an expensive distraction for many investors and busi-

nessmen. Thirty years ago, no one coul dhave foreseen the huge

expansion of the Vietnam War, wage an dprice controls, two oil

shocks, the resignation of a president, the dissolution of the

Soviet Union, a one-day drop in the Dow of 508 points, or trea-

sury bill yields fluctuating between 2.8% and 17.4%

But, surprise—none of these blockbuster events made the

slightest dent in Ben Graham’s investment principles....Fear

is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next

30 years. We will neither try to predict these nor to profit from

them.^4

All companies—whether classic, vintage, or rookie—are subject
to change in character an dquality. Classics with rising sales an d
earnings can face contractions an dreversals from competitors, new
entrants, downturns in important markets, or changes in the way
their customers or suppliers do business in the face of changes.
Rookies with low sales an dno earnings can come to dominate an
industry, throttle the competition, and ultimately generate enormous
earnings an dvalue. Vintage companies can go either way.
Even if all businesses change, some businesses enjoy one thing
that does not change: the reasons their customers keep coming back.
Companies like that in your circle deserve careful attention; they are
so rare an dvaluable that Buffett calls them the Inevitables.^5
In maintaining an dstretching your circle of competence, note