How to Think Like Benjamin Graham and Invest Like Warren Buffett

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Chapter11. Going Global

W

arren Buffett repeatedly emphasized the importance of invest-

ing only with people you “like, trust, and admire” (the phrase

appears over a dozen times inThe Essays of Warren Buffett: Lessons

for Corporate America). Ben Graham deemphasized this managerial

factor in investment selection, but not because he did not thin kit

was important.

Graham’s trouble was the difficulty in measuring the manage-

ment factor. He believed that until “objective, quantitative, and rea-

sonably reliable tests of managerial competence are devised and ap-

plied, this factor will continue to be looked at through a fog.”^1 The

best Graham thought an investor could do to gauge the management

factor was to loo kat historical financial performance as it is reported

in financial statements.

At the same time, one of Graham’s key principles of investing as

business analysis focused squarely on integrity. Graham implored

investors not to entrust wealth to someone else unless either (1) the

investor could supervise that person or (2) the investor had “unu-

sually strong reasons for placing implicit confidence in his integrity

and ability.”^2 Graham was expressly talking about investment advi-

sers, but the point applies equally to managers. After all, whether

an investor uses an intermediary or not, her wealth is in the hands

of business managers.

A fog still clouds the view of managerial ability and trustworthi-

ness, but consider two important points. First, the corporate gover-

nance field has blossomed since Graham wrote, and many people

argue that it now contributes clearer ways of thinking about and

measuring managerial integrity and effectiveness. Second, Graham

implicitly noted the importance of managerial trustworthiness when

he deferred to the financial record as a gauge of managerial ability.

As we just saw, the reliability of historical financial statements de-

pends on managerial trustworthiness.

While managerial ability and trustworthiness may not warrant an

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