How to Think Like Benjamin Graham and Invest Like Warren Buffett

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C hapter 12

RULES AND TRUST

A

n investor is going to entrust her wealth to someone else.

Shouldn’t the investor have a high degree of confidence in that

person’s ability and integrity? Of course. It is simple common sense,

but how to assess ability and integrity is a bit trickier.

Graham used the quantitative analysis of the sort described in

Part II as a proxy. If the numbers loo kgood year after year and

provide a basis for thinking that they will continue to do so, that

may suggest that management is able.

Many other investors, including Warren Buffett in his early days,

learned hard lessons from paying too little attention to management

integrity. True, if a company’s numbers loo kgood and are accurate,

its managers are probably able and trustworthy. If the numbers look

good but are misleading, management may be neither. As Buffett

reminds us, “In the long run, managements stressing accounting

appearances over economic substance usually achieve little of ei-

ther.”^1

Therefore, integrity is an additional independent factor in in-

vestment selection. Is there a sensible way to thin kabout managerial

integrity? Buffett says the key is to invest with managers you “like,

trust, and admire.” His test for whether an investment meets this

requirement is whether the managers are “men you would be pleased

to see your daughter marry.”^2

Does this “son-in-law” standard help? It may only suggest avoid-

ing managers you would not be pleased to invite over for a Super

Bowl party, but this is a great deal more meaningful than it sounds.

THE FAMILY MANAGER

All business transactions depend on trust and always have. Contracts

help define and protect rights, but entering into one calls for some

expectation that the other party will do what he says he will do.

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