14 ATaleofTwoMarkets
are not important, but the quality of their analysis and the indepen-
dence of their thought and judgment are.
The best investors employ a mind-set that takes account of just
a few things, but those things are indispensable. Every extraordinary
investor follows Ben Graham’s first principle: The market does not
perfectly price the business value of a stock. Warren Buffett takes
that insight dead seriously by limiting his purchases to stocks that
are way underpriced by the market. Both of these investment titans
as well as Phil Carret emphasize the importance of avoiding bad
deals, stocks that are way overpriced in the market.
These investors and other greats, such as Buffett’s partner Char-
lie Munger, always remember that there are tens of thousands of
investment options available to just about anyone. To opt for one
requires a strong belief that the market is giving the best deal avail-
able compared to all the others. And opportunity does knock. One
way to test opportunity is to take Loeb’s approach: always ask
whether you would be comfortable committing a large portion of
your resources to a single stoc kyou are considering.
Buffett and other outstanding investors, including Peter Lynch,
know that an intelligent appraisal depends on your ability to under-
stand a business. This gives you a basis for gauging points all these
top investors consider crucial, such as a company’s competitive
strength, brand power, and ability to develop new products profitably.
The investment giants (not monkeys) don’t worry much about
whether their investments end up concentrated in certain compa-
nies. For example John Neff, the portfolio manager of the Windsor
Fund from 1964 through 1995, generated returns exceeding the av-
erage by a steady 3% annually and did so while sometimes allocating
as much as 40% of the fund into a single business sector. Buffett’s
Berkshire Hathaway is a wonderfully diverse collection of outstand-
ing businesses, but that diversity was an accidental by-product of the
tremendous growth in the capital it deployed rather than a conscious
effort to participate in lots of different businesses or sectors.
This cast of illustrious investors extends the commonsense un-
derstanding of markets and businesses to the analysis of business
fundamentals. Chief among these factors are economic character-
istics such as strong financial condition, earnings stability and
growth, strong sales and profit margins, and large amounts of inter-
nally generated cash to fund growth as opposed to a continuing
reliance on external financing sources. These investors also pay
attention to the quality and integrity of management, looking for