swing, value investing is most effective when mastery of the essential
elements come together to produce a consistently reliable result.
This book centers on the concept that successful value investors
have an ingrained mental framework through which all investment
decisions are contemplated. This framework stems from Benjamin
Graham, who told us in The Intelligent Investor that “ investment is
most intelligent when it is most businesslike. ”^2
When examining the performance and method of opera-
tion for today ’ s most successful investors — Warren Buffett, Mason
Hawkins, Seth Klarman, Bruce Berkowitz, and others — their results
stem from their ability to consistently apply the same fundamental
approach to investing time and time again. In analyzing such an
approach, the central concepts of value investing come down to six
fundamental elements.
Use of the word “ element ” is deliberate. In science, chemical
elements are combined to create the foundation of human exist-
ence. Water is comprised of two elements, hydrogen and oxygen.
You must have both to make water.
Similarly, for value investing to be intelligent and successful, six
essential elements are required. Analyze the investment approach
of any successful value - oriented investor and you will observe that,
like water, the basic elements exist. While these elements can be
identifi ed individually, it ’ s critical to understand that all six ele-
ments come together to form a complete mental framework. Of
even greater value, they can serve to spot any faults or mistakes that
were made in making an investment. Find an investment mistake
that you made and odds are that one of these elements was com-
promised. These six elements in order are:- Develop a sound investment philosophy.
- Have a good search strategy.
- Know how to value a business and assess the quality of
management.
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