The Business of Value Investing.pdf

The Only Three Types of Investments You Need to Know 17

market crash, the Asian currency crisis, and the Internet bubble,

have been six sigma types of events. All have occurred in the past

two decades. To those who considered Buffett ’ s results a six sigma

event and that “ looking for value [investments] with a signifi cant

margin of safety ” was an outdated method, Buffett delivered this

powerful argument:

In this group of successful investors... there has been a com-

mon intellectual patriarch, Ben Graham. But the children who

left the house of this intellectual patriarch have called their

“ flip ” in very different ways. They have gone to different places

and bought and sold different stocks and companies, yet they

have had a combined record that simply can ’ t be explained by

random chance.^2

Benjamin Graham is considered the father of the value invest-

ing approach. His two great works, The Intelligent Investor and

Security Analysis , created the foundation for investing in businesses

that were selling for less than their true value. The general idea

behind Graham ’ s approach was to look at the fundamental, con-

crete variables in the business, namely profi ts and cash generation.

Find those businesses that were selling in the market for less than

total value of the discounted future cash fl ows and invest in them.

Graham defi ned his approach to investing as “ an operation...

which, upon thorough analysis, promises safety of principal and a

satisfactory return. Operations not meeting these requirements are

speculative. ”^3

The Business Side of Investing

What Ben Graham did was take stock market participation and sug-

gest that it too could be approached in a logical scientifi c-like man-

ner. Before Graham ’ s value-oriented approach took hold, the stock

market was viewed as a speculative arena for the wealthy. The idea

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