The Only Three Types of Investments You Need to Know 21Another example is the Sequoia Fund, run by another Graham
student, Bill Ruane. Ruane started the fund in 1970, the begin-
ning of one of the worst down markets in U.S. history. The Sequoia
Fund was begun to take the money of the investors of the Buffett
Partnership because Buffett was closing shop. What did Ruane do?
Over the next 14 years, he delivered a 17.2 percent annual com-
pounded rate versus 10 percent for the S & P. 6
So if every value approach is different with respect to its invest-
ment makeup, what is the underlying common theme? The answer
is simple: Value investors are seeking discrepancies between busi-
ness value and the stock price of those businesses in the market.
That ’ s all they do.
So the next logical question is: How do we determine whether a
business is cheap and an attractive investment? Although investing is
part art and part science, thanks to the foundation laid out by Ben
Graham and expanded on by Warren Buffett and others, determin-
ing the value of a stock is a fairly straightforward concept. Ironically,
most investors stumble because they make the process more diffi -
cult than it needs to be. Let ’ s be clear: Successful investing requires
intense analytical effort. Nonetheless, if you can understand that
what really matters in determining the value of a business is usually
a few data points, you are less likely to make an expensive mistake.Three Buckets: Undervalued, Overvalued,
and Fairly Valued
Value investors look at businesses through a very simple construct.
Businesses come in only three fl avors: undervalued, overvalued, or
fairly valued. Every single business will fall into one of these three
buckets.
Let me fi rst start with an important caveat. In determining
which bucket of valuation a business falls into, you must fi rst be
able to value the business. And to be able to value it, you must fi rstCH002.indd 21CH002.indd 21 9/2/09 11:06:26 AM9/2/09 11:06:26 AM