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Investment decision based on arithmetic and little algebra - Ben Gramham


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Is this statement still true today? What do you guys think?

 

Ben Graham was an original thinker as well as a clear thinker. He had high ethical standards and was modest and unassuming. He was one of a kind… He tried to keep things simple. He wrote that he didn’t believe security analysts should use more than arithmetic and possibly a little algebra for any investment decision. In re-reading the preface to the first edition of Security Analysis, I am impressed all over again with Ben’s views: ‘[We] are concerned chiefly with concepts, methods, standards, principles, and above all with logical reasoning. We have stressed theory not for itself alone but for its value in practice. We have tried to avoid prescribing standards which are too stringent to follow or technical methods which are more trouble than they are worth.’
by Walter Schloss
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Tough to say.

 

Something like "Magic formula" or value-weighted index funds may outperform long term and they are clearly just arithmetic and algebra.

 

Most active investors either use more or use non-quantitative metrics (like moat, management, etc.) or both.

How many of them produce outperformance is the $1M question.

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Sometimes i feel like there is little worth in asking if "this is still true today?" What we need to be asking is are we applying what their are saying to use. We can sit here and debate if this is "still true today" but ultimately i feel like that doesn't get us anywhere.

 

Let me use an analogy. The NFL is a lot different in 2015 than it was in 1960.  Players are bigger, players are faster....players dont smoke and drink on the sidelines. Players drink protein shakes, dietary improvements make for stronger players. Platyers train in the off season. The technical part of the game has changed. There a lot more different plays to run in a game. WE look at film...monitor how athletes move on the field with RFID.  You have to play the game as it is while you are playing the games. Take any player from the 60s and the equivalent now and the now player will be better trained. The NFL is more competitive with out a doubt.

 

 

Just as the NFL has changed over times, so has the business field. Emphasis should be on being a clear thinker and should be "concerned with concepts, methods, standards, principles, and above all with logical reasoning. "....but times are different. BG never lived in times of HELOCs or SIVs or Dot coms or internets or the million other changes that have happen since that quote. Just the way Archie Manning hasent played in the NFL Peyton or Eli currently do.

 

 

One of the reasons i like following Ackman or Berkawitz is that you can actually learn from them. I can piece together what they are thinking, what they are looking for, what they are avoiding, how the law works. Stepping though the "logical reasoning" with them I can learn about concepts and maybe if im luck apply them in the future when they are no longer around. I'm lucky i can go to PACER and get the court documents from my office. I dont have to be in NYC anymore instead i can be on vacation when something comes out.

 

Its a daunting task to look around at everything being a newbie, lets face it even me at 30 i'm still a newbie, but you have to get out there and do it.  I understand the irony in my post here, but anecdotal comments don't mean shit. You have to get in the dirt, you have to get in the mess, you have to bite off more than you can chew.

 

This is mostly why i keep my mouth shut. Even Buffet at one point didnt know why GEICOs business model was attractive. BUT HE KEEPS LEARNING. You have to work hard to continue learning. you have to ask the dumb questions, you have to search out the answers.

 

I will say this also, I feel there are a lot more distractions.

 

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I'd guess there are a ton of investors that outperform without advanced mathematics. Besides a handful of regressions, I've never used anything above basic algebra in investing (and it's not like those regressions were necessary anyway). Just because Ben Graham's methods work(ed), that doesn't mean other investment styles don't work. Very traditional value investing can still work and so can advanced quant algorithms that I don't even understand.

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Yet in football the standards still apply.  Sure it's complex, but if you have a team that can block, tackle non-complex simple runs are very effective.  You can have the most complex offense in the league, but it doesn't mean squat if the basics aren't in order.

 

Graham's methods still apply, I and many others use them successfully in our portfolios.  Here's the issue, simple investments that work are not exciting.  How exciting is an average business at 75% of book value?  Not exciting, but buying at 75% and selling at 150% works, and it works over and over and over. 

 

Here's an example, Titanium Holdings.  They own cash and a cleaning business.  They're selling for about 30% of net cash, they're profitable.  It's boring, simple, almost no research is needed.  You don't need to know about the Texas cleaning industry.  I've taken a ride on this stock from 30% of BV to 60% before.  There are a few rides left, no industry expertise or almost no intelligence needed to double your money.  But it's small and boring, and 99% of the posters on here will find an excuse to not invest, maybe there's no catalyst, or no moat, or management owns too much or something else.  There are excuses for any stock. 

 

I know that I've found buying things on sale to readily ascertainable values (either assets or earnings) and waiting for them to revalue has been very profitable for me.  This is basic value investing, and it works.  It's not exciting, I'll never be invited to Columbia to speak because it's too simplistic.  But it's the basic blocking and tackling of the investing world.  I'd rather perfect the basics and spend my time on other pursuits rather than trying to master complexity.

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What I would like to know is whether anyone has personally beaten the market with this strategy or knows someone who has.  I'm not trying to disparage it and it actually has a lot of appeal to me.  It just seems like there are a lot more guys beating the market with value investing and maybe that is because it is easier.

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Yet in football the standards still apply.  Sure it's complex, but if you have a team that can block, tackle non-complex simple runs are very effective.  You can have the most complex offense in the league, but it doesn't mean squat if the basics aren't in order.

 

Graham's methods still apply, I and many others use them successfully in our portfolios.  Here's the issue, simple investments that work are not exciting.  How exciting is an average business at 75% of book value?  Not exciting, but buying at 75% and selling at 150% works, and it works over and over and over. 

 

Here's an example, Titanium Holdings.  They own cash and a cleaning business.  They're selling for about 30% of net cash, they're profitable.  It's boring, simple, almost no research is needed.  You don't need to know about the Texas cleaning industry.  I've taken a ride on this stock from 30% of BV to 60% before.  There are a few rides left, no industry expertise or almost no intelligence needed to double your money.  But it's small and boring, and 99% of the posters on here will find an excuse to not invest, maybe there's no catalyst, or no moat, or management owns too much or something else.  There are excuses for any stock. 

 

I know that I've found buying things on sale to readily ascertainable values (either assets or earnings) and waiting for them to revalue has been very profitable for me.  This is basic value investing, and it works.  It's not exciting, I'll never be invited to Columbia to speak because it's too simplistic.  But it's the basic blocking and tackling of the investing world.  I'd rather perfect the basics and spend my time on other pursuits rather than trying to master complexity.

 

+1

 

 

So to paraphrase, history doesn't repeat, but it does rhyme....You can't just run a Geiger counter over the market as you could from '30 to '55, but Ben Graham never goes out of style.

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