Yahoo Finance This Might Be the Best $2 Warren Buffett Ever Spent
Warren Buffett, one of the most well-known billionaires in the world and CEO of Berkshire Hathaway, has a current net worth of about $134 billion, making him the 8th-richest person on the entire planet. But the man referred to as the “Oracle of Omaha” for his decades-long string of impressive stock picks credits much of his initial success to a simple $2 investment he made in 1950 — at the age of just 19.
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That’s when Buffett picked up a copy of legendary investor Ben Graham’s famous book “The Intelligent Investor.” Here’s what Buffett has to say about Graham and his book, and how Buffett’s simple investment in his education might be something that’s valuable for you as well.
What Is ‘The Intelligent Investor’?
“The Intelligent Investor” is a book written by famous value investor Ben Graham in 1949. It’s received countless plaudits, even being called “possibly the most important and influential value investing book ever written.”
This is because it preaches the mantra of long-term investing by identifying stocks trading at a value. Rather than trying to make quick capital gains by trading in and out of positions, “The Intelligent Investor” focuses on sustainable, long-term gains by investing in stocks that offer true value.
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What Does Buffett Say About Graham and His Book?
Buffett has long been a proponent of financial education. In fact, he often quips that investing in yourself is the best possible way to spend your money. But when it comes to picking stocks, he swears by his $2 purchase of Graham’s famous book.
Buffett offered these lofty words of praise: “I read the first edition of this book early in 1950 when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is. Of all the investments I ever made, buying Ben’s book was the best.”
The Most Important Principles in ‘The Intelligent Investor’
Here are three of the most important principles in Graham’s famous book:
Valuing a stock as a business
Reacting to stock market fluctuations within a margin of safety
Investing in businesses with enduring competitive advantages run by honest and able people at a sensible price
Now let’s break down each of these in a bit more detail.
Valuing a Stock as a Business
One of Buffett’s most commonly repeated mantras is that you should think of stocks as businesses, not simply numbers moving up and down on a computer screen.
As he told CNBC, “If you own your stocks as an investment — just like you’d own an apartment, house or a farm — look at them as a business,” Buffett advised. “If you’re going to try to buy and sell them based on news or something your neighbor tells you, you’re not going to do well. Find a good bunch of businesses and hold them.”
This is a principle that Buffett gets right from Graham’s book. In the era of zero-commission trading, it’s all too common for traders to think they can profit the most by jumping in and out of positions frequently. But Buffett says that’s not the right path.
He goes so far as to say, “You will not make money trying to sell stocks daily or weekly.” Instead, Buffett and Graham agree — you want to look at stocks as long-term businesses.
Reacting to Market Fluctuations Within a Margin of Safety
For Graham, the margin of safety is the difference between the intrinsic value of a company and its market value. This helps protect your investments during periods of market volatility, as a long-term value higher than the current market price of a stock will tend to pull its price higher over time, regardless of short-term market fluctuations.
As Buffett puts it, “We haven’t the faintest idea what the market’s going to do when it opens Monday,” indicating that short-term movements aren’t a real concern when you own stocks that are priced at a value.
Investing in Businesses With Enduring Competitive Advantages Run by Honest and Able People at a Sensible Price
Following Graham’s strategy, Buffett believes in buying quality companies at a good price. Buffett describes “enduring competitive advantages” as a “moat,” protecting companies from competitors. He expounded on this principle further at the 1995 Berkshire Hathaway Shareholders Meeting, saying:
“What we’re trying to find is a business that, for one reason or another — it can be because it’s the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers’ mind, it can be because of a technological advantage, or any kind of reason at all — that it has this moat around it.”
These are the types of businesses that Graham and Buffett both endorse, as they provide good long-term value that can create significant wealth over time.
Bottom Line
When one of the most successful investors in the world issues an endorsement, it’s worth listening to. For more than 70 years, Buffett has recommended — and lived — the investment philosophy written by Ben Graham in his book “The Intelligent Investor.”
It can likely help with your portfolio planning, as well.
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