Following proven principles – the ones pioneered by Benjamin Graham, Warren Buffett and others – generates bottom-line results that are plenty exciting.
At The Oxford Club’s Private Wealth Seminar in Boston this week, an attendee at the cocktail reception took a minute to thank for me the presentation I gave that morning.
“But will you also hear a bit of constructive criticism?” he asked.
I encouraged him to fire away.
“As a regular reader of yours,” he said, almost apologetically, “I’ve heard some of this before. In fact, I’m not sure I heard anything about your investment approach today that was brand new.”
I nodded. His remark reminded me of something I experienced a few years ago when CNBC did a two-hour special on Warren Buffett’s investment technique. It was called “The Billionaire Next Door.” (You can still watch it on the Internet.)
Warren’s Old Tricks
I taped it so I could play it back in an hour and 15 minutes. When it was over, however, I felt a twinge of disappointment. I hadn’t heard Buffett say a single thing I hadn’t heard him say before.
Then it dawned on me: Of course I hadn’t heard anything brand new. Buffett’s track record is one of the best in the world.
He doesn’t need to fix or reinvent his system for identifying opportunities. It isn’t broken.
Moreover, I’ve been a student of Buffett’s for more than 30 years. I well know that he uses the same value approach that his mentor Benjamin Graham taught him more than 60 years ago.
Buffett looks for undervalued companies with solid sales and earnings growth, exceptional management, high returns on equity, defensible profit margins (thanks to patents and trademarks), and manageable debt.
He does an independent analysis of the value of a business and compares it with the market price. If it is selling at a substantial discount to that number – thereby offering not just good upside potential but a high margin of safety – he invests. If it doesn’t, he passes.
So while he is always on the lookout for new ideas, he’s not using some fresh approach to find them. He doesn’t need to.
New and Improved
To some extent, we are all conditioned by Madison Avenue to look for products that are “new and improved.” More often than not, of course, what’s improved is the packaging and what’s new is the price. It’s generally higher.
More importantly, if someone offered you the opportunity to invest in ideas generated by a brand-new investment technique, would you really risk your hard-earned money in them? Why should you believe that would work?
And even if it does initially, never confuse genius with a bull market. How could you be reasonably sure it would work in the future?
Don’t get me wrong. I’m as interested as anyone in finding or hearing fresh investment ideas. But they have to meet battle-tested investment criteria first.
I’m not interested in great stories uncovered by some brand-new stock-selection technique. (And this is doubly true if it includes Fibonacci numbers, Japanese Candlestick Formations or some other mystical mumbo-jumbo.)
In short, successful investing can be repetitive, even a bit boring.
But following proven principles – the ones pioneered by Benjamin Graham, Warren Buffett and others – generates bottom-line results that are plenty exciting.
And, in the end, that’s the only thing that matters