Clearly, the art of value investing has moved on since Ben Graham. There are a number of notable investors and private fund managers who could show excellent performance over the course of several decades.
If nothing else, it proves that the approach works - or at least that it used to work. This is a great start.
Ben Graham used to teach stock investment skills and his most successful, famous and brilliant student by far was Warren Buffett. That the world's richest and most famous ever investor was a student of this art adds considerably more weight to the legend of value investment.
However, value investing with Warren Buffett is a different art than that practised by Graham. Think of it as an evolution. Buffett took the analytical approach of Graham and added to it some thoughts of business from another great, Phil Fisher. From Fisher was taken the idea of a business franchise. This is described as the 'protective moat' that surrounds it.
This protective moat might be a winning brand name, market domination - is that a monopoly? - or some other advantage that makes the economics of the business favourable. This is compared with the commodity type business which supplies something which may be obtained from many locations and is therefore subject to heavy competition.
Value investing with Warren Buffett also includes some other important mathematical concepts that help to judge and value the worth of a company and management. These include look-through earnings and retained profits. We do not plan to discuss these in detail here.
Buying In Bulk
It needs to be noted though that as he has explained more and more over the years, there are a lot of investors - both private and institutional - that try to copy his methods. A much larger number of people chasing deals makes it harder for Buffett to find the good opportunities. Additionally, once your fund becomes as large as Berkshire Hathaway has it becomes very hard to find opportunities on a scale that will make any difference.
These factors mean that Berkshire Hathaway now mostly purchases very large businesses outright. For example, in 2015 Berkshire was involved in a deal with Heinz and Kraft Foods Group in which it invested $10 billion. You and I are very unlikely to make investments of that size!
Berkshire Hathaway has also benefited massively from the ownership of the American insurance giant GEICO. The "float" of capital can be invested for short-term periods to make an additional return - and putting money into Buffett's hands provides lots of opportunities.
The Secret To His Success
Lastly, while Charlie Munger and Buffett are exceptional at finding great opportunities, they have also benefited from owning entire businesses. This advantage is subtle and took me a long time to recognise, but it is very powerful. They often talk about retained earnings, but when you own common stock as a normal investor would, the company has X amount of retained earnings but only pays out a much smaller proportion of it as a dividend.
In contrast, when you own the business outright - as Berkshire Hathaway tends to do - you have the choice as to how to use all of the retained earnings. If you want to use them towards another unrelated purchase you can! We cannot do that and it is a very large factor between the results we might achieve and the results that Buffett and Berkshire Hathaway actually manage.
These are not parts of the value investing process, they are just very smart and effective parts of his empire that have had a powerful impact on his long-term investment results.
However, if you plan to invest like Buffett, it is advised that you immerse yourself in his theories and teachings. Much of his methodology is in the public domain.
For a great discussion and explanation of the theories of value investing with Warren Buffett, the books by Mary Buffett offer an excellent insight and are highly recommended. Buffettology, as they are known, offer thought provoking reading and really are more training manual than bedtime read.
If you would like to read more about value investment, please visit the following pages:
What Is Value Investing?
What Are The Value Investing Basics?
Problems With The Value Investing Approach
The Value Investing Rules Of Ben Graham
The Good And Bad Of A Value Investing Strategy
What Is Asset Stripping?
Value Versus Growth Investing