# 95 Summary of Value Investing: From Graham to Buffett by Bruce Greenwald and Judd Kahn
In this episode, we are discussing Value Investing by Bruce and Judd. It centers on the evolution of valuation methods, contrasting traditional Graham and Dodd approaches with discounted cash flow (DCF) analysis. The core argument emphasizes the limitations of DCF, particularly its reliance on unreliable long-term projections, and advocates for a three-pronged valuation method incorporating asset value, earnings power value, and a nuanced assessment of growth. The authors highlight the crucial role of sustainable competitive advantages (“moats”) and industry dynamics in determining a company’s intrinsic value and the importance of specialized knowledge for accurate valuation, especially concerning intangible assets. Ultimately, the text aims to refine the value investing framework for assessing companies, particularly franchise businesses, where growth significantly contributes to value but also introduces complexities in valuation.
1. Core Principles of Value Investing:
Mr. Market’s Capriciousness: Financial market prices are volatile and subject to unpredictable mood swings. “Mr Market … shows up every day to buy or sell any financial asset he is a strange fellow subject to all sorts of unpredictable mood swings that affect the price at which he is willing to do business.”
Intrinsic Value vs. Market Price: Assets have an underlying economic value (intrinsic value) that is often different from their market price. “the intrinsic value of the security is one thing the current price at which it is trading is something else though value and price May on any given day be identical they often diverge.”
Margin of Safety: Value investors buy securities when their market price is significantly below their intrinsic value, creating a “margin of safety.” This gap protects investors from errors in valuation or unexpected market downturns. “Graham referred to this gap between value and price as the margin of safety ideally the Gap should amount to about one half and not be less than one-third of the fundamental value he wanted to buy a dollar for 50 cents.”
Simple Process: The core strategy is to estimate fundamental value, compare it to market price, and buy when price is below value by a sufficient margin of safety. “a value investor estimates the fundamental value of a Financial Security and Compares that value to the current price at which Mr Market is offering it if price is lower than value by a sufficient margin of safety the value investor buys the security”
Variations within Value Investing: While the master recipe is simple, value investors differ in how they approach security selection, valuation, margin of safety calculation, portfolio construction and diversification and selling timing. “were there legitimate descendants differ from one another where each may add his or her unique flavor is in the precise way they handle some of the steps involved in the process selecting Securities for valuation estimating their fundamental values calculating the appropriate margin of safety required for each security deciding how much of each security to buy which encompasses the construction of a portfolio and includes a choice about the amount of diversification the investor desires deciding when to sell securities”
2. Distinguishing Value Investors from Others:
Technical Analysts (Technicians): Focus on price movements and trading data, ignoring fundamental economic value. “technicians avoid fundamental analysis of any kind they pay no attention to a company’s line of business its balance sheet or income statement the nature of its product markets or anything else that might concern a fundamental investor of any stripe they care nothing for economic value”
Macro Fundamentalists: Focus on broad economic factors (inflation, interest rates, etc.) and forecast broad trends, often employing a “top-down” approach and not calculating specific intrinsic value. “macro fundamentalists are concerned with broad economic factors that affect the universe of Securities as a whole or at least in large groups inflation rates interest rates exchange rates unemployment rates and the rate of economic growth at the national or even International level”
Micro Fundamentalists (Non-Value): These investors also study economic fundamentals but use prior and anticipated price movements as a key component of their analysis, and base trading decisions on whether they have a superior understanding of upcoming events like new product launches, earnings surprises, and shifts in competitive conditions. “these investors study the history of this security noting how the price has moved in response to changes in those economic factors that are thought to influence it earnings industry conditions new product introductions improvements in production technology management shake-ups growth and demand shifts in financial leverage new plant and Equipment Investments Acquisitions of other companies and divestitures of lines of b…
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