Your choice between Buffett and Graham? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Your choice between Buffett and Graham? 

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In this issue:
» US is headed for the worst financial depression
» Brazil's trade deficit bloats
» Have India's macro policies been faulty?
» Corruption is widespread in Europe
» ...and more!

Most investors, who believe in the sound principles of value investing, would certainly have heard of the legendary investor Benjamin Graham. Indeed, his book 'The Intelligent Investor' is widely considered the best book on investing ever written. That Warren Buffett, who began his career under the mentorship of Graham, is a staunch supporter of the latter's investment philosophy is hardly surprising.

On a broader basis, the core investment philosophy for both of them remains similar. Essentially both agree that stocks have to be bought cheap with sufficient margin of safety and that discipline and not getting carried away by emotions will surely generate wealth for shareholders for the longer term.

But if one digs deeper, there are differences. For one, Graham's investment philosophy is probably more quantitative based as opposed to a more qualitative approach adopted by Buffett.

For instance, one of the theories that Graham is famous for is the 'cigar butt' theory. This implies that investors should consider buying dirt cheap stocks irrespective of fundamentals. He backed this is up with the analogy that cigar butts thrown on the ground are always good for a few puffs. In other words, investors should look for discarded companies possessing good turnaround prospects.

Buffett does not believe in following such an entirely quantitative approach. He opines that Graham's philosophy works well when the assets involved are of a smaller ticket size. But the moment you are managing substantial funds (which is what Berkshire Hathaway is doing) and are looking to buying large companies then a qualitative approach becomes important.

Thus, while Buffett started out following Graham's policy of picking up cheap stocks, over time his philosophy evolved and he began focusing more on quality companies. In other words, Buffett would rather buy a great business at a fair price rather than a mediocre business at a very cheap price. A great business would be one that has a strong moat, pricing power, robust return ratios and management depth. And it is an investment philosophy that has yielded considerably strong returns to shareholders of Berkshire Hathaway.

However, this does not mean that Graham's philosophy is no longer relevant. In fact, as per Buffett's own admission, the more sure money tends to be made in Graham like stocks even if Buffett's methods produce the bigger money. Therefore, a small investor with only limited knowledge about stocks is less likely to go wrong using the Graham method than he would using Warren Buffett's method.

Thus, whose philosophy would you rather follow, Benjamin Graham or Warren Buffett? Let us know your comments or share your views in the Equitymaster Club.

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01:26  Chart of the day
Emerging markets are in the midst of a meltdown as a combination of various factors has resulted in foreign investors pulling out money. Of course, many of the problems are country specific. And yet there are some economic indicators which point out to the same trend. One such indicator is the rise in consumer prices. As today's chart of the day shows, barring China, all the other BRIC nations have been seeing higher consumer prices. India leads the pack by a wide margin with consumer prices being just below the 10% mark. In India's case, the RBI's policy of gradually hiking interest rates has not really worked. And the Indian government has not done its bit in eliminating supply side bottlenecks.

Retail inflation* remains high in India
*Consumer prices in December 2013

We know things aren't particularly good across the world right now. But how bad they exactly are? Well, if well known market commentator Doug Casey is to be believed, the US could well be headed for the worst financial depression in its entire history in 2014! Now, that's a pretty strong statement we reckon. So he better have some good reason to explain his thesis. In a recent interview he did just that. He argues that we've been in a storm since 2009. And now we are going back into its trailing edge which is going to be much longer lasting, much worse and much different than what we had in 2008 and 2009.

Why much worse and much longer lasting? Simply because idiotic governments around the world seem to be printing trillions of dollars worth of currencies which is going to turn the world into a generalised financial bubble as per him. Therefore, while the earlier crisis were specific to a certain asset class, this time around he won't be surprised if a bunch of nations go bankrupt at the same time. That's a pretty dire warning, isn't it? And something that's certainly not out of the realms of possibility. One more reason to buy gold as a small percentage of one's assets we reckon.

Time and again the government has been criticized for its lopsided and ineffective subsidy schemes. Hence the Planning Commission set up a committee in August 2013 to judge the real outcome. The committee was meant to evaluate the effectiveness of social sector initiatives. And it turns out the findings of the committee are no different from public impression of the subsidy schemes. Moreover the effectiveness of the schemes has not changed a bit since 2005.

The Independent Evaluation Office's findings indicate that almost 40% of the food grains allocated under PDS do not reach the intended beneficiary. As per the office, the split between genuine leakages and pilferage is around 50:50. Which means that corruption has a meaningful role to play in the ineffective PDS. And this statistic has not changed throughout the UPA regime! Despite that, the government is hell bent on embarking upon a gargantuan subsidy scheme to make food available to the poor. The government needs to be made accountable for such an attempt at wasting tax payer money and pilfering precious food grains.

Currency devaluation is a widely used tool to bridge trade deficit. Weak currency boosts export competitiveness resulting into a trade surplus. However, something different seems to be happening with Brazil. The nation currently witnessed its highest ever monthly trade deficit in January. This is despite the fact that Brazilian Real has depreciated by about 18% in the last year. Higher demand for imported goods and delay in pick-up of export produce is hurting the trade balance. This has put Brazil in a tricky situation. Trade deficit not easing despite currency devaluation is a sign that imports are rising at a faster pace. This is likely to put further pressure on Real. Depreciating currency can import inflation into countries that run trade deficit. Up till now, the government was able to control inflation by managing fuel and energy prices. However, it can do very little to curb imported inflation as there is no effective way to curb the same except for levying quotas or duties. Rising imported inflation may paralyze the government. This can have cascading effects on the economy.

The Indian economy is under a spell of stagflation. Economic growth rates have fallen down to decade low levels of around 4.5-5%. On the other hand, consumer inflation continues to remain stubbornly high at around 9-10%. What are the factors that brought the Indian economy to the current sorry state of affairs? Of course, there was a lot of weakness and uncertainty in global economy. And this, in many ways, impacted India's growth story. But were external factors solely to be blamed? Certainly not!

An article in Economic Times gives an interesting perspective on what went wrong in India over the last five years. The biggest blame falls on ineffective economic policies. Macro policies were too focussed on redistribution of income instead of accelerating productive growth. What does this mean? Imagine that the economy is a giant pizza with unequal distribution among its population. By focusing on fiscal sops, the government's efforts were largely towards redistributing the pizza. What the government failed to do was to expand this pizza at a solid rate.

When interest rates are lower than the inflation rate, the government is prompted to scale up its welfare spending and thereby increasing the fiscal deficit. In the post-financial crisis period, the RBI had been slow in tightening the monetary policy to counter the high inflation. This delayed response took a toll on the savers as negative real rates persisted for an extended period. Another mistake that policymakers made was their focus on wholesale price inflation instead of the more relevant consumer price inflation (CPI). The silver lining is that the RBI has now realised that the headline CPI is the best measure of inflation.

Corruption is a word hardly anyone in India is unaware of. In every walk of life we face some form of corruption or the other. But India is not alone in its fight against corruption. Despite its relatively clean image, the European Union is losing at least 120 bn Euros a year to corruption, and more than three-quarters of citizens believe that the problem is widespread in their countries. Corruption has accelerated since the financial crisis. Europe's problem is not so much with small bribes on the whole but with the ties between the political class and industry. Tackling corruption is a tall order since the very ministers elected for leading and serving the country indulge in it. And while the obvious solution could be to introduce laws to curb this disease, whether the politicians in government would really want to implement these measures remains a big question mark.

The Indian equity markets had a volatile trading session today. At the time of writing, the BSE-Sensex was trading lower by about 25 points with stocks from the information technology, metals and pharmaceuticals spaces leading the pack of losers. Stock markets in other major Asian economies ended in the red. Both Japan and Hong Kong ended lower by about 4% and 3% respectively.

04:56  Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator"- Benjamin Graham
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9 Responses to "Your choice between Buffett and Graham?"


Jun 8, 2014




Feb 7, 2014

I will prefer the Buffett theory. Reason comparatively more safe.



Feb 7, 2014

I will prefer the Buffett theory. Reason comparatively more safe.


Suresh Gujarati

Feb 5, 2014

Dear Sirs,
it is depend on the script to fellow the theory of Graham or that of Buffet.and study of the script
Suresh Gujarati



Feb 5, 2014

I think Graham's theory is way too risky for individual investor. 1. It plays with penny stocks with bad management. 2 many times success depends on turn around, which is very unlikely, depending on management change,3. Esle you wait till liuidation and fair valuation. 4 and lastly in a mature and fair market like US it may still work, where some kind of shareholder activism is in place.
certainly not emerging market like India.



Feb 4, 2014

The "cigar butt" theory of Benjamin Graham appears quite dangerous. It could spell nothing but doom. I, never in my wildest dreams, imagined that he had such an irrational approach.

Well, the cigar butt thrown on the ground could give few more puffs, but not the beaten down stocks which are fundamentally weak. I'm now worried about the new product that you are going to launch, "Extreme Value Pro", which is going to be based on the so called 'cigar butt' theory. Your commitment to value investing based on this approach raises many an eyebrow.

Like (1)


Feb 4, 2014

Grahams method is definitely more risky especially in view ofthe possibilities of aggressive accounting policies of such companies since the CEO wants to show better results. I would rather go with Buffet since the likelihood of such companies folding up is rather remote and having built a reputtion they will be more careful.

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minesh bhimani

Feb 4, 2014

for India it is the right time to act immediate implementation of GST and labour reforms can boost investment and industry, but sadly none of the political party has any stand on it.

Like (1)

Nitin Bhuta

Feb 4, 2014

I would prefer to use both the theories when selecting any stock with long term prospects by using the principles of margin of safety, its valuation ( tangible as well as intangible valuation) and unique selling prepositions in the common layman's mind with strong and independent management who manages the affairs in the transparent manner.

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