Warren Buffett or Benjamin Graham: Who's better? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Warren Buffett or Benjamin Graham: Who's better? 

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In this issue:
» Those waiting for correction may be disappointed feels Damani
» What's driving emerging markets higher?
» Macro environment in India not as rosy as it looks
» Asian markets manage to end positive during the week
» ...and more!

Our long time readers would know how we absolutely love to devour what both Graham and Buffett have to say about investing. Taken together, these two have perhaps done more to spread the idea of sensible, long term investing than the rest of the investing community we reckon. However, what if we pit these two titans against each other? Who do you think is a better investor between the two of them?

Well, if you don't want to rack your brains hard enough, you could jump straight to what Buffett's long time partner and his right hand man Charlie Munger has to say on the issue. And he is very clear in his mind that Buffett is indeed the better investor. As a matter of fact he has even gone on to admit that Ben Graham had a lot to learn as an investor.

Now, that's as bold a comment as they come in investing according to us. But never the one to mince words, Munger, in his own inimitable style shot off that the Great Depression of the 1930s scarred Benjamin Graham for life. And it made such a huge impact on him that he never dared to look beyond those cheap, cigar butt stocks, selling at a fraction of their liquidation value.

Mind you, Munger is not criticizing Graham's technique. He is however of the view that Graham's approach would never work with the kind of money Buffett and Munger have been entrusted with. In other words, when you have billions of dollars or even many millions of dollars, Graham's path is not the path to follow. He thus doubts whether Graham was as good an investor as Buffett is or for that matter even he himself is. What Munger did acknowledge was the fact that Graham was a very good writer and a brilliant man and perhaps the only intellectual in the investing business at the time.

Well, if you ask us, a vast majority of the investors operate with small sums of money. Small enough to practice both the Graham as well as Buffett method of investing. Therefore it all boils down to what one is more comfortable with or what suits one's temperament. If you think you have a quantitative bent of mind and don't have a good enough grip on what businesses would look like few years from now, Graham is the way to go.

On the other hand, if you understand a few businesses well and are able to take a good call on the qualitative aspect of the business like its competitive advantage and are comfortable making just a few concentrated bets then indeed Buffett's approach is what you should follow.

Of course both the approaches are likely to help you beat the markets over the long term. But with Buffett's approach you are bringing more to the table in terms of more skills and more courage to make few bets. Therefore, the payoff is also likely to be higher than with Graham's approach we believe.

What do you think? Do you think Buffett is a better investor than Graham? Let us know your comments or share your views in the Equitymaster Club.

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01:32  Chart of the day
Is the old economy making way for new economy? It certainly looks like it if you look at the market cap figures of the largest companies in the US. Of the top four, three are from the new economy sector of technology while only one, Exxon Mobil, belongs to the old economy sector of oil and gas. Of course Berkshire Hathaway, the fifth largest firm is as we all know an amalgamation of many world class companies. As a matter of fact, Exxon Mobil is under the risk of slipping further what with Google and Microsoft knocking at its doors. However, if you ask us, due to fickle nature of technology, there is a possibility that names around stocks like Exxon Mobil and J&J could change but these age old companies continue to hold on to their positions on account of very little change in their business models.

New economy outshining the old economy

In an interview with a leading financial daily, BSE member and noted Indian investor Ramesh Damani gives his views about what's going on in the Indian share markets right now. He uses American market historian Joseph Granville's theory of bull and bear markets to explain his stance. As per Granville's theory, the bull and bear markets can be classified into three phases. The first phase is characterized by complete depression. Putting this in India's context, Mr Damani points out the severe negativity we witnessed in the markets last year as the first phase. In the second phase, the markets go up zooming with stocks doubling and trebling. While prices tend to be high, they may not be too high to deter investors from buying stocks. And since the action on the markets is forward looking, there is time lag between what the markets price in and the result to show in the company's earnings and the overall economy. In his view, investors waiting for a correction may be disappointed.

While it is true that during bull markets it is quite tough to buy stocks trading at lucrative valuations, it would be foolish to jump on the bandwagon without caring about what price you are paying. So no doubt you may have to pay a premium to buy quality businesses. But make sure you do not engage in speculative bets without any focus on fundamentals and valuations.

The EM MSCI index has been a barometer of how the emerging markets perform. But the recent trend of this index seems to be a bit contrary to what was in the past. Now emerging markets traditionally have been driven by exports to either the Eurozone or China. The Eurozone, however, continues to remain sluggish and China's growth has slowed. And yet the EM MSCI index has been rising. So what has brought about this difference? Mr Yardeni of Yardeni Research points out that the reason for this has largely to do with internal developments that have been taking place in emerging countries. India is a classic example of this case.

We know that India's GDP had considerably slowed down when the UPA government was in power. With the Modi government being voted into power in May, sentiments have improved as this government has largely been perceived as pro reform. So investors are making a beeline for Indian shores to capitalise on the new wave of growth that the Modi government is widely expected to unleash. Similar trends have been playing out in other emerging countries as well and the story now is more about economic reforms than exports led growth. However, according to us, whether investors will be rewarded in the longer run will all depend on how effectively these economic reforms are implemented.

5.7% growth is considered decent for an economy that was reeling under governance mess just a quarter back. Achieving a sub-6% growth in the first quarter has made economists and investors suddenly optimistic. However, there are signs that the revival path will be challenging than expected. For one, agriculture, which displayed a strong performance during the quarter, may fall short of growth expectations for the full year. High base effect and deficiency in monsoons in some parts of India are some of the reasons.

Of course, lower agricultural growth would hurt farm incomes. And thus consumer spending. Also many believe that the investment cycle is about to kick start and thus fuel growth. But one must remember that the decision on the coal block allocation is critical for the revival of the power sector. And the power sector's growth is closely linked to GDP growth. Any delay in its recovery could significantly hurt growth prospects. Thus, investors banking on the revival of India growth story should be slightly cautious.

Global markets largely ended in the negative territory with less than a handful of Asian indices managing to stay afloat. The US markets adopted a cautious tone ahead of the Federal Reserve meet next week. Details of the quantitative easing and possible interest rates are expected to be announced during the Fed meet. Even energy stocks in the US were down as crude prices slid below US$ 100 a barrel and therefore overall markets were down 0.9% for the week. Even European markets ended lower on rising investor concerns as Europe and US implemented a new round of sanctions against Russia.

Some Asian stock markets were able to trade positive during the week. The Japanese index was the biggest gainer up by 1.8% on the back of a weak yen. Even China, India and the Singapore markets were marginally up for the week.

The Indian markets remained barely positive because of weak macro data. Industrial production hardly expanded in the month of July and consumer inflation eased slightly to 7.8% in August from 8% in July.

BSE Mid Cap and BSE Small Cap stocks continued to perform well recording much higher gains than the broad BSE-Sensex. A large number of sectoral indices ended the week on a firm note. Auto (up 2%), FMCG (up 1.8%) and Banking (up 1.7%) indices led the pack of gainers. Oil & gas (down 0.8%), IT (down (0.6%) were among the major losers for the week.

Performance during the week ended September 12, 2014
Data Source: Yahoo Finance

04:56  Weekend investing mantra
"Warren and I aren't prodigies. We can't play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points" - Charlie Munger
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4 Responses to "Warren Buffett or Benjamin Graham: Who's better?"


Sep 14, 2014

Having understood some of the salient features,i wish to say that both these 2 stalwarts have to be placed on the same platform.

Regarding Mr ramesh Damani's observations regarding disappointment to those who looked for market correction,it is to be pointed out that technically the ROC(Rate of Change) has been going lower and lower and that should also be considered as a correction. Some of the scrips like L&T,Colgate,HUL,Canara Bank etc had corrections. So one should look out for correction in individual scrips. Next corrections may be in pharma shares. Already there has been correction has started in Sun Pharma and Ranbaxy. To emphasize once again,one should look for corrections in individual scrips.



Sep 13, 2014

due to political versatile its not rosy for macro instead of micro



Sep 13, 2014

Graham bcoz he has not any rule and terminology . It's only his inner voice



Sep 13, 2014

QUALITATIVE ANALYSIS is a must; else its a High Risk calculated gamble just going by Quantitative Analysis only.

Investment based upon QUALITATIVE ANALYSIS backed-up Stock picks takes the gamble out of Equity Investment.

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