This is a Good Time to Buy Warren Buffett Stocks at Ben Graham Prices

Apr 20, 2020

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Rahul Shah, Editor, Profit Hunter

There are many ways of slicing and dicing stocks and arrange them into different categories.

They can be categorised as large caps and small caps. Growth and value. Cyclical and non-cyclical etc.

Do you know what my personal favourite is? Ben Graham stocks and Warren Buffett stocks.

Let's try to understand each one of these.

Back in 1962, Warren Buffett began buying shares in a textile company in the hope of making a quick buck. The stock was trading at a whopping 60% discount to its book value and 25% lower than it's per share working capital.

The business wasn't exactly high quality though. The company was shutting down one plant after another and racking up big losses.

However, Buffett figured that the price was so low that even if the company went bankrupt, he would still end up making money on the stock. It did not come to that however.

Two years after Buffett bought the stock, the company made an open offer to buy back Buffett's shares at a 50% premium to his purchase price.

Buffett called these kinds of stocks as picking up discarded cigar butts that had one last puff remaining in them.

And though the stub might be ugly and soggy - the underlying business might be of poor quality - the puff would be free.

The idea was to quickly take that one puff and then start looking for other cigar butts.

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Interesting to note that Warren Buffett's cigar butt approach worked extremely well when he was managing small sums. The many free puffs he obtained back in the 1950s made that decade by far the best of his life.

Now, let's talk about another Warren Buffett investment, this time from the 70s.

In 1972, Buffett bought a small company called See's Candy that was into retailing of boxed chocolates. However, this was no cigar butt business. The company was making a pre-tax profit of US$ 1 for every US$ 2 it had invested in the business. That's return on capital of a massive 50%.

It was only later that both Buffett realised they had stumbled upon a goldmine of sorts. Not only did See's report growth in earnings year after year, it did so without requiring any massive investment of capital to support the growth.

The company had a certain competitive advantage that helped it to earn massive returns on capital. Besides, the advantage was durable in nature and could last for a long, long time to come.

Buffett now had a blueprint with which to give a new shape to Berkshire Hathaway. They decided to make a permanent move away from cigar butt kind of businesses and into See's Candy type of businesses where the returns are high and durable in nature. And what a great move it turned it out be.

This new blueprint has been singlehandedly responsible for making Buffett one of the richest guys on the planet.

Now, it is obvious that a company like See's Candy isn't going to be available for cheap. Its virtues would be known to the market, thus making it command premium valuations. Thankfully for Buffett though, he was able to buy the stock extremely cheap. As per his own admission, Buffett paid a little over 6x its pre-tax earnings.

Put differently, Buffett bought the business at a PE of around 6x.

Now, 6x is something you value a cigar butt stock at and not a quality business like See's Candy. A company that has the attributes of See's would sell for nothing less than a high double digit PE in a normal market environment.

That Buffett was able to buy it at such low valuations leads me to term it as 'Buying Warren Buffett stocks at Ben Graham prices.'

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Normally, Mr Market does a great job of keeping these two entities separate. You will seldom find a cigar butt stock trading at a high double digit multiple. Likewise, it is rare to see quality stocks like say Colgate, Nestle or HUL trade below their book values.

However, in a depressed market environment like the current one, lines between the two tend to get blurred for a handful of stocks. In other words, it is not uncommon to find Warren Buffett stocks at Ben Graham prices when Mr Market is fearful like it is right now.

Therefore, all you need to do is start looking for such stocks when the broader market has taken a huge beating. You need to look for stocks that have earned consistently high return ratios, have some kind of a durable advantage that you can identify and run by managements with stellar reputation.

And last but not the least, see whether such stocks are available at Ben Graham valuations i.e. below their book values or extremely low price to earnings ratios.

There could be tremendous upside for the taking in case you managed to unearth a few such gems.

I am recommending two such stocks to my Microcap Millionaires subscribers today. Both enjoy stellar reputation in the market for their products, both have earned healthy return ratios in the past and both are helmed by good management teams.

Of course, they are both available below their book values for the first time in many years. I am confident they will be great additions to my Microcap Millionaires group of stocks.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

PS: It's our anniversary and we have a surprise for you! Find out more here...

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2 Responses to "This is a Good Time to Buy Warren Buffett Stocks at Ben Graham Prices"

Balakrishna Ramanatha shenoy

Apr 26, 2020


In this market I have already purchased few stocks such BHEL 400nos.& UPL, Mold tech packaging,
Indusind Bank etc, these shares are good or not. Kindly gave me your advice.
Thanks a lot
RBalakrishna shenoy


Apurbasundar Bandyopadhyay

Apr 24, 2020

Presently no comment

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