Introduction
Investors adopt many different approaches that offer little or no real prospect of long-term success and considerable chance of substantial economic loss. Many are not coherent investment programs at all but instead resemble speculation or outright gambling. Investors are frequently lured by the prospect of quick and easy gain and fall victim to the many fads of Wall Street. My goals in writing this book are twofold. In the first section I identify many of the pitfalls that face investors. By...
Value Investing Is Predicated on the EfficientMarket Hypothesis Being Wrong
Investors should understand not only what value investing is but also why it is a successful investment philosophy. At the very core of its success is the recurrent mispricing of securities in the marketplace. Value investing is, in effect, predicated on the proposition that the efficient-market hypothesis is frequently wrong. If, on the one hand, securities can become undervalued or overvalued, which I believe to be incontrovert-ibly true, value investors will thrive. If, on the other hand,...
Notes 1
1. Connie Bruck, The Predators' Ball New York Penguin, 1989 , p. 28. 2. A more appropriate method would have been to examine defaults or, better still, total investment returns for junk bonds grouped by year of issuance, which would have eliminated the arithmetic flaws in the customary default-rate calculation. 3. Louis Lowenstein, Lessons for Wall Street from Main Street, Columbia Magazine October 1989 26-27. 4. Berkshire Hathaway, Inc., annual report for 1989, p. 19. 5. Par is usually 1,000,...
Beware of Value Pretenders
Value investing is one of the most overused and inconsistently applied terms in the investment business. A broad range of strategies make use of value investing as a pseudonym. Many have little or nothing to do with the philosophy of investing originally espoused by Graham. The misuse of the value label accelerated in the mid-1980s in the wake of increasing publicity given to the long-term successes of true value investors such as Buffett at Berkshire Hathaway, Inc., Michael Price and the late...
Value Investing The Importance of a Margin of Safety
Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized. The element of a bargain is the key to the process. In the language of value investors, this is referred to as buying a dollar for fifty cents. Value investing combines the conservative analysis of underlying value with the requisite discipline and patience to buy only when a sufficient discount from that value is...