value investing

Umair of bubblegeneration points us to a number of fascinating articles and speeches by value investors including a great speech in 1984 by Warren Buffet, and a 2003 speech by Charles Munger. I recommend reading the Buffet piece first, as it sets the stage for the Munger piece, which is more a criticism of economics through the eyes of one of the most successful value investors.
Both Buffet and Munger (and a number of other key value investors) were students of Benjamin Graham and David Dodd, who were famous economics professors at Columbia and wrote a seminal text on investment management called “Security Analysis” in 1934. (!!!)
The Buffet speech, which was given at Columbia Business School at a seminar marking the 50th anniversay of the publication of Graham and Dodd’s “Security Analysis” profiles 9 different value investors, who all surpassed the market averages by focusing on two variables above all others: price and value.
One of the insights from the Buffet piece which hit me was this one:

“it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t take at all. It’s like an innoculation. If it doesn’t grab a person right away, I find that you can talk to him for years and show him records, and it doesn’t make any difference. They don’t seem able to grasp the concept, simple as it is.

It is instant recognition, or it is nothing.

The Munger speech is a critique of economics, specifically 9 problems that Munger sees in modern economics, and the fact that economics can benefit from a multi-disciplinary approach, something that is anathema to the traditional economic curriculum. Munger has a number of amusing anecdotes and stories to support his criticisms, and thus it is a fun read.

One reply on “value investing”

The piece by Munger is definately worth reading. It is not as coherent as I would like, but highlights some of the issues that I have about economics. He’s attempting to summarize the various flaws associated with economic theory. I could summarize the problems with even more economy, because there are three:
1) How much will people produce?
2) How much do people value things produced tomorrow versus things produced today?
3) How will all of those things be allocated?
Implicit in those problems, both Macro and Micro, is to declare that you are attempting to predict human behavior. On a macro basis, such as describing the behavior of the economy as a whole, or describing the stock market, which is an even more complex issue, the problems almost defy the imagination. Economics is the dismal science for a lot of reason, not the least of which is that it’s almost incalculable. Or, put another way, if you could predict the economy you have effectively predicted human behavior and development a la Seldon’s “psychohistory” from Asimov’s “Foundation” series.
He also points out a classic aphorism – “perfect” is the enemy of “good.” This applies to political and other situations as much as predictive economic models.

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