Tuesday, August 12, 2008

Jean-Marie Eveillard - Value Investor Insight - May 30, 2008

JME: For the past 30 years we’ve sort of floated in style between Ben Graham and Warren Buffett. Graham’s approach is static, quantitative and focused on the balance sheet. There’s no attempt to look into the future and judge the more qualitative aspects of the business. He’d love the Japanese net-nets today, for example.

Buffett’s major idea was to also look more qualitatively for those few businesses with apparently sustainable competitive advantages, where the odds were fairly high that the business would be as successful ten years from now as it is today. In those situations, one makes money not so much from the elimination of the discount to intrinsic value, but more from the growth in that intrinsic value.

When I started out in 1979, both in the U.S. and Europe, there were many Ben Graham-type stocks to uncover after the dismal stock performance of the 1970s. As we grew and markets changed, we’ve moved more to the Buffett approach, but not without trepidation. If one is wrong in judging a company to have a sustainable competitive advantage, the investment results can be disastrous. With the Graham approach, the very large discount to static value minimizes that risk. Overall, I’d like to believe we’ve learned well from both Graham and Buffett and that we own securities that would attract each of them.

Most of the time the short-term outlook stinks for the companies we end up buying, for company-specific or cyclical reasons. The best opportunities tend to be when the company now facing a lousy short-term outlook was not long before considered a darling of growth investors, and when the problems are now perceived to be more permanent. If you think those problems aren’t really permanent, you can make very attractive investments if you turn out to be right.
Value Investor Insight