Warren Buffet vs Benjamin Graham Philosophy

If we talk about value investing, there are usually two Grand Masters as the reference, namely Benjamin Graham and Warren Buffett. Graham is the pioneer and Buffett is the most brilliant students.

Philosophy of value investing espoused by Ben Graham started when investor funds under management be dragged Great Depression of 1929 that hit the United States and even the world. We ourselves are usually familiar with the name of the great depression era malaise. Graham was so blow that he put security on the investment fund's first priority before the targeted profit. Screening is so strictly enforced by Graham to ensure the security of investments.

To understand how Graham thought, we must put ourselves into the post-Great Depression era. At that time, very few people are willing to invest in the stock market. Investors who think shares of trauma as an investment instrument that is very dangerous. No wonder then the shares traded at a very low price. In this condition, although Graham did a very strict screening, there are many stocks that go into the criteria. Graham often can find stocks that sell below book value or the amount of cash that is higher than its stock price. Only in less than five years since the great depression, Graham is able to restore losses suffered by investors at once catapulted him as a fund manager.

His book entitled "Security Analysis" written in 1934 and the "Intelligent Investor" which was first published in 1949 has changed the paradigm of the investment world. Investments that were previously regarded as something mysterious, gambling arena, has found its way even supernatural. From these books we can look at Graham's investment in shares as an investment in the business. Therefore, the decision to purchase a stock must be preceded by a fit and proper test of their financial statements in advance.

One of the people are fascinated with the ways of thinking Graham was Warren Buffett. Once terkesimanya Buffett to assume that a book "Security Analysis" as the best investment book ever published. Buffett himself eventually became a student of Graham and had joined the investment firm Graham. At that point, began to create different views with the teacher. Graham looked at stocks solely based on its financial statements. During the financial statements of a stock meets the criteria applied and the price is cheap, he would buy it. Graham himself argues that in order to minimize the risk on a stock, it must diversify as widely as possible. Not uncommon at one time Graham holds hundreds of types of stock (of course that have met the criteria). Until here, Buffett discovered that many of the shares held by Graham never returned to their fair prices. This can be compensated by greater returns on other stocks. Buffett began to realize that even if sold at cheap prices, stocks whose business casual is not very appreciated by the market. Markets tend to provide lower prices for such shares.

Settling Buffett with Charlie Munger further strengthens the view Buffett's about it. Brilliant Munger argues that it is better to invest in stocks that have a business that "wonderful" although sometimes offered at a reasonable price (no discount). This view is quite affecting Munger and Buffett became one of the principles he held in investing. Consequently, by holding stocks with outstanding business, not many stocks that could be chosen. Buffett only necessary but diversified in stocks that have really good business.

Another difference from Graham and Buffett's investment style of investing is an investment horizon of both. Graham's investment horizon is only about 2-3 years. Usually if their shares prices rose by 50%, he will sell it. Similarly, stocks that do not go up the price. Graham will replace them with other stocks potential. The main reason is the opportunity loss by holding stocks whose performance (price) is less encouraging. Contrary to Graham, Buffett's investment horizon is long, even practically forever. Is Buffett bought shares ever took off? The answer: never. Buffett will immediately sell the shares if the stock is out of business a "wonderful".

Probably not many people know that Buffett is not the valuation method adopted from Graham, but from John Burr Williams. Williams is a pioneer of the stock valuation by the method of Discounted Cash Flow (DCF) is the reference Buffett in doing valuation.

Despite many differences in investment style, a lot of similarities between Graham and Buffett. One is the view of the "margin of safety". Although sometimes Buffett bought the shares at a fair price, he would have preferred stock with discounted prices, just like his teacher. Another similarity is about the health of the financial statements to be an absolute prerequisite before investing. However, both have become icons and their value investing has proven the success of the philosophy that they embrace.