Value investing: follow in Buffett’s footsteps and reap the rewards

By Euan Stuart Oct 31, 2005

Until recently, value investing was virtually unknown outside financial circles. That changed when US fund management firm Brandes Investment partners made several high-profile takeover bids and cleaned up, taking big stakes in the likes of Marks & Spencer and Abbey National. What is striking about Brandes is its dedication to a stock-picking approach pioneered in the 1930s by Benjamin Graham, the “father of value investing”, according to Maynard Paton on MotleyFool.com.

Born in London in 1894, Graham’s family migrated to America when he was a child. He was hugely successful as a Wall Street analyst and, after surviving the crash of 1929, he went on to publish Security Analysis in 1934, which has never been out of print, and in 1949, The Intelligent Investor, the ‘bible’ of value investing. His investment principles advocate buying businesses rather than stocks, knowing who runs those businesses, investing solely for profits and having confidence in the value-investment style. Among other things, he also talks about ‘Mr Market’, a random entity who must be ignored by the investor at all times, and the ‘margin of safety’, the price at which a share investment can be bought with minimal downside risk.

Two of Graham’s most high-profile fans are investment guru Warren Buffett, chairman of Berkshire Hathaway, and Charles Brandes, founder of Brandes Investment. Graham’s value philosophy has served Brandes well over time, says Paton. Launched in 1974, it is one of the fastest-growing fund managers in the world. The firm employs 500 people, all of whom are partners, and in 1984 total assets had reached $11m. By 2004, they topped $85bn. From its base in southern California, Brandes has emerged as one of the most important players in the UK stockmarket, says James Hall in The Sunday Telegraph. Of its total $76bn (£41bn) of assets under management, almost 14% - some $11bn(£6bn) - is tied up in “substantial” stakes in Britain’s best-known firms. Brandes has 7.4% of BAE Systems, 7% of J Sainsbury, 3.3% of William Morrison, 9% of ICI, 12% of Corusand 4% of BT. Brandes was also the “lynchpin” shareholder in Marks & Spencer when Philip Green, the billionaire retailer, endeavoured to acquire the troubled retailer. With its 11.6% stake, Brandes’s decision to lend its support to Green’s approach almost - but not quite - gave him a “decisive edge”.

There is only one Warren Buffett, says Michael Maiello in Forbes. Nobody else’s stock-picking record “comes close” to Buffett’s in both cumulative percentage gain and dollar magnitude. Berkshire shares were worth $15 apiece when he took over the company 39 years ago; now they go for $85,500, and the company’s market value is $131bn. But whereas Benjamin Graham liked to buy companies forless than net current assets - meaning cash, inventory and receivables minus all obligations - Buffett has “pushed the definition” of intrinsic value in new directions. He is willing to pay for intangibles, like a consumer brand name or a newspaper monopoly, provided those assets throw off ‘owner’s profits’ - cash that can be extracted from a business after necessary capital outlays are paid for. But while the definition may be different, the reality is the same - Graham, Buffett and Brandes have all reaped the benefit of the value-investment style.

Published in How to invest | More articles by Euan Stuart

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