This is one of my favorite passages from The Intelligent Investor. It’s a passage that I immediately gravitated to when I first read it, and it does a nice job of summarizing how I think about my investment approach: methodically making many different investment decisions that as a group end up yielding excellent results over time.
To use a baseball metaphor… I like getting on base as often as possible: hitting singles. I’m always prepared for the home run ball, but in the mean time, I’ll keep buying undervalued stocks, stacking the odds in my favor. It’s not the New York Yankees, it’s the Oakland A’s. That’s also how individual investors can compete and defeat their better-resourced investment opponents. Do what they can’t or won’t do, and invest with the odds in your favor.
Here is Ben Graham describing himself in the third person and discussing his famous GEICO investment (emphasis mine):
“We know very well two partners who spent a good part of their lives handling their own and other people’s funds in Wall Street. Some hard experiences taught them it was better to be safe and careful rather than to try to make all the money in the world. They established a rather unique approach to security operations, which combined good profit possibilities with sound values. They avoided anything that appeared overpriced and were rather too quick to dispose of issues that had advanced to levels they deemed no longer attractive. Their portfolio was always well diversified, with more than a hundred different issues represented. In this way they did quite well through many years of ups and downs in the general market; they averaged about 20% per annum on the several millions of capital they had accepted for management, and their clients were well pleased with the results.
In the year in which the first edition of this book appeared an opportunity was offered to the partners’ fund to purchase a half-interest in a growing enterprise. For some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses. But the pair was impressed by the company’s possibilities; what was decisive for them was that the price was moderate in relation to current earnings and asset value. The partners went ahead with the acquisition, amounting in dollars to about one-fifth of their fund. They became closely identified with the new business interest, which prospered.
In fact it did so well that the price of its shares advanced to two hundred times or more than the price of the half-interest. The advance far outstripped the actual growth in profits, and almost from the start the quotation appeared much too high in terms of the partners’ own investment standards. But since they regarded the company as a sort of “family business,” they continued to maintain a substantial ownership of the shares despite the spectacular price rise. A large number of participants in their funds did the same, and they became millionaires through their holding in this one enterprise, plus later-organized affiliates.
Ironically enough, the aggregate of profits accruing from this single investment-decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners’ specialized fields, involving much investigation, endless pondering, and countless individual decisions.
Are there morals to this story of value to the intelligent investor? An obvious one is that there are several different ways to make and keep money on Wall Street. Another, not so obvious, is that one lucky break, or one supremely shrewd decision – can we tell them apart? – may count for more than a lifetime of journeyman efforts. But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplines capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them.
Great story from Graham. I actually enjoy reading more about his disciplined approach than how he made a fortune in Geico, but it’s a great story regardless.
- A few weeks back I wrote a related post on GEICO, Graham and Buffett. It’s the growth stock that ironically made the father of value investing rich.
- GEICO Case Study by Wedgewood Partners