The Great Investors Cliff Notes

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The Great Investors

The book The Great Investors is a truly insightful novel that highlights the investing techniques that eventually made nine investors successful. The chapters of the book are organized in such a way that each one exclusively focuses on one investor and his investing methods (except chapter 3, which covers both Buffett and Munger).
The first investor that the book touches on is Benjamin Graham, who is regarded as the father of modern investing. Graham was the leading exponent of the value school of investing. He developed a value investing theory that established the groundwork for long term investing techniques that will later be used by other profound investors, including Warren Buffet. The gist of Graham’s investing theory centered on buying securities in sound companies whose underlying value, the intrinsic value, exceeds its market value. Graham argued that the market would eventually recognize the company’s true value in the long run, which will raise the company’s share price and allow investors to reap a return who bought the security when it was undervalued.
Graham felt that a thorough analysis of the underlying business rather than the security is required in order to realize its intrinsic value. Graham advised that to get the right frame of mind to thoroughly analyze a share, the investor should imagine that he or she is buying an interest in a private business. Moreover, the investor should assess the quantitative and qualitative elements of the business. Graham puts more weight on the quantitative assessment due to the certainty that data illustrated. However, Graham did regard that qualitative valuation is important because it will allow the investor to decide if the company is inherently stable. If the company is inherently stable, then the company’s has the capability to perform successfully for years to come. Ultimately, the investor will be more certain in his or her calculation of the intrinsic value because the stability of the company will give the investor confidence that the company will not participate in any value destroying activities in the future. In conclusion, by focusing on the underlying business will enable you to avoid the error of only considering short-term prospects for the movement of shares. Graham viewed the market as an irrational voting machine that sets prices based on the votes (buying and selling) of thousand of individuals who are flawed because they have a tendency to distort facts and use faulty reasoning. Thus, individuals should make valuations based on the sound reasoning derived from their own thorough analysis, and only consider the market factors when they are in the individuals’ favor (an extremely low buy price or an extremely high selling price).
Key to Graham’s investing theory is safety. Early on in his life, Grahams was able to see the downfalls of market speculation when his mother lost everything in the 1907 stock market crash. Therefore, Graham felt it was vital to have a margin of safety in his investments to protect against loss under unfavorable market conditions. Graham stated that a proper margin of safety is attained when the intrinsic value substantially exceeds the market value. Shares that are priced too low does not meet this obligation, the market price needs to be significantly lower. Thus, when the market significantly undervalues a security, a margin of safety will arise for the investor. The sizable gap between the intrinsic value and the market value allows a satisfactory return at the minimum because the gap will compensate for the circumstance that the security is found to be less attractive.
Based on the fundamental aspects mentioned above, Graham developed three related approaches to investments- current asset value investing, defensive value investing and enterprising value investing. Current asset value investing involved investing in companies whose NCAV exceeds its share price. Graham’s next investment approach is
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