Taming the Beast: Wall Street's Imperfect Answers to Making Money

Summary

• Warren Buffett, the modern-day heir of Benjamin Graham, has updated the master’s concepts of value investing. In addition to Graham’s devotion to fundamentals, Buffett wants to know a company’s management, sometimes applies macroeconomic analysis, and will take an occasional flier on a dubious-seeming investment. Sometimes, he lets his gut guide him—as it did, to his sorrow, when he invested in Irish banks.
• Buffett, though, still hews to such core beliefs as: an investment should be understandable to the investor. That’s why he normally shies away from tech issues and derivatives.
• Graham’s notion of “intrinsic value,” which seeks to find a stock’s real worth, has been refined. Value money manager Joel Green­blatt, for instance, uses the nexus between earnings yield and return on capital.
• Dividend-paying stocks, another time-honored value favorite, have had their problems but they still win the plaudits of value icons like David Dreman. Studies still show that these stocks outpace nonpayers over the long pull.
• Value stocks, by many analyses, do better over time than do growth stocks. One reason is that they have higher to rise and are innately strong, not just fads.
• But value stocks have weaknesses. They have endured bad times, too, as during the tech boom. Also, there are such problems as the “value trap,” where cheap stocks only get cheaper, hurting investors. That happened to financial stocks, a value stalwart, during the 2008–2009 bear market.