A short read on Graham vs Buffet

The field of investing is synonymous to the names “Benjamin Graham” and “Warren Buffet”. The former is also renowned as “Father of Value investing”. “Intelligent investor” which finds prominence in the oeuvre of Graham, has reserved a spot in the wish list of every novice investor. Incidentally, Buffet followed the methodology of Value investing in initial years, but later segued his emphasize on ‘growth’. 

For instance, presume a stock takes the form a tree. Over the years, the trunk augments in all its dimensions. The root shall firmly stay camouflaged beneath the soil. Trunk of a tree is akin to the aspect ‘growth’. The root is akin to the aspect ‘fundamental value’ (FV). FV of a stock stays steadfast over the year, despite market turbulence. Whereas, growth stands vulnerable to market factors. The root goes less life less on the occasion of the tree being uprooted, whereas trunk stands vulnerable to every natural catastrophe. Similarly, the ‘value’ completely erodes on the winding up of the company. Periods of recession or similar economic downfalls, makes it difficult for companies to sustain the existing levels of operations.

Benjamin Graham, advocates the ‘value’ aspect of a stock. To be concise, he refers to the ‘intrinsic value’ of a stock. This hauls us to the question – on what is ‘intrinsic value’. In my conjecture, intrinsic value is neither an equivalent of book nor market value. It hovers somewhere in between. The real worth of stock / object is termed as its intrinsic value. Intrinsic value is not restricted to quantitative & financial aspects alone. Qualitative factors are pivotal in determining it. For instance, lets take the case of State bank of India (SBI). Book value per share of  SBI is Rs 244 (approx). The market price oscillates in Rs 170-190 range, in the recent past. This reflects the market has judged SBI’s intrinsic value in the negative territory. So why has market undervalued SBI, despite Sovereign backing??? Perhaps, the reason could be the sovereign (Government of India) itself. SBI has taken commercially dilutive moves in the recent times. Remarkably, SBI spearheaded the bail out of beleaguered  YES bank. The merger of SBI with its associate banks (State bank of Mysore, Patiyala, Indore, Hyderabad, Saurastra and Travancore) was not accretive either. Since, GoI owns majority stake – giving nod for such mergers, is a given. Incidentally, SBI Chairman – remarked that “Yes bank was not purely a commercial move”. 

Back on track, intrinsic value for SBI is dented owing to bureaucratic covenants and domination. According to Graham, investors should cherry pick such stocks which are undervalued. Adhering to Graham’s principles, one should invest in SBI.

Forasmuch Buffet ‘s view, investors should pick stocks by thrusting prominence on ‘growth’ aspect. Buffet underplays on current valuation of the stock. He insists on investment, if the investor is sure shot about the future prospects of his pick. Bear in mind, Buffet emphasis might augur well for an investor with enduring & widening moat (Capital base). In his own words, he mentions, he invests with a mindset as though the market shall stand suspended for 5 years, after the date of investment. 

For instance, (in Indian context) shares of ‘Dr. Reddy Lab’ are valued in the Rs 3900-4100 spread. Technical analysis conclude that the share is over valued. Whereas, market analysts feel the price of the share will continue to enhance in the future, given its strong base in Indian pharma sector and impending drug approvals with US Food & Drug administration department. Adhering to Buffet’s view, an investor should pick Dr. Reddy stocks, despite high valuations.

In my opinion, an investor cannot restrict himself to the theories of Buffet / Graham standalone. A blend of them might prove to be a smart one. For instance, picking a moderately valued stock (trading above intrinsic value) with well grounded growth prospects, would ensure capital appreciation over the years. Market attitudes are unpredictable. Investing at higher valuations, despite well sounding growth prospects could be slightly risky, as future stands unpredictable. For instance, YES bank was the crown jewel among private sector banks in 2018. Financials and growth projections, then were highly alluring. Unfortunately, many investors fell for the bait. Surprisingly, bond holders also turned victims for the financial abyss in the bank. Yes bank’s AT-1 (Additional Capital tier 1) bonds write off is considered an one-off instance. The current scenario at YES bank requires no description.

A conservative investor would prefer Graham, whereas his aggressive peer would prefer buffet. Ponder whether you are conservative or aggressive……….

-Arunachalam Sivaraman

Published by adithyaarunachalam

I'm a millennial, from Chennai, India. Passionate about building up a career in finance, I follow and stay abreast on news feeds. I'm a novice blogger, So feel free to pass on your conjecture to me @adithyaarunachalam@Gmail.com

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