The investment secret that made Buffett a billionaire

by Joshua Benton, Editor, The South Africa Investor, 12 November 2018
The investment secret that made Buffett a billionaire
In 1954, 24-year-old Warren Buffett received a phone call that would ultimately change his life.

The person on the other line offered Buffett a job in New York City and he accepted without asking about the salary.

It was arguably the smartest - and most profitable - decision he ever made.

That's because Buffett knew the man who had just employed him. A man he studied under at Columbia University.

His name?

Benjamin Graham.

When Buffett went to work for Graham, he would discover the ultimate investing secret and in fact, it’s a secret that helped Buffett make an abundance of riches.  

This is the secret Buffett learnt…
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“Purchase securities at prices less than their intrinsic value”

This is what Benjamin Graham said in a 1946 letter to shareholders of his Graham-Newman Corporation.

Graham understood the REAL VALUE of a company couldn’t change as dramatically as market prices do. So, volatility in the markets was proof of pricing inefficiency.

And because of this price inefficiency it created great investment opportunities.

This simple secret helped Graham generate an annualised return of 21%, compared to the market's 12% over 20 years.
 

The Graham Formula: A few minutes of math can help you uncover a lifetime of profitable investments

He argued that stocks tend to return to their fair value over time – and that, by buying stocks that were undervalued, a return to fair value would necessitate a rise in stock price and a profit for the investor.

So, Benjamin Graham developed a “paper and pencil” formula that could be used to quickly and intelligently estimate a company’s real value. Although further analysis was needed before committing money into an investment, this formula could be used to easily determine if a stock was generally worth consideration.
5% influenced by Benjamin Graham.
 

 

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Here’s a breakdown of the formula:

  • A company’s “EPS” is its earnings per share, or earnings divided by the total shares outstanding.
  • At the time the formula was developed, Graham calculated that the average price to earnings for non-growth stocks was 8.5.
  • The “g” represents the seven- to 10-year growth outlook for the company.
  • When Graham developed the formula, the average yield on AAA corporate bonds was approximately 4.4%.
  • “Y” is the current yield on long-term corporate bonds.

Each element is quite simple on its own. Yet by putting them together, Graham forged a powerful tool for estimating a stock’s true value.

While as a student and employee of Benjamin Graham, Buffett learnt and mastered this investment secret.

And it’s not only helped him grow Berkshire Hathaway into a $550 billion company, but also transformed him into one of the most successful investors ever.

In fact, Buffett himself says his investment style was 8
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The basic idea of buying stocks below their true values is as important as it's ever been...Especially in today's market

Stock markets around the world have felt some heat over the past month. It’s not only the All Share that’s fallen.

But the silver lining is many share prices have deviated below their real value. In fact, the All Share is one of the cheapest stock markets right now. 

And like I said, Graham believes situations like this, presents investors with a great opportunity to buy quality companies for cheap.

As an avid follower of Graham, I’ve used this secret to uncover cheap but great investments over the past three years.  And it’s been a huge success.

This secret has helped the Real Wealth portfolio bank an average of 79.80% on just 4 stocks alone.

There’s no better time than now to buy some seriously undervalued stocks.

See you next week,

Joshua Benton, Real Wealth

PS. Warren Buffett wasn’t the only investors that made a fortune from this secret. Professional investors Walter Schloss, Irving Kahn and William J. Ruane all used this secret to make their fortunes. Find out how you can use it to make money investing undervalued stocks today.



The investment secret that made Buffett a billionaire
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