Ever heard of “The Super investors of Graham-and-Doddsville”?
It’s the title of an article written by famed investor, Warren Buffett. It was published in a 1984 issue of Hermes, Columbia Business School’s magazine.
In it, he examines the power of value investing by comparing the investment performance of some of the world’s most successful value investors. He nicknamed them, “Super Investors”.
Buffett wrote, “In this group of successful investors there has been a common intellectual patriarch, Ben Graham”.
But he continued, “[these Super Investors] have gone to different places and bought and sold different stocks, yet they have a combined record that simply cannot be explained by random chance.”
Here are the track records of some of the super investors he compared…
• William J. Ruane’s strategy – 10 time his initial investment in less than 14 years.
• Tom Knapp and Ed Anderson of Tweedy Browne – 18 times their initial investment in 16 years.
• And Walter Schloss’ strategy – a massive 220 times in 28 years!
What’s their profit secret?
These are men who selected securities based on discrepancies between price and value, but they all made their selections very differently.
And today, I’d like to share some reasons for their hyperprofits!
Buying dollars for 40 cents
Their success lies in the fact that they are effectively, “buying dollar bills for 40 cents”. According to Buffett, “The common intellectual theme is this: They search for discrepancies between the value of a business and the price of that business in the market.”
Ben Graham called this discrepancy between the value and price of a stock the “Margin of Safety”,
I often refer to these types of stocks as “Mispriced stocks” in Real Wealth.
So what dynamics create these “mispriced stocks”
Events like wars, financial crises, recessions and pandemics and lockdowns help create this unique mispricing in good businesses.
One of the most famous examples is how Sir John Templeton invested in mispriced stocks during World War 11 and ended up quadrupling his money.
Or how in the ‘70s when the oil crisis and subsequent stock market crash occurred, Charlie Munger (Buffett’s late business partner) invested $25 million in Sea Candies, which eventually turned into over $2 billion.
So how do you find this “mispricing” in stocks?
One solid way is to look at the Net Asset Value (NAV).
More specifically, the NAV on a per share basis.
It was this simple ratio of…assets – liabilities/debt divided by the number of outstanding shares, which Ben Graham used to identify the true value of a company irrespective of how the market priced it!
And depending on the value of this number, it highlights a unique situation in a company’s share price…
One that if you take advantage of, can lead to nice profits.
For example, we added Frontier Transport Holdings Limited (JSE: FTH) to the Real Wealth portfolio back in June 2023.
At the time, the company’s market cap stood at just over R1.3 billion. Yet, it made around 35% of its value in operating profit in a year.
Plus, it boasted a net cash position of R500 million – around 38% of its market cap is cash.
And the kicker? FTH traded at a +15% discount to its REAL value of 532c – giving us a nice margin of safety.
All in all, the stock was just too cheap to ignore. Since then, it’s up 60%.
In short, these are the types of stocks I look for in Real Wealth. And there are still plenty of opportunities like this waiting to be picked up by “super investors”.
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