I read an interesting article in The Star on Thursday. If there are two things I’ve picked up from between my reading on investing and goal achievements, it would be these two points:

1. Get educated on your investment vehicle of choice, and

2. Follow someone who has been successful in that area

I think most of us know that Warren Buffett is probably one of the most successful investors in the stock market. The question is: how did he get so successful at it?

The article tells us that his mentor was Benjamin Graham, also known as the “Father of Value Investing” and the “Dean of Wall Street”, Graham wrote a number of books investing, such as “Security Analysis” and “The Intelligent Investor” (which Warren Buffett was known to have said was the best book ever written on investing.

Warren began with Graham’s investing philosophy:

Graham focused on investing in a stock that has an intrinsic value of RM1.00 and selling at 50 sen per share. It is this difference between the intrinsic value and the market price that determines the margin of safety that an investor looks for when investing in a stock. To Graham, the asset value of a company is important in calculating a company’s intrinsic value. To him, the balance sheet strength of a company is vital. This can be simply explained by the fact that he was writing “Security Analysis” in the depths of the Great Depression during which individual and corporate bankruptcies were the norm rather than the exception. Graham’s value investing was rather mechanical and essentially quantitative in approach.

He later met Munger in 1959 who taught him that there was more to investing than just buying a share at 50 sen against its intrinsic value of RM1.00.

Besides assessing the direction of the general business climate of a particular business, Munger would also assess the quality of management and how a company is run.

One of the most important investment concepts that Buffett learned from Munger was to be able to identify a good business and invest in such a business at a reasonable price.

A good business is one which has a strong franchise, above average returns on equity or capital employed, a relatively small need for capital investment and a business that throws off cash. Munger advised that “the difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.” Munger taught Buffett the value of great franchises and the benefit of qualitative analysis, as opposed to Graham’s strictly quantitative style focusing exclusively on tangible assets. With Munger’s coaching, Buffett realised that “when you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough; it’s worth a pretty good price.” Hence his huge investments in stocks like Coca-Cola in 1988 although Coca-Cola was not cheap by conventional standards.

Until I read this article, I confess I had never even heard of Benjamin Graham or Munger. Although I haven’t really the inclination for investing in stocks, I figured it wouldn’t hurt to keep an eye open and learn something new everyday. One never knows when the information might come in handy in future.