And, of course, there is Buffett himself. It is his achievements that give value investing a good name. But while many popularizers who become the public face of a discipline reap the scorn of their colleagues, Buffett epitomizes value investing for insiders as much as for those on the outside. He seems to be the very reason why most value investors are value investors. Much of the writing on the arcane craft eventually comes around to a central question: What Would Warren Do? Which of course makes one wonder: What happens to the value-investing community once he is gone?
I wasn’t the only one wondering about this. During the Q&A, Buffett was asked, once again, why he hasn’t started to give some control of Berkshire Hathaway to a successor. Buffett’s response: “If we had a good way to inject someone into some role that would make them a better CEO of Berkshire, we’d do it, but the candidates we have right now are running businesses, making decisions, getting experience. To bring them into the Berkshire offices while I’m sitting there reading would be a waste of talent.”
Beyond a certain point, what Warren Buffett does can’t be taught. That’s why, as the British financial writer Merryn Somerset Webb once drily pointed out, despite all the self-proclaimed value investors in the world, “Buffett is certainly the only money manager around in a position to give £20 billion to charity.”
But if Buffett is such a hard act to follow, then why were we all spending a beautiful spring day in the Omaha convention center trying to drink in his wisdom, not to mention eat his brain food?
I spent much of my time in Omaha trying to answer that question, a task complicated by the difficulty of defining what, exactly, value investing is. When Benjamin Graham and David L. Dodd wrote the value-investing urtext, Security Analysis, in 1934, the rules were more hard-and-fast. Graham and Dodd looked for companies whose price was less than their intrinsic value, and offered various formulas for divining this value.
Buying stock in firms where the intrinsic value of the assets is higher than the market capitalization worked well in the depths of the Great Depression, when investors were wary of holding equity. Between 1929 and 1932, the Dow lost just about 90 percent of its value, bottoming out at 41.22. What economists call the “equity premium”—the extra return that investors demand to compensate for the risk of holding stocks—has never since been so high. That’s why Graham and Dodd could find companies whose liquidation value offered a substantial “margin of safety” for people who bought their equity.
Moreover, book value and other balance-sheet-based metrics have become less useful, as the market, and the economy, have changed. Persistent inflation means that the historical cost of the assets on the balance sheet in many cases bears only passing resemblance to their actual worth. Meanwhile, firms get more and more of their value from intangible assets, like intellectual property or strong brands, that don’t show up in the financial statements. Geico, one of Buffett’s crown jewels, gets much of its value not from physical equipment or even investment savvy, but from a sterling brand name built on relentless advertising.