Warren Buffett: How Should The Small Investor Manage His Money?

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If you’ve been around the value investing community for a while then you’ve probably seen this little gem from Warren Buffett. If you haven’t, then it’s time to watch.

Two Drawbacks of Net Net Stock Investing

When I used to frequent the forums, there was a lingering debate about what kind of value investment style is best: Warren Buffett’s current brand of value investing or classic Benjamin Graham styled stocks. People in the contemporary Warren Buffett camp kept bringing up the fact that Warren Buffett moved away from the classic Graham approach because it seemed to have a couple huge drawbacks.

Indeed it does. People who invest the way Benjamin Graham taught investors to invest miss out on any continuing growth and, consequentially, a lot of the good returns that a franchise stock can provide. Once an investor sells his stock at fair value — the firm’s NCAV, at a price that reflects the market PE, at a price that nudges the dividend yield down to the market average yield — the stock can continue increasing it’s intrinsic value long into the future.

While all of Benjamin Graham’s strategies made money for investors if adhered to, some were far more profitable than others, such as investing in a bucket of net net stocks. But, if you’re working with too large of a pot of money like Warren Buffett then it can be very hard to find enough net net stocks to invest in without having a global reach.

Warren Buffett Vindicates Graham

But investment returns speak for themselves. Despite the fact that investors could have squeezed out more from their investments if they hadn’t of sold out at fair value, classic Benjamin Graham styled investing yields far better returns over the long term and the returns of net net stocks in particular are phenomenal.

Now Warren Buffett’s preference for classic Graham investing is clear… so long as you’re investing small sums.

It’s worth noting here that in terms of safety, ease, and profit, Benjamin Graham’s net net stock strategy has proven far better than any other classic Graham value investing style. I guess all this means the ultimate vindication of classic Benjamin Graham investors everywhere.

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