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Buffett’s shift to embrace the qualitative (while not abandoning the quantitative)

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I’m sorry to report this, but there are no net current asset value shares meeting the criteria – now I’ll search the market for cyclically-adjusted price earning ratio bargains. Until such time as I find one I’ll discuss more of the Warren Buffett story. We are still in 1967-8.

© Mike Hodges

Growing from the Graham root

The twenty-something Buffett was exceptionally strongly influenced by the ideas of Benjamin Graham who focused particularly on net assets or, even more especially, the net current assets in the balance sheet, with some attention also directed at the earnings power and the qualitative factors of:

•Business prospects
•Quality of managers
•Stability of enterprise.

Trumping everything else was the balance sheet strength due to the margin of safety it gave.

Buffett was tempted to try other approaches, tentatively at first and then more boldly. The success of Disney, Amex and a host of other investments made Warren want to put increasing amounts of money into companies with excellent qualitative characteristics – largely regardless of the net asset position.

However, when looking at any philosophy let us not crudely throw out one idea and complete substitute with an alternative.

It is perfectly possible to run a portfolio using both the ideas of Graham and the combined ideas of Philip Fisher, Charlie Munger and the thirty-something Warren, as this quote from his October 1967 Letter to Partners makes clear:

“The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. …..Interestingly enough, although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a high-probability insight. This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side – the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.”

Clearly, Buffett is not saying…….. To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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