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The Superinvestors of Graham and Doddsville is an article that Warren Buffett wrote in 1984 for the 50th Anniversary of Security Analysis a book that was co-authored by Benjamin Graham and David Dodd in 1934. Benjamin Graham and David Dodd were professors at Columbia Business School who wrote Security Analysis after the massive losses that were incurred during the wall street crash and during the great depression.
Benjamin Graham became Warren Buffett’s teacher and a great influence on his investment strategy. He later wrote the book the Intelligent Investor in 1949. The premise of The Superinvestors of Graham and Doddsville is to challenge the notion that markets are efficient meaning that stock prices reflect everything that is known in the market. If this is the case then it should not be possible to find companies that are undervalued. The other notion that Warren Buffett also challenged in the article is was that investors that were consistently beating the market were just lucky.
Warren Buffett makes an analogy of Orangutans in a coin flipping contest that has several round of elimination that ends with 40 orangutans that consistently won their coin tosses to become the winners. You could easily dismiss it as a random event that could have resulted in any of the Orangutangs that were in the competition making it into the final 40 until you learn that all 40 winners came from the same zoo in Omaha. You would then take an interest into why they outperformed the others could it be their diet or some special exercises they do?
This is the case with the Superinvestors of Graham and Doddsville who each subscribe to the teachings and wisdom of Graham and Dodd resulting in them beating the S&P 500 consistently and becoming very wealthy.
The common intellectual theme of the investors of Graham and Doddsville is this: they search for the discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the Efficient Market Theorists concern as to whether these stocks are bought on Monday or Thursday, or whether it is January or July, etc.
Among the Superinvestors of Graham and Doddsville, Warren Buffet names the likes of:
- Walter Schloss of WJS Partnership
- Tom Knapp and Ed Anderson of Tweedy, Browne Inc
- Bill Ruane of Sequoia Fund
- Charlie Munger who became his dear friend and partner at Berkshire Hathaway,
- Rick Guerin of Pacific Partners,
- Stan Perlmeter of Perlmeter Partners Ltd
Our Graham & Dodd Investors, needless to say, do not discuss beta, the capital asset pricing model or covariance in returns among securities. These are not subjects of any interest to them. In fact most of them would have difficulty defining those terms. These investors simply focus on two variables: price and value.
The following were their tack records with audited financials at the time
- WJS Partnership from 1956-1984 1st Qtr, 28 ¼ year annual compounded rate 21.3% vs Standard & Poors 28 ¼ annual compounded rate 8.4%.
- Tweedy, Browne Inc from 1968-1983 15 ¾ year annual compounded rate 20% vs Standard and Poors 7.0%.
- Buffet Partnership from 1957-1969, annual compounded rate 29.5% vs Dow 7.4%
- Sequoia Fund, Inc from 1970 -1984, annual compounded rate 18% vs Standard and Poors 10%.
- Charles Munger (Overall Partnership) from 1962-1975, annual compounded rate 19% vs Dow 5%.
- Pacific Partners (Overall Partnership) from 1965-1983, annual compounded rate 32.9% vs 7.8%.
- Perlmeter Investments (Overall Partnership) from 1965-1983, annual compounded rate 23% vs Dow 7%.
image source equitymaster
The idea here is to buy $1 bills for 40 cents as Warrant Buffet constantly states. You can get the full article here.
Brandon Msimanga
Economic and Investment Analyst
BCom Economics, University of Pretoria
BCom (Hons) Business Management, University of Pretoria
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