WEBVTT 00:00:00.000 --> 00:00:02.279 Welcome to the Deep Dive, where we take a monumental 00:00:02.279 --> 00:00:05.219 stack of research, academic papers, and historical 00:00:05.219 --> 00:00:08.019 insights, and we distill them into the most potent 00:00:08.019 --> 00:00:10.119 knowledge transfer available. We're giving you 00:00:10.119 --> 00:00:12.380 the shortcut to being well -informed, not just 00:00:12.380 --> 00:00:14.960 about what happened, but, you know, why it still 00:00:14.960 --> 00:00:18.199 matters right now. And today, we are plunging 00:00:18.199 --> 00:00:21.420 into the investment world's most enduring and, 00:00:21.500 --> 00:00:24.719 I think, profoundly influential philosophy, value 00:00:24.719 --> 00:00:27.440 investing. It's a system, really. It claims to 00:00:27.440 --> 00:00:29.620 take the guesswork out of the market. How so? 00:00:30.000 --> 00:00:32.460 The entire paradigm is focused relentlessly on 00:00:32.460 --> 00:00:36.119 one thing, buying securities that appear underpriced. 00:00:36.119 --> 00:00:38.799 But not just based on a hunch or a hot tip. No, 00:00:38.880 --> 00:00:42.280 not at all. It's through methodical, rigorous, 00:00:42.539 --> 00:00:45.520 fundamental analysis. And it's an approach that 00:00:45.520 --> 00:00:47.780 has produced some of the greatest wealth creators 00:00:47.780 --> 00:00:49.799 in history. OK, let's unpack this immediately. 00:00:50.399 --> 00:00:52.619 If we establish the bedrock of this whole approach, 00:00:52.820 --> 00:00:55.439 it all comes down to buying an asset for less 00:00:55.439 --> 00:00:57.960 than its true underlying worth. Right. What we 00:00:57.960 --> 00:01:00.280 call intrinsic value. And that term, intrinsic 00:01:00.280 --> 00:01:03.200 value, it can sound a little elusive, can't it? 00:01:03.240 --> 00:01:05.680 Especially in today's fast -moving markets. It 00:01:05.680 --> 00:01:08.519 sounds elusive because it's an estimation. But, 00:01:08.640 --> 00:01:10.939 and this is the key part, it's an estimation 00:01:10.939 --> 00:01:13.319 based on verifiable facts about the business 00:01:13.319 --> 00:01:15.780 itself. So separate from all the emotional noise 00:01:15.780 --> 00:01:18.099 of the market. Exactly. Think of it like this. 00:01:19.040 --> 00:01:22.099 What would a highly rational, fully informed 00:01:22.099 --> 00:01:26.200 private buyer pay for the entire company today? 00:01:26.980 --> 00:01:29.980 That's your intrinsic value. And the discipline 00:01:29.980 --> 00:01:33.159 isn't just about finding that number. No. It's 00:01:33.159 --> 00:01:35.219 about ensuring you buy with a protective buffer. 00:01:35.439 --> 00:01:37.519 That protective buffer being, of course, the 00:01:37.519 --> 00:01:40.920 famous concept from Benjamin Graham. The margin 00:01:40.920 --> 00:01:43.299 of safety. Precisely. The margin of safety is 00:01:43.299 --> 00:01:46.219 that gap, that discount between the market price 00:01:46.219 --> 00:01:49.000 and your calculated intrinsic value. So if you 00:01:49.000 --> 00:01:51.359 think a stock is worth $100. And you only pay 00:01:51.359 --> 00:01:54.260 $60 for it, that $40 difference, that's your 00:01:54.260 --> 00:01:56.319 margin of safety. You know, that sounds less 00:01:56.319 --> 00:01:58.219 like a financial theory and more like a fundamental 00:01:58.219 --> 00:02:00.060 rule of engineering, which I really appreciate. 00:02:00.239 --> 00:02:02.519 It's a perfect analogy. You always build in more 00:02:02.519 --> 00:02:04.939 strength than you think you need. It's a protection 00:02:04.939 --> 00:02:07.239 against, what, a calculation error? A calculation 00:02:07.239 --> 00:02:10.800 error, yes, but also against the sheer unpredictability 00:02:10.800 --> 00:02:13.979 of the future, the world. Right. An engineer 00:02:13.979 --> 00:02:17.539 designs a bridge to handle 100 tons, but they 00:02:17.539 --> 00:02:21.199 build it to withstand 150. That 50 -ton buffer, 00:02:21.379 --> 00:02:24.210 that's what protects you. Against what? Poor 00:02:24.210 --> 00:02:26.250 materials, maybe? Poor materials, an unexpected 00:02:26.250 --> 00:02:28.909 traffic load, or just a simple miscalculation 00:02:28.909 --> 00:02:31.830 in the initial design. In investing, that buffer 00:02:31.830 --> 00:02:33.830 protects you if the company's earnings are a 00:02:33.830 --> 00:02:35.669 bit weaker than you projected. Or if the whole 00:02:35.669 --> 00:02:38.210 market just goes into a panic because of a recession. 00:02:38.370 --> 00:02:40.830 Exactly. It drives all prices down unexpectedly. 00:02:41.270 --> 00:02:43.550 Your margin of safety is what lets you sleep 00:02:43.550 --> 00:02:45.729 at night. And what's truly fascinating to me 00:02:45.729 --> 00:02:48.460 is that this entire strategy... which has proven 00:02:48.460 --> 00:02:51.360 itself for nearly a century, is just a direct 00:02:51.360 --> 00:02:53.419 rejection of one of the dominant theories of 00:02:53.419 --> 00:02:55.740 academic finance. Oh, it's the ultimate intellectual 00:02:55.740 --> 00:02:57.560 conflict. You're talking about the efficient 00:02:57.560 --> 00:02:59.819 market hypothesis, right? The EMH. That's the 00:02:59.819 --> 00:03:03.259 one. The EMH posits that because all information 00:03:03.259 --> 00:03:06.280 is instantly available to millions of hyper -rational 00:03:06.280 --> 00:03:09.139 traders, all securities are priced perfectly 00:03:09.139 --> 00:03:12.360 and accurately at all times. So if the price 00:03:12.360 --> 00:03:15.560 is $100, The value is $100. There are no deals 00:03:15.560 --> 00:03:18.539 to be had. Correct. But the value investor comes 00:03:18.539 --> 00:03:21.979 along and says, Wait a minute. Human beings run 00:03:21.979 --> 00:03:24.259 the market. And human beings are emotional. They're 00:03:24.259 --> 00:03:27.719 subject to fear and greed and just wild short 00:03:27.719 --> 00:03:29.979 -term thinking. So the market isn't always rational. 00:03:30.240 --> 00:03:33.099 Exactly. Value investing proposes that the market 00:03:33.099 --> 00:03:35.719 is often irrational, creating these little windows, 00:03:35.840 --> 00:03:38.419 these opportunities where securities are, in 00:03:38.419 --> 00:03:41.460 fact, not accurately priced. And those moments 00:03:41.460 --> 00:03:45.259 are caused by what? Panic? Neglect? All of the 00:03:45.259 --> 00:03:48.539 above. Panic, neglect, or sometimes just a simple 00:03:48.539 --> 00:03:50.860 lack of understanding of the underlying business. 00:03:50.939 --> 00:03:53.319 The ability to spot those temporary mispricings. 00:03:53.560 --> 00:03:55.740 That's the whole game. And this movement, this 00:03:55.740 --> 00:03:58.240 whole philosophy, it didn't start with some flashy 00:03:58.240 --> 00:04:00.979 hedge fund in the 80s. It started in a classroom. 00:04:01.280 --> 00:04:04.180 It did. The foundation was laid at Columbia Business 00:04:04.180 --> 00:04:06.900 School by Benjamin Graham and David Dodd. This 00:04:06.900 --> 00:04:09.860 was way back, starting around 1928. And then 00:04:09.860 --> 00:04:12.379 it was all formalized in their, well, their legendary 00:04:12.379 --> 00:04:16.540 1930s. for text security analysis. Which is, 00:04:16.560 --> 00:04:20.220 I mean, a dense, rigorous book. It really set 00:04:20.220 --> 00:04:24.000 the standard for how professional analysts should 00:04:24.000 --> 00:04:26.779 look at companies. It's interesting. Our sources 00:04:26.779 --> 00:04:29.660 are very clear that Graham himself never actually 00:04:29.660 --> 00:04:32.399 used the phrase value investing. That's right. 00:04:32.439 --> 00:04:34.980 It was coined later to describe his ideas. Which, 00:04:35.120 --> 00:04:37.819 ironically, might have led to some misinterpretations 00:04:37.819 --> 00:04:40.300 over the years. For sure. The simplistic idea 00:04:40.300 --> 00:04:43.120 that he was just telling people to buy the absolute 00:04:43.120 --> 00:04:45.800 cheapest stocks they could find, regardless of 00:04:45.800 --> 00:04:47.519 the quality of the business. That distinction 00:04:47.519 --> 00:04:49.980 is so important, and it kind of foreshadows the 00:04:49.980 --> 00:04:52.160 whole evolution of the strategy we're going to 00:04:52.160 --> 00:04:54.740 talk about. It does. So our mission today is 00:04:54.740 --> 00:04:57.579 to trace this whole intellectual history. We 00:04:57.579 --> 00:04:59.519 want to understand Graham's rigid foundation, 00:04:59.860 --> 00:05:02.839 then see how the key figures who came after him 00:05:02.839 --> 00:05:05.300 adapted it. People like Warren Buffett and Charlie 00:05:05.300 --> 00:05:08.279 Munger. Exactly. And then we'll explore how modern 00:05:08.279 --> 00:05:10.579 quantitative and technological methods have, 00:05:10.639 --> 00:05:13.240 well, completely reshaped what it even means 00:05:13.240 --> 00:05:16.319 to calculate intrinsic value today. Right. Let's 00:05:16.319 --> 00:05:18.699 dive in. Let's do it. Let's dedicate some serious 00:05:18.699 --> 00:05:22.399 time to the bedrock here in Section 1. The foundational 00:05:22.399 --> 00:05:25.019 work of Benjamin Graham and David Dodd. They 00:05:25.019 --> 00:05:27.399 did more than just invent a strategy. They really 00:05:27.399 --> 00:05:29.779 professionalized the discipline of security analysis. 00:05:30.139 --> 00:05:34.519 They did. They separated it from the casino -like 00:05:34.519 --> 00:05:37.319 speculation that really dominated Wall Street 00:05:37.319 --> 00:05:40.139 before the Great Depression. And Graham is absolutely 00:05:40.139 --> 00:05:42.420 the towering figure here, the father of value 00:05:42.420 --> 00:05:45.439 investing. No question. His work survives primarily 00:05:45.439 --> 00:05:49.920 through two monumental texts. First, as you said, 00:05:50.000 --> 00:05:52.620 security analysis in 19... which he co -authored 00:05:52.620 --> 00:05:54.779 with Dodd. That was a dense one, the professional 00:05:54.779 --> 00:05:57.540 academic blueprint. Right. And then his later 00:05:57.540 --> 00:06:00.060 work, The Intelligent Investor, which took those 00:06:00.060 --> 00:06:02.620 core concepts and translated them into actionable, 00:06:02.860 --> 00:06:05.459 accessible principles for the individual investor. 00:06:05.759 --> 00:06:07.720 Which is why it's earned a permanent place on, 00:06:07.860 --> 00:06:10.199 well, pretty much every successful investor's 00:06:10.199 --> 00:06:12.959 bookshelf. It really has. So what was so revolutionary 00:06:12.959 --> 00:06:15.829 about securing analysis at the time? What void 00:06:15.829 --> 00:06:18.050 did it fill that made it the definitive guide 00:06:18.050 --> 00:06:20.910 for decades? Before Graham, Wall Street analysis 00:06:20.910 --> 00:06:24.709 was often, well. qualitative. It was based on 00:06:24.709 --> 00:06:27.649 reputation, industry trends, or maybe the charisma 00:06:27.649 --> 00:06:30.050 of a company's management. The story. The story, 00:06:30.189 --> 00:06:33.350 exactly. Graham's lasting contribution was his 00:06:33.350 --> 00:06:36.629 intense, almost obsessive emphasis on the quantifiable. 00:06:36.810 --> 00:06:39.290 The numbers. He mandated that analysts focus 00:06:39.290 --> 00:06:41.250 on things that could be objectively measured 00:06:41.250 --> 00:06:44.269 and verified. Primarily, that meant reported 00:06:44.269 --> 00:06:47.360 earnings and book value. So he was telling people 00:06:47.360 --> 00:06:50.180 to stop listening to the CEO's promises and start 00:06:50.180 --> 00:06:52.079 actually reading the financial statements. Yes. 00:06:52.319 --> 00:06:54.399 Treating a stock like a fractional share of a 00:06:54.399 --> 00:06:57.129 real business, not like a lottery ticket. That's 00:06:57.129 --> 00:06:59.149 the perfect way to phrase it. His methodology 00:06:59.149 --> 00:07:02.149 intentionally minimized those qualitative factors. 00:07:02.449 --> 00:07:05.310 Why? He believed that trying to judge the quality 00:07:05.310 --> 00:07:07.790 of a management team or guessing the likelihood 00:07:07.790 --> 00:07:10.709 of success for some new, exciting product launch, 00:07:10.850 --> 00:07:13.769 it just introduced too much subjectivity, too 00:07:13.769 --> 00:07:17.129 much speculation. You wanted cold, hard, verifiable 00:07:17.129 --> 00:07:20.310 numbers. Exactly. And in his early years, especially 00:07:20.310 --> 00:07:23.310 in the wake of the 1929 crash, he was focused 00:07:23.310 --> 00:07:25.470 on buying assets that were basically undergoing 00:07:25.470 --> 00:07:28.279 liquidation. So he wanted to buy companies for 00:07:28.279 --> 00:07:31.560 less. Than their net current asset value. Right. 00:07:31.639 --> 00:07:33.420 Essentially treating the stock as if it were 00:07:33.420 --> 00:07:35.500 worth more dead than alive. That's what people 00:07:35.500 --> 00:07:38.980 now call net net investing or deep value. You're 00:07:38.980 --> 00:07:41.600 buying something for less than its easily liquidated 00:07:41.600 --> 00:07:44.779 inventory, cash and receivables after you subtract 00:07:44.779 --> 00:07:47.699 all the liabilities. That's the classic, highly 00:07:47.699 --> 00:07:50.180 conservative Graham approach. And to find those 00:07:50.180 --> 00:07:52.519 opportunities, he established these very objective, 00:07:52.860 --> 00:07:56.379 very measurable screening criteria. And these 00:07:56.379 --> 00:07:58.959 were designed to filter out. the high flyers, 00:07:58.980 --> 00:08:01.639 the popular stocks. And instead focus on the 00:08:01.639 --> 00:08:05.120 neglected, the depressed or the genuinely misunderstood 00:08:05.120 --> 00:08:07.540 companies. Let's walk through that checklist 00:08:07.540 --> 00:08:10.100 because these original criteria are still the 00:08:10.100 --> 00:08:12.660 starting point for countless systematic strategies 00:08:12.660 --> 00:08:15.220 today. What was Graham actually telling people 00:08:15.220 --> 00:08:18.240 to look for in the 1930s? The screen was highly 00:08:18.240 --> 00:08:21.379 statistical. And very conservative. First, he 00:08:21.379 --> 00:08:23.620 looked for stocks trading at a significant discount, 00:08:23.839 --> 00:08:27.000 sometimes 30 percent or more to their book value. 00:08:27.100 --> 00:08:29.620 Or tangible book value, which is even stricter. 00:08:29.699 --> 00:08:32.779 Right. Book value, just to be clear, is the accounting 00:08:32.779 --> 00:08:36.129 value of assets minus liabilities. Tangible book 00:08:36.129 --> 00:08:39.350 value then excludes any intangible assets, making 00:08:39.350 --> 00:08:41.610 it, as you said, even more conservative. So that 00:08:41.610 --> 00:08:43.629 ensures you're buying something that has physical, 00:08:43.789 --> 00:08:46.629 verifiable assets backing up the price. Precisely. 00:08:46.649 --> 00:08:48.809 He also favored companies with high dividend 00:08:48.809 --> 00:08:52.000 yields. Why dividends specifically? Well, dividends 00:08:52.000 --> 00:08:54.720 provided concrete, immediate evidence that the 00:08:54.720 --> 00:08:56.820 company was profitable and that it was shareholder 00:08:56.820 --> 00:08:59.519 friendly. It reduced your reliance on future 00:08:59.519 --> 00:09:01.899 capital appreciation, which is always uncertain. 00:09:02.159 --> 00:09:04.820 Makes sense. And critically, he looked for low 00:09:04.820 --> 00:09:08.679 valuation ratios, specifically low price to earnings, 00:09:08.919 --> 00:09:12.740 P .E. multiples and low price to book P .B. ratios. 00:09:13.139 --> 00:09:15.440 A low P .E. ratio. That's a pretty clear sign 00:09:15.440 --> 00:09:17.879 of neglect, right? It suggests the market is 00:09:17.879 --> 00:09:20.120 currently paying very. little for every dollar 00:09:20.120 --> 00:09:22.860 of the company's earnings. It is. So his specific, 00:09:23.000 --> 00:09:25.539 very stringent checklist included a few things. 00:09:25.740 --> 00:09:28.639 First, purchasing firms that had steady profits 00:09:28.639 --> 00:09:31.700 over multiple years. Stability was non -negotiable. 00:09:31.820 --> 00:09:34.000 Second, as we said, they had to be trading at 00:09:34.000 --> 00:09:36.899 low prices relative to book value. Third, they 00:09:36.899 --> 00:09:39.720 needed low P .E. ratios, often in the single 00:09:39.720 --> 00:09:42.580 digits. And finally, and this was crucial for 00:09:42.580 --> 00:09:44.960 defense against insolvency, they had to carry 00:09:44.960 --> 00:09:47.529 relatively low debt. So it was really a financially 00:09:47.529 --> 00:09:50.049 conservative filter. Extremely. It was designed 00:09:50.049 --> 00:09:52.509 to ensure you were buying a cheap company, but 00:09:52.509 --> 00:09:55.529 not necessarily a failing one. Every single one 00:09:55.529 --> 00:09:57.929 of those layers, from the steady profits to the 00:09:57.929 --> 00:10:02.009 low debt, it all serves to enhance that one single 00:10:02.009 --> 00:10:05.190 most critical concept. The margin of safety. 00:10:05.309 --> 00:10:07.789 It's the ultimate safeguard. Absolutely. If you 00:10:07.789 --> 00:10:10.070 adhere strictly to this checklist and you buy 00:10:10.070 --> 00:10:13.250 a stock well below its calculated intrinsic value, 00:10:13.470 --> 00:10:16.240 you're creating a buffer. A buffer against the 00:10:16.240 --> 00:10:18.580 three main threats. Which are? Unforeseen poor 00:10:18.580 --> 00:10:21.419 outcomes, broad market volatility, and just as 00:10:21.419 --> 00:10:24.299 important, your own analytical error. And without 00:10:24.299 --> 00:10:26.889 that buffer? Without that buffer, Graham argued, 00:10:27.070 --> 00:10:29.450 you are just engaging in financial speculation. 00:10:29.809 --> 00:10:32.570 You're not doing disciplined investing. The value 00:10:32.570 --> 00:10:35.429 investor is willing to be patient, knowing they've 00:10:35.429 --> 00:10:38.070 bought a dollar bill for 70 cents or maybe even 00:10:38.070 --> 00:10:41.870 50 cents, and time is on their side while the 00:10:41.870 --> 00:10:44.809 market eventually, hopefully, corrects its irrational 00:10:44.809 --> 00:10:47.230 pricing. The clarity of Graham's methodology 00:10:47.230 --> 00:10:49.870 is powerful, but as we move into section two, 00:10:50.110 --> 00:10:53.690 it's clear the core insight. that price and value 00:10:53.690 --> 00:10:56.690 are not always the same thing. It actually predates 00:10:56.690 --> 00:10:59.490 him by centuries. Oh, for sure. We need to place 00:10:59.490 --> 00:11:01.470 Graham in this broader historical context and 00:11:01.470 --> 00:11:03.690 then see how the definition of value itself had 00:11:03.690 --> 00:11:05.850 to evolve after his lifetime. Showing the lineage 00:11:05.850 --> 00:11:08.549 proves the concept is timeless. It really is. 00:11:08.649 --> 00:11:11.350 We can trace the recognition of this price versus 00:11:11.350 --> 00:11:13.529 value divergence all the way back to the financial 00:11:13.529 --> 00:11:16.450 markets of the 1600s. That's astonishing. How 00:11:16.450 --> 00:11:18.649 far back are we talking in concrete terms? We 00:11:18.649 --> 00:11:21.350 can point to the 1690s and specifically to the 00:11:21.350 --> 00:11:24.049 famous writer and commentator Daniel Defoe. The 00:11:24.049 --> 00:11:26.809 author of Robinson Crusoe. The very same. He 00:11:26.809 --> 00:11:28.669 observed the stock of the East India Company 00:11:28.669 --> 00:11:31.669 trading at what he called a ludicrous price over 00:11:31.669 --> 00:11:34.649 300 percent more than its face value. Wow. And 00:11:34.649 --> 00:11:36.970 Defoe wrote about how this valuation suggested 00:11:36.970 --> 00:11:40.080 and I'm quoting here. No material difference 00:11:40.080 --> 00:11:43.120 in intrinsic value between the shares being bought 00:11:43.120 --> 00:11:45.980 for huge sums and those that cost much less. 00:11:46.220 --> 00:11:48.639 So he's saying the underlying worth hasn't changed, 00:11:48.679 --> 00:11:50.279 just the price people are willing to pay for 00:11:50.279 --> 00:11:53.340 it. Exactly. It shows that the concept of overpaying 00:11:53.340 --> 00:11:56.440 for an asset, and thus the idea of a true underlying 00:11:56.440 --> 00:11:59.600 worth, existed three centuries before Graham 00:11:59.600 --> 00:12:02.080 even started teaching. That anecdote just grounds 00:12:02.080 --> 00:12:04.379 the whole discussion, showing that human nature 00:12:04.379 --> 00:12:06.950 in markets really hasn't changed a bit. So then 00:12:06.950 --> 00:12:09.389 we jump forward to the Victorian era with someone 00:12:09.389 --> 00:12:11.909 who has been retrospectively labeled a value 00:12:11.909 --> 00:12:14.570 investor. That would be Hetty Green, often called 00:12:14.570 --> 00:12:17.250 America's first value investor. She lived from 00:12:17.250 --> 00:12:20.649 1834 to 1916. And she was a renowned contrarian. 00:12:20.690 --> 00:12:23.149 A legendary one. Her standard operating procedure 00:12:23.149 --> 00:12:25.909 was to buy unwanted, often depressed assets. 00:12:26.190 --> 00:12:28.570 It could be undervalued land, undervalued debt, 00:12:28.669 --> 00:12:31.629 or stock at extremely low prices. And then what? 00:12:31.750 --> 00:12:34.419 Just wait. and simply hold them until the market 00:12:34.419 --> 00:12:36.960 changed its mind. She famously said that she 00:12:36.960 --> 00:12:39.480 kept these assets until they go up in price and 00:12:39.480 --> 00:12:42.399 people are anxious to buy. That patience and 00:12:42.399 --> 00:12:45.919 contrarian focus on a low purchase price, those 00:12:45.919 --> 00:12:48.919 are core tenets of the value ethos. They absolutely 00:12:48.919 --> 00:12:51.860 are. And institutionally, we know that there 00:12:51.860 --> 00:12:53.940 was an investing firm operating at the same time 00:12:53.940 --> 00:12:56.620 as Graham that followed these exact same principles. 00:12:56.799 --> 00:13:00.080 Yes, the firm Tweedy Brown. It was founded in 00:13:00.080 --> 00:13:03.370 1920. and is often described as the oldest value 00:13:03.370 --> 00:13:05.769 investing firm on Wall Street. And their founder, 00:13:05.909 --> 00:13:09.029 a man named Forrest Berwyn Bill Tweedy, found 00:13:09.029 --> 00:13:12.110 a really specific niche. He did. He focused on 00:13:12.110 --> 00:13:14.850 buying smaller, often family owned companies. 00:13:15.169 --> 00:13:17.490 And because these stocks traded in really low 00:13:17.490 --> 00:13:19.830 volumes and had fewer buyers, the sellers were 00:13:19.830 --> 00:13:21.970 often desperate. Which allowed Tweedy to acquire 00:13:21.970 --> 00:13:23.970 shares at steep discounts to their book value. 00:13:24.169 --> 00:13:26.529 It's a perfect example of capitalizing on market 00:13:26.529 --> 00:13:29.330 inefficiency caused by illiquidity, a lack of 00:13:29.330 --> 00:13:31.389 buyers. And they must have been effective. Because 00:13:31.389 --> 00:13:33.230 the sources note that Tweedy and Graham actually 00:13:33.230 --> 00:13:34.990 worked in the same building and became friends. 00:13:35.330 --> 00:13:38.090 They did. They both operated from 52 Broadway 00:13:38.090 --> 00:13:40.710 in New York City. And that intellectual exchange 00:13:40.710 --> 00:13:43.909 between the academic formalizer, Graham, and 00:13:43.909 --> 00:13:47.110 the highly effective practitioner, Tweedy, was 00:13:47.110 --> 00:13:49.730 critical to cementing these ideas in the real 00:13:49.730 --> 00:13:52.009 world. Now let's discuss the surprising independent 00:13:52.009 --> 00:13:55.250 developer of very similar ideas, John Maynard 00:13:55.250 --> 00:13:59.080 Keynes. Yes. We usually associate him with macroeconomics, 00:13:59.080 --> 00:14:01.759 not picking individual stocks. And Keynes is 00:14:01.759 --> 00:14:04.059 a profound example of practical learning, just 00:14:04.059 --> 00:14:06.960 trumping abstract theory. While he was managing 00:14:06.960 --> 00:14:09.139 the endowment of King's College, Cambridge, in 00:14:09.139 --> 00:14:11.940 the 1920s, he started out with a market timing 00:14:11.940 --> 00:14:14.379 strategy. Trying to predict the broad movements 00:14:14.379 --> 00:14:17.200 of the economy. And he failed, spectacularly. 00:14:17.279 --> 00:14:19.639 So he pivoted. And how did that pivot align with 00:14:19.639 --> 00:14:21.500 what Graham was thinking? After he abandoned 00:14:21.500 --> 00:14:24.000 his failed attempts at market timing, Keynes 00:14:24.000 --> 00:14:26.679 shifted his focus. He started concentrating on 00:14:26.679 --> 00:14:29.600 a very small, select number of undervalued stocks 00:14:29.600 --> 00:14:31.940 that he knew exceptionally well. So he stopped 00:14:31.940 --> 00:14:34.659 chasing the big picture macro calls and started 00:14:34.659 --> 00:14:37.759 doing microvaluation. That's it. He targeted 00:14:37.759 --> 00:14:41.000 undervalued stocks, often small and mid -sized 00:14:41.000 --> 00:14:43.940 companies, and particularly those in industries 00:14:43.940 --> 00:14:48.000 that were considered, you know. dull or out of 00:14:48.000 --> 00:14:50.100 favor. Like mining in autos during the Great 00:14:50.100 --> 00:14:52.860 Depression. Exactly. So he switched from trying 00:14:52.860 --> 00:14:55.620 to time the flow of the entire river to carefully 00:14:55.620 --> 00:14:58.120 examining the quality of the individual boats 00:14:58.120 --> 00:15:00.559 floating in it. And the long -term results were 00:15:00.559 --> 00:15:03.639 undeniable. Despite that rough start, his portfolio 00:15:03.639 --> 00:15:06.480 managed to beat the market averages by an incredible 00:15:06.480 --> 00:15:10.700 6 % annually over more than two decades. It was 00:15:10.700 --> 00:15:13.299 just confirmation of the power of focus valuation 00:15:13.299 --> 00:15:16.039 over speculative timing. And the sources confirm 00:15:16.039 --> 00:15:18.080 he developed this completely independently of 00:15:18.080 --> 00:15:20.500 Graham and Dodd. Yes. The archival review at 00:15:20.500 --> 00:15:22.659 King's College suggests there's no evidence of 00:15:22.659 --> 00:15:24.899 collaboration. His theories were developed on 00:15:24.899 --> 00:15:26.820 his own and weren't widely known until decades 00:15:26.820 --> 00:15:29.740 after his death in 1946. But the considerable 00:15:29.740 --> 00:15:32.210 overlap in terms... In terms and concepts, especially 00:15:32.210 --> 00:15:35.169 the focus on intrinsic value, it suggests the 00:15:35.169 --> 00:15:37.330 principles are just universally valid. They are. 00:15:37.509 --> 00:15:39.610 Which brings us to the core evolution of the 00:15:39.610 --> 00:15:43.889 idea, the post -1970s world. Graham's original 00:15:43.889 --> 00:15:46.269 reliance on book value started to become a major 00:15:46.269 --> 00:15:49.169 liability as the economy shifted. This is the 00:15:49.169 --> 00:15:51.789 critical transition point. Book value assets 00:15:51.789 --> 00:15:54.470 minus liabilities. It works beautifully when 00:15:54.470 --> 00:15:56.730 your assets are tangible. Factories, trucks, 00:15:56.990 --> 00:16:00.330 inventory, oil reserves. Exactly. It works a 00:16:00.330 --> 00:16:02.710 lot less well when the company's primary value 00:16:02.710 --> 00:16:05.230 resides in its head, not in its physical plan. 00:16:05.409 --> 00:16:07.269 We're talking about the rise of technology and 00:16:07.269 --> 00:16:09.350 service sectors, where the assets are things 00:16:09.350 --> 00:16:11.990 like patents, brands, copyrights, or management 00:16:11.990 --> 00:16:15.049 expertise, intangible assets. And this creates 00:16:15.049 --> 00:16:17.850 two massive problems for Graham's original framework. 00:16:18.379 --> 00:16:21.019 First, intangible assets are incredibly difficult 00:16:21.019 --> 00:16:23.279 to quantify reliably. And second, they often 00:16:23.279 --> 00:16:25.539 won't survive a company breakup. If a manufacturing 00:16:25.539 --> 00:16:28.200 firm goes bust, you can sell the factory. If 00:16:28.200 --> 00:16:30.220 a tech firm goes bust, how much is their code 00:16:30.220 --> 00:16:33.320 or their brand equity worth? Often nothing. Right. 00:16:33.399 --> 00:16:35.940 And in fast changing industries like software 00:16:35.940 --> 00:16:38.600 or personal computers in the 80s, the value of 00:16:38.600 --> 00:16:40.480 those assets could suffer permanent impairment 00:16:40.480 --> 00:16:42.720 almost overnight because of disruptive innovation. 00:16:43.379 --> 00:16:45.980 Yesterday's cutting edge patent is tomorrow's 00:16:45.980 --> 00:16:48.620 worthless scrap of paper. Absolutely. So the 00:16:48.620 --> 00:16:50.500 balance sheet just stops telling the whole story. 00:16:50.799 --> 00:16:53.740 If we can no longer rely on physical assets to 00:16:53.740 --> 00:16:56.840 represent intrinsic value, how do we adapt the 00:16:56.840 --> 00:16:59.500 core principle of valuation to the modern knowledge 00:16:59.500 --> 00:17:01.799 economy? And that is the very... problem that 00:17:01.799 --> 00:17:04.299 led to the modern solution. Which is the discounted 00:17:04.299 --> 00:17:07.839 cash flow model or DCF. Right. The DCF model 00:17:07.839 --> 00:17:11.579 shifts the focus entirely from past assets to 00:17:11.579 --> 00:17:14.279 future earnings potential. The definition of 00:17:14.279 --> 00:17:17.680 intrinsic value is reformed. It becomes the sum 00:17:17.680 --> 00:17:20.539 of all future cash flows the business is expected 00:17:20.539 --> 00:17:23.039 to generate. Discounted back to the present day 00:17:23.039 --> 00:17:25.599 to reflect the time value of money and risk. 00:17:25.779 --> 00:17:27.799 Exactly. So instead of looking at the factory 00:17:27.799 --> 00:17:30.519 they built in 1950, you're looking at the revenue 00:17:30.519 --> 00:17:33.200 stream they will generate until 2050. This allows 00:17:33.200 --> 00:17:35.720 you to value those intangible assets, future 00:17:35.720 --> 00:17:38.740 growth, competitive advantages, all the things 00:17:38.740 --> 00:17:40.720 that Graham's strict balance sheet rules kind 00:17:40.720 --> 00:17:43.819 of missed. It does. But it introduces this new 00:17:43.819 --> 00:17:46.619 problem of valuation ambiguity, which we'll circle 00:17:46.619 --> 00:17:48.680 back to. Because now your valuation is heavily 00:17:48.680 --> 00:17:51.559 dependent on your own assumptions. major input 00:17:51.559 --> 00:17:54.259 assumptions. The estimated growth rate of the 00:17:54.259 --> 00:17:56.759 business, the discount rate you apply to reflect 00:17:56.759 --> 00:17:59.599 risk, and the terminal value you assign to the 00:17:59.599 --> 00:18:02.140 business beyond your forecast period. And if 00:18:02.140 --> 00:18:04.440 two analysts use even slightly different assumptions 00:18:04.440 --> 00:18:07.500 for those three inputs. They can arrive at wildly 00:18:07.500 --> 00:18:09.880 different intrinsic values for the very same 00:18:09.880 --> 00:18:12.859 company. So the DCF model is a powerful tool, 00:18:13.019 --> 00:18:15.259 but it also relies on subjective forecasting. 00:18:15.680 --> 00:18:17.980 Which makes it the source of so much analytical 00:18:17.980 --> 00:18:20.950 error and debate today. That challenging transition 00:18:20.950 --> 00:18:23.170 from the certainty of the balance sheet to the 00:18:23.170 --> 00:18:25.670 prediction of cash flows, it leads us perfectly 00:18:25.670 --> 00:18:28.990 into section three, the modern approaches. Right. 00:18:29.069 --> 00:18:31.589 We see the legacy kind of split into two major 00:18:31.589 --> 00:18:34.809 methodologies, the systematic, which uses technology 00:18:34.809 --> 00:18:37.809 to run gram screens, and the qualitative, which 00:18:37.809 --> 00:18:39.869 uses human judgment to refine the definition 00:18:39.869 --> 00:18:42.220 of quality. Let's start with quantitative value 00:18:42.220 --> 00:18:45.079 investing. Quantitative or systematic value investing 00:18:45.079 --> 00:18:47.519 is basically Graham's objective rules -based 00:18:47.519 --> 00:18:50.299 approach, but supercharged by modern computing 00:18:50.299 --> 00:18:53.680 power. So it involves rigorously analyzing massive 00:18:53.680 --> 00:18:56.779 data sets. Financial statement line items, economic 00:18:56.779 --> 00:19:00.059 metrics, even unstructured data like news reports, 00:19:00.339 --> 00:19:03.579 all to systematically screen for undervalued 00:19:03.579 --> 00:19:05.640 traits. This sounds like a direct attack on human 00:19:05.640 --> 00:19:07.599 error. Right. We're using statistical finance, 00:19:07.740 --> 00:19:10.539 machine learning, behavioral finance. all to 00:19:10.539 --> 00:19:13.099 find undervalued stocks. That's the core mission. 00:19:13.420 --> 00:19:15.680 Quantitative investing seeks to replace that 00:19:15.680 --> 00:19:19.700 slow ad hoc stock by stock analysis done by a 00:19:19.700 --> 00:19:22.599 human with a massive data driven system. And 00:19:22.599 --> 00:19:25.259 the goal is to eliminate cognitive biases. Exactly. 00:19:25.640 --> 00:19:28.559 Humans are notoriously bad at objectivity. We 00:19:28.559 --> 00:19:30.900 suffer from confirmation bias, recency bias, 00:19:31.180 --> 00:19:33.960 anchoring. A rules based system executed by a 00:19:33.960 --> 00:19:36.880 computer doesn't get greedy or fearful or emotionally 00:19:36.880 --> 00:19:39.099 attached to a stock. It's interesting that Graham 00:19:39.099 --> 00:19:41.299 himself seemed to acknowledge the need for this 00:19:41.299 --> 00:19:43.279 kind of systemization a long, long time ago. 00:19:43.400 --> 00:19:45.880 He did. Later in his life, Graham admitted that 00:19:45.880 --> 00:19:48.660 relying on detailed individual financial analysis 00:19:48.660 --> 00:19:51.240 of single stocks was probably unlikely to produce 00:19:51.240 --> 00:19:53.359 superior risk adjusted returns consistently. 00:19:53.599 --> 00:19:55.940 So what did he recommend instead? He advocated 00:19:55.940 --> 00:19:59.420 for a rules based approach. One focused on constructing 00:19:59.420 --> 00:20:02.279 a well diversified portfolio using objective 00:20:02.279 --> 00:20:05.099 financial factors. The quantitative movement 00:20:05.099 --> 00:20:07.240 is simply realizing his ultimate conclusion, 00:20:07.480 --> 00:20:10.519 but with far superior technology. Can we look 00:20:10.519 --> 00:20:12.839 at some real world examples of how this quantitative 00:20:12.839 --> 00:20:15.799 screening works, maybe even in its simplest forms? 00:20:16.099 --> 00:20:18.400 Sure. We can start with Joel Greenblatt's famous 00:20:18.400 --> 00:20:21.740 magic formula investing. It's a highly simplified 00:20:21.740 --> 00:20:24.119 illustration, but it gets the point across. OK. 00:20:24.200 --> 00:20:26.980 It systematically ranks and buys companies based 00:20:26.980 --> 00:20:30.299 on just two simple factors, earnings yield and 00:20:30.299 --> 00:20:32.660 return on invested capital. So the idea is to 00:20:32.660 --> 00:20:35.480 buy good companies at cheap prices systematically. 00:20:35.640 --> 00:20:38.119 That's it. It's a very easy to understand filter, 00:20:38.279 --> 00:20:40.359 but more sophisticated. modern practitioners, 00:20:40.539 --> 00:20:43.059 they evaluate dozens, even hundreds of metrics 00:20:43.059 --> 00:20:45.220 at the same time. And a key text in this field 00:20:45.220 --> 00:20:47.619 is James O'Shaughnessy's What Works on Wall Street. 00:20:47.720 --> 00:20:50.599 A classic. It provides comprehensive backtesting 00:20:50.599 --> 00:20:53.339 of all these different quantitative value strategies 00:20:53.339 --> 00:20:56.700 with data spanning from 1927 all the way through 00:20:56.700 --> 00:20:59.589 2009. And what did he find? These studies confirm 00:20:59.589 --> 00:21:01.890 that simple value factors, when you apply them 00:21:01.890 --> 00:21:04.289 consistently and systematically across large 00:21:04.289 --> 00:21:07.849 pools of data, they tend to outperform over long 00:21:07.849 --> 00:21:10.690 time frames. So that's the systematic data -driven 00:21:10.690 --> 00:21:13.410 path. Now let's pivot to the other evolution, 00:21:13.710 --> 00:21:16.690 the qualitative shift driven by Graham's most 00:21:16.690 --> 00:21:19.329 famous disciples, Warren Buffett and Charlie 00:21:19.329 --> 00:21:22.240 Munger. This is perhaps the more publicly recognizable 00:21:22.240 --> 00:21:25.000 face of modern value investing. For sure. And 00:21:25.000 --> 00:21:27.599 it represents a pivotal moment where Graham's 00:21:27.599 --> 00:21:30.720 initial rigidity that focused on statistically 00:21:30.720 --> 00:21:33.779 cheap cigar butts that had one last puff left 00:21:33.779 --> 00:21:37.119 in them was abandoned in favor of quality. Buffett 00:21:37.119 --> 00:21:39.400 credits his initial success to Graham. But the 00:21:39.400 --> 00:21:41.339 philosophy evolved dramatically when Charlie 00:21:41.339 --> 00:21:43.680 Munger became a key partner at Berkshire Hathaway 00:21:43.680 --> 00:21:46.440 in the 1970s. Munger famously focused on the 00:21:46.440 --> 00:21:49.200 non -quantifiable elements. He looked for companies. 00:21:49.349 --> 00:21:51.549 with qualities that ensured long term durability, 00:21:51.769 --> 00:21:53.930 even if the stock wasn't statistically dirt cheap. 00:21:54.109 --> 00:21:56.769 Munger forced Buffett to ask a much harder question. 00:21:56.930 --> 00:22:01.509 Why buy a stock that's 50 percent below its intrinsic 00:22:01.509 --> 00:22:05.069 value if that intrinsic value is eroding rapidly 00:22:05.069 --> 00:22:07.910 because of competitive pressure or obsolescence? 00:22:08.069 --> 00:22:09.930 Better to pay a fair price for something whose 00:22:09.930 --> 00:22:13.089 value is growing. Exactly. Munger emphasized 00:22:13.089 --> 00:22:15.690 companies with robust qualitative qualities, 00:22:16.069 --> 00:22:19.430 sustainable competitive advantages or a moat, 00:22:19.430 --> 00:22:22.410 as Buffett calls it, and long term growth potential. 00:22:22.650 --> 00:22:25.430 They sought businesses that could compound value 00:22:25.430 --> 00:22:28.390 over decades. This influence caused Buffett to 00:22:28.390 --> 00:22:30.849 fundamentally reduce his emphasis on just those 00:22:30.849 --> 00:22:34.069 statistically cheap assets. He recognized that 00:22:34.069 --> 00:22:36.940 cheap. often just means structurally impaired. 00:22:37.200 --> 00:22:39.720 The cheap price often turns out to be a value 00:22:39.720 --> 00:22:41.960 trap. The price is low because the business is 00:22:41.960 --> 00:22:43.819 bad or it's getting worse, meaning the intrinsic 00:22:43.819 --> 00:22:46.200 value you calculated is actually on its way to 00:22:46.200 --> 00:22:48.559 zero. And this shift was all crystallized in 00:22:48.559 --> 00:22:50.619 one of the most quoted sentences in investment 00:22:50.619 --> 00:22:52.700 history. Warren Buffett's updated philosophy. 00:22:53.200 --> 00:22:54.940 It's better to buy a great company at a fair 00:22:54.940 --> 00:22:57.759 price than a fair company at a great price. And 00:22:57.759 --> 00:23:00.339 that one statement completely redefined value 00:23:00.339 --> 00:23:03.650 investing. It did. It emphasized that quality 00:23:03.650 --> 00:23:06.009 and durability are themselves components of the 00:23:06.009 --> 00:23:08.650 margin of safety because they secure those future 00:23:08.650 --> 00:23:11.309 cash flows. It connects right back to the DCF 00:23:11.309 --> 00:23:13.549 model we were talking about. The growth component 00:23:13.549 --> 00:23:16.349 matters immensely. You want a company whose future 00:23:16.349 --> 00:23:18.910 cash flows are highly predictable and durable. 00:23:19.089 --> 00:23:21.819 Exactly. And beyond the analysis, the source 00:23:21.819 --> 00:23:24.180 material notes that perhaps the most valuable 00:23:24.180 --> 00:23:26.880 component shared by all successful value investors 00:23:26.880 --> 00:23:30.660 is simple temperament. Meaning emotional stability 00:23:30.660 --> 00:23:33.700 in the face of market mania. That's it. Buffett 00:23:33.700 --> 00:23:35.960 recognizes that markets are driven by emotional 00:23:35.960 --> 00:23:38.960 extremes, fear and greed, which is what creates 00:23:38.960 --> 00:23:41.259 the mispricings in the first place. And his famous 00:23:41.259 --> 00:23:43.539 advice is the guide to that temperament. Be greedy 00:23:43.539 --> 00:23:45.720 when others are fearful and fearful when others 00:23:45.720 --> 00:23:48.480 are greedy. And that requires incredible emotional 00:23:48.480 --> 00:23:51.670 stability. patience. It enables the value investor 00:23:51.670 --> 00:23:54.109 to stick rigorously to their intrinsic value 00:23:54.109 --> 00:23:56.849 calculation, even when everyone else is panicking 00:23:56.849 --> 00:23:59.849 and dumping the stock. Or conversely, getting 00:23:59.849 --> 00:24:01.910 euphoric and bidding the price up to totally 00:24:01.910 --> 00:24:04.009 unsustainable levels. It's the key to the whole 00:24:04.009 --> 00:24:06.630 thing. That sense of disciplined temperament 00:24:06.630 --> 00:24:09.049 and patience is the thread that runs through 00:24:09.049 --> 00:24:13.150 Section 4, the pantheon of value investors. This 00:24:13.150 --> 00:24:15.069 is not just a list of names. It's an intellectual 00:24:15.069 --> 00:24:18.490 lineage. Right. It traces how Graham's principles 00:24:18.490 --> 00:24:21.049 were put into practice across different decades 00:24:21.049 --> 00:24:23.730 and different market cycles. It's the super investors 00:24:23.730 --> 00:24:26.450 of Graham and Doddsville roster showing the direct 00:24:26.450 --> 00:24:29.329 output of that one Columbia classroom. And the 00:24:29.329 --> 00:24:31.509 immediate lineage of Graham's teaching assistants 00:24:31.509 --> 00:24:35.589 and employees is just profound. Let's start with 00:24:35.589 --> 00:24:37.569 those who work directly alongside the master. 00:24:37.730 --> 00:24:40.420 OK. We can begin with Irving Kahn, who served 00:24:40.420 --> 00:24:42.339 as one of Graham's teaching assistants back in 00:24:42.339 --> 00:24:45.740 the 1930s. Kahn was a decades -long friend and 00:24:45.740 --> 00:24:48.279 a close contributor. He actually provided research 00:24:48.279 --> 00:24:50.539 for both security analysis and the intelligent 00:24:50.539 --> 00:24:54.059 investor. He did. He later co -founded Kahn Brothers 00:24:54.059 --> 00:24:56.460 & Company, a dedicated value investing firm, 00:24:56.619 --> 00:24:59.119 and remained its chairman until his death at 00:24:59.119 --> 00:25:02.579 the remarkable age of 109. Wow. That longevity 00:25:02.579 --> 00:25:04.880 is a testament to the safety that's inherent 00:25:04.880 --> 00:25:07.200 in the methodology. And then there's Walter Schloss. 00:25:07.599 --> 00:25:10.200 who is maybe the definition of the self -made, 00:25:10.220 --> 00:25:13.579 strict Graham disciple. Schloss is the quintessential 00:25:13.579 --> 00:25:16.559 deep value investor. He started as a runner on 00:25:16.559 --> 00:25:18.720 Wall Street, attended Graham's night courses, 00:25:18.960 --> 00:25:21.319 and then worked at the legendary Graham -Newman 00:25:21.319 --> 00:25:24.119 partnership. And he strictly adhered to Graham's 00:25:24.119 --> 00:25:27.240 statistical approach, right? He prioritized low 00:25:27.240 --> 00:25:30.609 prices over any qualitative factors. Absolutely. 00:25:30.970 --> 00:25:34.170 He ran his own firm for nearly 50 years and was 00:25:34.170 --> 00:25:37.349 featured prominently by Buffett in his 1984 speech, 00:25:37.630 --> 00:25:40.109 confirming that Schloss's success was achieved 00:25:40.109 --> 00:25:42.829 simply by buying statistically cheap stocks and 00:25:42.829 --> 00:25:45.750 being incredibly patient. The sources also highlight 00:25:45.750 --> 00:25:47.730 the firm that Graham himself preferred to use. 00:25:47.890 --> 00:25:50.579 That would be Tweedy. Brown, the oldest firm 00:25:50.579 --> 00:25:53.039 we mentioned earlier, Christopher H. Brown, who 00:25:53.039 --> 00:25:55.240 ran the firm for years, was deeply committed 00:25:55.240 --> 00:25:57.400 to Graham's principles. The Wall Street Journal 00:25:57.400 --> 00:26:00.019 confirmed Tweedy Brown was Benjamin Graham's 00:26:00.019 --> 00:26:02.440 favorite brokerage firm. That's right. And Brown 00:26:02.440 --> 00:26:04.400 also wrote The Little Book of Value Investing, 00:26:04.420 --> 00:26:06.619 ensuring the ideas remained accessible to new 00:26:06.619 --> 00:26:09.319 generations. Their funds have a long documented 00:26:09.319 --> 00:26:11.799 history of beating the market averages. Now, 00:26:11.819 --> 00:26:13.819 moving internationally, we had Peter Cundall, 00:26:13.900 --> 00:26:16.160 who applied these strict principles to the Canadian 00:26:16.160 --> 00:26:18.970 market. Cundall was a highly respected. Canadian 00:26:18.970 --> 00:26:22.690 value investor who maintained Graham's stringent 00:26:22.690 --> 00:26:26.049 criteria. His Cundall value fund gave Canadian 00:26:26.049 --> 00:26:28.829 investors access to this methodology. And he 00:26:28.829 --> 00:26:31.190 got high praise from Buffett himself. He did. 00:26:31.509 --> 00:26:34.049 Warren Buffett indicated that Cundall had the 00:26:34.049 --> 00:26:36.150 credentials and the approach that Buffett looked 00:26:36.150 --> 00:26:38.609 for in a chief investment officer. That's about 00:26:38.609 --> 00:26:41.230 as high praise as you can get. For a modern example 00:26:41.230 --> 00:26:43.470 that really captures the drama of the margin 00:26:43.470 --> 00:26:46.470 of safety, we have to talk about Michael Burry. 00:26:46.549 --> 00:26:49.789 Of course. Burry, the founder of Scion Capital, 00:26:49.950 --> 00:26:52.750 cemented his fame by being one of the first investors 00:26:52.750 --> 00:26:55.509 to recognize the systemic failure brewing in 00:26:55.509 --> 00:26:57.970 the subprime mortgage market. Famously featured 00:26:57.970 --> 00:27:00.829 in the big short. Right. And his approach, which 00:27:00.829 --> 00:27:03.430 involved incredibly deep analysis and a focus 00:27:03.430 --> 00:27:06.210 on massive downside protection, was rooted entirely 00:27:06.210 --> 00:27:09.329 in Graham's text. Burry has explicitly stated 00:27:09.329 --> 00:27:11.809 that his investment style is 100 percent based 00:27:11.809 --> 00:27:14.150 on the concept of a margin of safety from security 00:27:14.150 --> 00:27:16.890 analysis. He's a living example of how the principles 00:27:16.890 --> 00:27:19.660 can be. applied to complex, modern financial 00:27:19.660 --> 00:27:22.700 products. He really is. And the academic lineage 00:27:22.700 --> 00:27:24.819 at Columbia didn't just stop when Graham retired. 00:27:25.200 --> 00:27:27.440 It continued through the professors who came 00:27:27.440 --> 00:27:29.480 after him. The school became an intellectual 00:27:29.480 --> 00:27:32.539 factory for value managers. Graham taught Buffett 00:27:32.539 --> 00:27:36.099 from 54 to 56. Two decades later, a professor 00:27:36.099 --> 00:27:38.380 named Roger Murray was teaching value investing 00:27:38.380 --> 00:27:41.559 to future superstars like Mario Gabelli. And 00:27:41.559 --> 00:27:44.579 later, Bruce Greenwald arrived. Greenwald became 00:27:44.579 --> 00:27:47.180 a leading contemporary voice, producing his own 00:27:47.180 --> 00:27:50.099 protégés like Paul Sonkin. Columbia Business 00:27:50.099 --> 00:27:52.299 School's enduring emphasis on this valuation 00:27:52.299 --> 00:27:55.539 methodology really makes it a central node for 00:27:55.539 --> 00:27:58.180 this school of thought globally. Let's look at 00:27:58.180 --> 00:28:00.460 the other major lineage, the one that stems from 00:28:00.460 --> 00:28:02.539 the mutual series funds. This tradition began 00:28:02.539 --> 00:28:04.839 with Max Hein, who founded the Mutual Shares 00:28:04.839 --> 00:28:08.039 Fund way back in 1949. Heinz's great success 00:28:08.039 --> 00:28:10.940 was then continued by his protege, the legendary 00:28:10.940 --> 00:28:13.980 value investor Michael F. Price. Price was known 00:28:13.980 --> 00:28:16.660 for his aggressive activism and forensic accounting. 00:28:16.900 --> 00:28:19.839 Yes, often focusing on distressed securities 00:28:19.839 --> 00:28:23.079 and complex restructurings to maximize shareholder 00:28:23.079 --> 00:28:26.380 value. Even after Mutual Series was sold to Franklin 00:28:26.380 --> 00:28:29.440 Templeton in 96, the disciples of Hein and Price 00:28:29.440 --> 00:28:32.150 carried on that tradition of deep... contrarian, 00:28:32.150 --> 00:28:34.650 event -driven value investing. And one of those 00:28:34.650 --> 00:28:37.730 Mutual Series alumni wrote a book that has become 00:28:37.730 --> 00:28:40.789 this rare, highly sought -after classic. That 00:28:40.789 --> 00:28:43.549 is Seth Klarman, an alum of Mutual Series and 00:28:43.549 --> 00:28:45.589 the founder and president of the Botpost Group. 00:28:45.769 --> 00:28:48.890 And the book is Margin of Safety, Risk -Averse 00:28:48.890 --> 00:28:51.250 Investing Strategies for the Thoughtful Investor. 00:28:51.309 --> 00:28:54.069 Right. And because it's out of print, copies 00:28:54.069 --> 00:28:56.890 have become investment classics themselves. They 00:28:56.890 --> 00:29:00.519 often sell for well over $1 ,000 used. Wow. And 00:29:00.519 --> 00:29:02.880 why is the book so revered? Because Klarman's 00:29:02.880 --> 00:29:05.259 philosophy emphasizes the preservation of capital 00:29:05.259 --> 00:29:07.900 above all else. He ensures that the margin of 00:29:07.900 --> 00:29:10.140 safety concept is applied not just to valuation, 00:29:10.420 --> 00:29:12.839 but to every aspect of portfolio management. 00:29:13.140 --> 00:29:15.740 Beyond these strict lineages, the sources highlight 00:29:15.740 --> 00:29:18.319 several other notable investors whose methods, 00:29:18.539 --> 00:29:21.779 while distinct, still orbit that core value principle. 00:29:22.039 --> 00:29:24.799 Right. Like Lawrence Tisch, who led Lowe's Corporation 00:29:24.799 --> 00:29:28.509 for over five decades. Fortune magazine famously 00:29:28.509 --> 00:29:30.730 described him as the ultimate value investor 00:29:30.730 --> 00:29:34.089 and a brilliant contrarian who saw value where 00:29:34.089 --> 00:29:37.569 others missed it. Often investing in deep, cyclical 00:29:37.569 --> 00:29:40.630 businesses during periods of maximum pessimism. 00:29:40.730 --> 00:29:43.549 And Lowe's Corporation has demonstrated the long 00:29:43.549 --> 00:29:46.849 -term effectiveness of that patience. By 2012, 00:29:47.150 --> 00:29:49.470 they had reached over $14 billion in revenues 00:29:49.470 --> 00:29:52.730 and assets, over $75 billion. Then we have someone 00:29:52.730 --> 00:29:54.650 who manages one of the world's largest pools 00:29:54.650 --> 00:29:57.009 of private capital. that would be michael larson 00:29:57.009 --> 00:29:59.430 the chief investment officer for cascade investment 00:29:59.430 --> 00:30:01.869 which manages the personal fortune of bill gates 00:30:01.869 --> 00:30:04.470 and the bill and melinda gates foundation endowment 00:30:04.470 --> 00:30:07.230 larson is a highly private value investor known 00:30:07.230 --> 00:30:10.470 for disciplined long -term asset selection and 00:30:10.470 --> 00:30:12.349 though his specific strategies are confidential 00:30:12.349 --> 00:30:15.990 his firm has consistently rivaled or even outperformed 00:30:15.990 --> 00:30:18.190 berkshire hathaway's returns which proves the 00:30:18.190 --> 00:30:20.509 methods work even when you're managing immense 00:30:20.509 --> 00:30:23.309 pools of wealth. It does. Let's discuss Martin 00:30:23.309 --> 00:30:25.470 J. Whitman, whose approach is highly defensive 00:30:25.470 --> 00:30:28.349 and, well, almost entirely dismissive of macro 00:30:28.349 --> 00:30:30.970 forecasting. Whitman's strategy is called safe 00:30:30.970 --> 00:30:33.230 and cheap, or the financial integrity approach. 00:30:33.509 --> 00:30:36.930 He focuses relentlessly on acquiring common shares 00:30:36.930 --> 00:30:40.250 of companies that possess extremely strong financial 00:30:40.250 --> 00:30:43.369 positions. So low debt, high liquidity. Exactly. 00:30:43.529 --> 00:30:46.369 And at a meaningful discount to their estimated 00:30:46.369 --> 00:30:50.910 net asset value or NAV, his philosophy asserts 00:30:50.910 --> 00:30:53.269 that it's generally futile to pay attention to 00:30:53.269 --> 00:30:56.750 macro factors like GDP or interest rates. Right. 00:30:56.849 --> 00:30:59.289 Because attempts to predict their movements are 00:30:59.289 --> 00:31:02.730 usually wrong and they just distract the investor 00:31:02.730 --> 00:31:05.589 from the hard work of actually valuing the specific 00:31:05.589 --> 00:31:07.650 business in front of them. That must simplify 00:31:07.650 --> 00:31:09.609 the process dramatically. Just ignore the noise. 00:31:09.769 --> 00:31:12.089 Focus solely on the company's balance sheet strength. 00:31:12.539 --> 00:31:15.819 Precisely. Now, we can circle back to Joel Greenblatt, 00:31:15.900 --> 00:31:17.859 who we mentioned earlier. He's known not just 00:31:17.859 --> 00:31:20.680 for his simple quantitative formula, but for 00:31:20.680 --> 00:31:23.359 specializing in specific types of market confusion. 00:31:23.500 --> 00:31:26.160 Special situations, right? Yes. Greenblatt achieved 00:31:26.160 --> 00:31:29.680 over 50 % annual returns for a decade at Gotham 00:31:29.680 --> 00:31:31.940 Capital by focusing on these special situations. 00:31:32.180 --> 00:31:35.339 Things like spinoffs, mergers, asset sales. Right. 00:31:35.420 --> 00:31:38.180 Events that often create temporary uncertainty 00:31:38.180 --> 00:31:41.759 or require complex legal understanding, causing 00:31:41.869 --> 00:31:43.990 the broader market to undervalue the components 00:31:43.990 --> 00:31:46.990 or the newly independent company. Greenblatt 00:31:46.990 --> 00:31:49.150 specialized in understanding the mechanics of 00:31:49.150 --> 00:31:51.369 these events to capture the value that was unlocked. 00:31:51.690 --> 00:31:53.849 Finally, we have to emphasize the strict financial 00:31:53.849 --> 00:31:56.250 discipline taught by the global value managers 00:31:56.250 --> 00:31:59.369 Charles Devol and Jean -Marie Evillard. They 00:31:59.369 --> 00:32:02.349 are famed global value managers known for achieving 00:32:02.349 --> 00:32:05.009 outstanding risk -adjusted outperformance over 00:32:05.009 --> 00:32:07.230 decades. And their non -negotiable principle 00:32:07.230 --> 00:32:09.490 goes right back to temperament and patience. 00:32:10.470 --> 00:32:12.710 Investors should never use margin or leverage. 00:32:13.009 --> 00:32:15.410 And why is this such a fundamental rule for them? 00:32:15.509 --> 00:32:18.809 They label the use of leverage as outright speculation. 00:32:19.390 --> 00:32:22.609 Because value investing is predicated on patience. 00:32:23.029 --> 00:32:25.450 You're waiting for the market price to converge 00:32:25.450 --> 00:32:28.500 with your calculation of intrinsic value. Leverage 00:32:28.500 --> 00:32:30.960 or using borrowed money introduces a mandatory 00:32:30.960 --> 00:32:34.299 timeline. If you use leverage and the stock price 00:32:34.299 --> 00:32:37.180 moves against you, your lender can issue a margin 00:32:37.180 --> 00:32:39.859 call, forcing you to liquidate at the worst possible 00:32:39.859 --> 00:32:42.440 time. It completely compromises your ability 00:32:42.440 --> 00:32:45.019 to be patient. It turns a long term investment 00:32:45.019 --> 00:32:47.680 into a short term trade based on timing. And 00:32:47.680 --> 00:32:50.079 by eliminating leverage, you secure your ability 00:32:50.079 --> 00:32:52.819 to hold that dollar you bought for 50 cents until 00:32:52.819 --> 00:32:54.519 the market finally agrees with your assessment. 00:32:55.000 --> 00:32:57.440 That separation between discipline analysis and 00:32:57.440 --> 00:33:00.059 forced speculation sets the stage perfectly for 00:33:00.059 --> 00:33:03.079 our final section, Section 5. The historical 00:33:03.079 --> 00:33:05.640 record is compelling, the disciples are legendary, 00:33:06.000 --> 00:33:08.440 but we need to address the hard performance data, 00:33:08.660 --> 00:33:11.380 the modern metrics required, and the persistent 00:33:11.380 --> 00:33:14.319 legitimate criticisms of this strategy. And if 00:33:14.319 --> 00:33:15.880 we look at the evidence of value performance, 00:33:16.279 --> 00:33:18.700 the academic research is remarkably consistent, 00:33:18.920 --> 00:33:21.099 especially when you track simple strategies over 00:33:21.099 --> 00:33:23.180 decades. And what does that consistency show? 00:33:23.529 --> 00:33:25.630 Numerous studies have consistently found that 00:33:25.630 --> 00:33:28.670 value stocks, so those defined by low key or 00:33:28.670 --> 00:33:31.470 low PB ratios, they outperform growth stocks 00:33:31.470 --> 00:33:33.529 and the overall market index when tracked over 00:33:33.529 --> 00:33:35.990 long periods. And some of this analysis goes 00:33:35.990 --> 00:33:38.329 all the way back to the 19th century. It does. 00:33:38.430 --> 00:33:40.450 This isn't a short term fad. It appears to be 00:33:40.450 --> 00:33:43.230 a systemic market anomaly. Is this overperformance 00:33:43.230 --> 00:33:46.569 uniform across the market, though? Do mega cap 00:33:46.569 --> 00:33:49.309 value stocks outperform just as well as the smaller 00:33:49.309 --> 00:33:52.390 ones? That's a key nuance. A review of U .S. 00:33:52.390 --> 00:33:56.230 market data from 1990 to 2015 found that the 00:33:56.230 --> 00:33:58.849 overperformance of value was significantly more 00:33:58.849 --> 00:34:01.509 pronounced in stocks for smaller and mid -sized 00:34:01.509 --> 00:34:04.609 companies than for the large, widely followed 00:34:04.609 --> 00:34:07.029 companies. So the market inefficiencies are more 00:34:07.029 --> 00:34:10.329 frequent and dramatic outside of the intensely 00:34:10.329 --> 00:34:14.010 scrutinized S &P 500 giants. Naturally. And of 00:34:14.010 --> 00:34:15.719 course, the real world. confirmation came from 00:34:15.719 --> 00:34:17.820 Buffett's famous speech where he profiled the 00:34:17.820 --> 00:34:20.280 results of Graham's disciples. Right. Confirming 00:34:20.280 --> 00:34:22.400 that buying businesses below intrinsic value 00:34:22.400 --> 00:34:25.460 is a sustainable long term road to success. The 00:34:25.460 --> 00:34:27.599 track record of those super investors proved 00:34:27.599 --> 00:34:30.639 the methodology works. But we have to confront 00:34:30.639 --> 00:34:33.219 the critics because value stocks do not always 00:34:33.219 --> 00:34:35.780 beat growth stocks. The late 1990s tech bubble 00:34:35.780 --> 00:34:38.639 is the classic example. Value lagged dramatically 00:34:38.639 --> 00:34:42.039 while growth soared for years. It did. And this 00:34:42.039 --> 00:34:43.880 leads to the fundamental question that academic 00:34:43.880 --> 00:34:47.739 finance poses. If value consistently outperforms 00:34:47.739 --> 00:34:50.679 over time, why isn't the market technically efficient? 00:34:50.920 --> 00:34:53.980 And if it is, what explains the outperformance? 00:34:54.380 --> 00:34:57.340 So what's the dominant academic criticism? It's 00:34:57.340 --> 00:34:59.760 known as the risk -based explanation. It argues 00:34:59.760 --> 00:35:01.719 that the outperformance of value doesn't imply 00:35:01.719 --> 00:35:04.659 market inefficiency. It might simply mean that 00:35:04.659 --> 00:35:07.690 value stocks are inherently riskier. How so? 00:35:07.889 --> 00:35:10.989 Well, perhaps because they're smaller, more indebted 00:35:10.989 --> 00:35:13.650 or facing more structural headwinds. And so they 00:35:13.650 --> 00:35:15.909 require a greater return premium to compensate 00:35:15.909 --> 00:35:18.329 investors for bearing that extra risk. So essentially, 00:35:18.369 --> 00:35:20.449 you're just getting paid extra to hold what is 00:35:20.449 --> 00:35:22.369 statistically more likely to fail. That's the 00:35:22.369 --> 00:35:24.869 argument. And furthermore, research by Foye and 00:35:24.869 --> 00:35:27.829 Miramore in 2016 suggested that the factors leading 00:35:27.829 --> 00:35:29.750 to value stock outperformance might be heavily 00:35:29.750 --> 00:35:31.989 country specific, which complicates applying 00:35:31.989 --> 00:35:34.610 a universal value factor model globally. And 00:35:34.610 --> 00:35:37.010 here's the core practical criticism. that every 00:35:37.010 --> 00:35:39.750 value investor has to face. The risk in relying 00:35:39.750 --> 00:35:42.590 purely on low prices. The value trap problem. 00:35:42.909 --> 00:35:45.349 This is critical, especially for the retail investor 00:35:45.349 --> 00:35:48.329 who is just relying on simple screens like a 00:35:48.329 --> 00:35:51.449 low P .B. ratio. Price centric value investing 00:35:51.449 --> 00:35:54.329 often leads people to misinterpret the data. 00:35:54.469 --> 00:35:57.989 How a stock trading at a depressed price is frequently 00:35:57.989 --> 00:36:00.630 depressed for a very sound structural reason, 00:36:00.829 --> 00:36:03.710 a fundamentally negative difference or a permanent 00:36:03.710 --> 00:36:06.010 change in the company's financial health or competitive 00:36:06.010 --> 00:36:08.429 standing. They screen for cheap and they just 00:36:08.429 --> 00:36:10.920 got junk. They bought the value equivalent of 00:36:10.920 --> 00:36:13.840 a broken down car. They completely missed Buffett's 00:36:13.840 --> 00:36:17.340 refined philosophy. You must have a qualitative 00:36:17.340 --> 00:36:20.340 margin of safety. So to address this specific 00:36:20.340 --> 00:36:23.320 problem, how to separate the genuinely neglected 00:36:23.320 --> 00:36:26.820 value stocks from the cheap, failing ones, a 00:36:26.820 --> 00:36:29.260 significant quantitative solution emerged from 00:36:29.260 --> 00:36:31.619 academia. And that would be the Piotrowski F 00:36:31.619 --> 00:36:34.019 -score. Right. Tell us about that. It was developed 00:36:34.019 --> 00:36:36.500 by a Stanford accounting professor, Joseph Piotrowski, 00:36:36.619 --> 00:36:39.349 in 2000. The F -score is a rigorous quantitative 00:36:39.349 --> 00:36:41.510 tool designed to discriminate between higher 00:36:41.510 --> 00:36:43.889 and lower potential members within a class of 00:36:43.889 --> 00:36:46.329 already identified value candidates. So you use 00:36:46.329 --> 00:36:48.690 it after the initial simple screening. Exactly. 00:36:48.889 --> 00:36:51.829 After you've identified stocks with, say, a high 00:36:51.829 --> 00:36:53.869 book -to -market ratio. So once you have your 00:36:53.869 --> 00:36:56.309 line of cheap stocks, how does the F -score function 00:36:56.309 --> 00:36:59.269 to refine it? The F -score is a nine -point scale. 00:36:59.409 --> 00:37:02.530 It awards one point for each positive signal 00:37:02.530 --> 00:37:04.889 found in a firm's annual financial statements. 00:37:05.170 --> 00:37:07.050 And what are those signals looking for? These 00:37:07.050 --> 00:37:09.610 nine checks cover three crucial areas of financial 00:37:09.610 --> 00:37:12.869 health, profitability, like a positive return 00:37:12.869 --> 00:37:16.289 on assets, leverage and liquidity, like a decrease 00:37:16.289 --> 00:37:19.289 in leverage, and operating efficiency, like an 00:37:19.289 --> 00:37:21.889 increase in asset turnover. So it's basically 00:37:21.889 --> 00:37:24.409 a health check focused on whether the cheap company 00:37:24.409 --> 00:37:27.119 is improving or deteriorating. Which is vital. 00:37:27.260 --> 00:37:29.960 And Piotrowski retrospectively demonstrated the 00:37:29.960 --> 00:37:32.420 power of this health check using data from 1976 00:37:32.420 --> 00:37:36.320 to 1996. He showed that high F -score selections 00:37:36.320 --> 00:37:38.739 within that cheap group increased returns by 00:37:38.739 --> 00:37:41.800 7 .5 % annually. Compared to the cheap class 00:37:41.800 --> 00:37:44.019 as a whole. Right. That is a massive lift in 00:37:44.019 --> 00:37:46.139 performance just by adding a layer of financial 00:37:46.139 --> 00:37:48.860 diligence. And its defensive capability was proven 00:37:48.860 --> 00:37:51.400 during the global financial crisis. It was. In 00:37:51.400 --> 00:37:53.760 a retrospective analysis of 56 different screening 00:37:53.760 --> 00:37:56.199 methods applied during the 2008 financial crisis, 00:37:56.760 --> 00:37:59.280 the F -score was one of the only strategies that 00:37:59.280 --> 00:38:02.260 consistently produced positive results. It's 00:38:02.260 --> 00:38:05.059 the perfect systematic answer to that cheap junk 00:38:05.059 --> 00:38:08.380 criticism. Now for the final philosophical critique, 00:38:08.460 --> 00:38:10.500 which brings this whole deep dive to its head. 00:38:10.719 --> 00:38:13.139 And it comes from the man who perfected the strategy. 00:38:13.900 --> 00:38:16.420 Warren Buffett's argument that value investing 00:38:16.420 --> 00:38:20.360 is, in fact, redundant. This is where the core 00:38:20.360 --> 00:38:23.320 logic of investing itself is debated. Buffett 00:38:23.320 --> 00:38:26.119 argued passionately in his 1992 letter to shareholders 00:38:26.119 --> 00:38:29.420 that defining value investing as a distinct strategy 00:38:29.420 --> 00:38:33.440 just causes profound confusion. Why? Because 00:38:33.440 --> 00:38:35.340 it suggests that there are other legitimate forms 00:38:35.340 --> 00:38:37.219 of investing that aren't based on value. And 00:38:37.219 --> 00:38:39.679 what was his conclusion? He argued unequivocally 00:38:39.679 --> 00:38:41.980 that growth is always a component in the calculation 00:38:41.980 --> 00:38:44.460 of value. Growth is simply the rate at which 00:38:44.460 --> 00:38:46.519 the future cash flows of a business will expand. 00:38:46.820 --> 00:38:49.679 If you ignore growth, you are miscalculating 00:38:49.679 --> 00:39:07.840 value. So if you're truly investing... In this 00:39:07.840 --> 00:39:11.940 critique naturally leads to the dismantling of 00:39:11.940 --> 00:39:15.170 what he calls naive value schemes. Absolutely. 00:39:15.449 --> 00:39:18.769 The problem is when investors take Graham's initial 00:39:18.769 --> 00:39:22.630 concept, low PE, high dividend, and apply it 00:39:22.630 --> 00:39:25.130 naively, ignoring the fundamental strength of 00:39:25.130 --> 00:39:27.349 the business. Take the investor who only screens 00:39:27.349 --> 00:39:29.949 for a high dividend yield. Right. They might 00:39:29.949 --> 00:39:32.489 prefer a declining company paying a high 5 % 00:39:32.489 --> 00:39:34.869 yield over a growing, efficient business that 00:39:34.869 --> 00:39:37.889 earns twice as much, reinvest half of that for 00:39:37.889 --> 00:39:40.909 20 % growth, and uses share buybacks for tax 00:39:40.909 --> 00:39:42.989 -efficient payouts. They're focusing on a simple, 00:39:43.090 --> 00:39:45.570 backward -looking... metric and entirely missing 00:39:45.570 --> 00:39:47.550 the wealth compounding strength of the growing 00:39:47.550 --> 00:39:50.389 business. Exactly. And Buffett critiques that 00:39:50.389 --> 00:39:53.289 these naive schemes often lead investors to support 00:39:53.289 --> 00:39:56.969 older, highly indebted, technologically uncompetitive 00:39:56.969 --> 00:39:59.690 companies. By definition, if you're selecting 00:39:59.690 --> 00:40:02.170 stocks based only on those high, simple metrics, 00:40:02.429 --> 00:40:05.150 you are frequently missing the great, efficient 00:40:05.150 --> 00:40:07.809 businesses that offer the highest long term returns. 00:40:08.070 --> 00:40:10.530 Finally, we have to acknowledge the ambiguity 00:40:10.530 --> 00:40:13.230 inherent in the process, which is the flip side. 00:40:13.320 --> 00:40:17.079 that DCF model. If this is so scientific, why 00:40:17.079 --> 00:40:20.199 do two sophisticated analysts reach totally different 00:40:20.199 --> 00:40:23.320 conclusions? The critique is valid. The method 00:40:23.320 --> 00:40:25.940 of calculating intrinsic value is not perfectly 00:40:25.940 --> 00:40:28.869 systematic. As we noted, two analysts can look 00:40:28.869 --> 00:40:31.210 at the exact same data and reach different intrinsic 00:40:31.210 --> 00:40:33.130 values because they have different assumptions 00:40:33.130 --> 00:40:35.449 about growth rates or discount rates in their 00:40:35.449 --> 00:40:37.929 DCF models. Which implies there's no single, 00:40:38.250 --> 00:40:40.929 systematic, universally agreed upon standard 00:40:40.929 --> 00:40:43.469 for valuing every stock. That's right. So success 00:40:43.469 --> 00:40:45.250 can't just be measured by the method you use, 00:40:45.329 --> 00:40:47.469 but by the result you achieved. The ultimate 00:40:47.469 --> 00:40:49.769 measure of success has to be the excess returns 00:40:49.769 --> 00:40:52.090 you achieve over the long term after allowing 00:40:52.090 --> 00:40:54.349 for all the various risks involved. The market 00:40:54.349 --> 00:40:57.500 risk. the specific risks of that industry, and 00:40:57.500 --> 00:40:59.800 the idiosyncratic risk of the individual's security. 00:41:00.099 --> 00:41:02.739 It just reinforces the idea that investment success 00:41:02.739 --> 00:41:05.340 is a combination of disciplined methodology and 00:41:05.340 --> 00:41:08.179 superior judgment in assessing quality and risk. 00:41:08.400 --> 00:41:10.760 So to wrap up our deep dive, we've taken this 00:41:10.760 --> 00:41:13.780 concept of buying a dollar for 50 cents, first 00:41:13.780 --> 00:41:16.039 formalized by Benjamin Graham and David Dodd, 00:41:16.039 --> 00:41:18.659 and we've traced its powerful evolution across 00:41:18.659 --> 00:41:21.739 a century of market cycles. We established that 00:41:21.739 --> 00:41:23.940 the foundation rests entirely on the margin of 00:41:23.940 --> 00:41:26.900 safety. That critical protective buffer against 00:41:26.900 --> 00:41:30.000 uncertainty, analytical error, and market volatility. 00:41:30.300 --> 00:41:32.719 Graham insisted on strict quantifiable metrics, 00:41:33.019 --> 00:41:37.179 low PE, low PB, low debt, to ensure maximum statistical 00:41:37.179 --> 00:41:39.619 cheapness. And we saw how that rigid framework 00:41:39.619 --> 00:41:42.239 had to adapt to the modern intangible economy 00:41:42.239 --> 00:41:45.000 driven by the profound influence of Charlie Munger 00:41:45.000 --> 00:41:47.500 and the refinement of Warren Buffett. They taught 00:41:47.500 --> 00:41:49.860 us that true intrinsic value must account for 00:41:49.860 --> 00:41:51.960 future growth and durable competitive advantages. 00:41:52.340 --> 00:41:55.300 Leading to the mantra, buy a great company. And 00:41:55.300 --> 00:41:57.860 whether you lean toward the rigorous, computer 00:41:57.860 --> 00:42:00.539 -driven quantitative methods using tools like 00:42:00.539 --> 00:42:03.059 the Piotrowski F -score to screen for financial 00:42:03.059 --> 00:42:05.980 health, or the qualitative deep -dive methods 00:42:05.980 --> 00:42:09.320 of a Buffett or a Klarman, the core mission is 00:42:09.320 --> 00:42:15.289 always identical. and acquire the asset below 00:42:15.289 --> 00:42:17.869 that calculated figure. That's it. So what does 00:42:17.869 --> 00:42:19.809 all this mean for you, the thoughtful investor 00:42:19.809 --> 00:42:22.070 who came looking for a shortcut to being well 00:42:22.070 --> 00:42:24.429 -informed? It means that the true debate in the 00:42:24.429 --> 00:42:26.690 investing world isn't really between value and 00:42:26.690 --> 00:42:29.690 growth, as Buffett suggests. That distinction 00:42:29.690 --> 00:42:32.550 is largely an artificial construct based on simplistic 00:42:32.550 --> 00:42:35.829 metrics. The actual existential conflict in finance 00:42:35.829 --> 00:42:38.630 isn't about style. It's about discipline. The 00:42:38.630 --> 00:42:40.969 core debate is between discipline analysis, which 00:42:40.969 --> 00:42:43.809 is investing, and mere guesswork or emotional 00:42:43.809 --> 00:42:46.090 timing, which is speculation. And the sources 00:42:46.090 --> 00:42:48.289 show us that truly great growing companies often 00:42:48.289 --> 00:42:50.849 look expensive on simple, backward -looking metrics 00:42:50.849 --> 00:42:53.909 like P -E or P -B ratios. But because their durable 00:42:53.909 --> 00:42:56.050 earnings power is so high and predictable, they 00:42:56.050 --> 00:42:58.090 may actually offer the greatest long -term margin 00:42:58.090 --> 00:43:00.210 of safety of all. They are the great company 00:43:00.210 --> 00:43:02.369 at a fair price. The question for you to mull 00:43:02.369 --> 00:43:05.090 over tonight, based on the rigor and the analytical 00:43:05.090 --> 00:43:06.929 requirements of these legendary practitioners, 00:43:07.250 --> 00:43:11.230 is this. How much reliance do you place on objective 00:43:11.230 --> 00:43:14.489 calculation and patience versus hope in short 00:43:14.489 --> 00:43:17.010 -term market movements? Which side of that line 00:43:17.010 --> 00:43:19.150 investing or speculation does your current approach 00:43:19.150 --> 00:43:22.010 truly fall on? Food for thought indeed. Thank 00:43:22.010 --> 00:43:23.929 you for joining us for the Deep Dive. We'll see 00:43:23.929 --> 00:43:24.389 you next time.