The Man Who Mentored Warren Buffett
And the lessons that were learned
In the spring of 1951, a young student by the name of Warren Buffett entered a classroom at Columbia Business School. An avid reader, Buffett had spent many high school nights studying stocks, analyzing investments, and reading his favorite book — “The Intelligent Investor.”
Buffett must have been excited as he entered the classroom; Benjamin Graham, the author of “The Intelligent Investor,” was the one teaching the class at Columbia Business School.
In Buffett’s mind, Benjamin Graham was the greatest investor to ever live. As his roommate at the time later told biographer Alice Schroeder, “it was almost like he found a god.”
But why did Buffett admire Graham so much? What was it about Benjamin Graham that drew the young investor’s praise? And what did Graham teach Buffett that mattered so much?
To fully observe how Benjamin Graham mentored Warren Buffett, we must first understand Graham’s investment style.
The Founder of Value Investing
Today, Benjamin Graham is recognized as a pioneer of value investing — the process of buying stocks that appear to be undervalued in the market. In any exchange, Graham believed, the market would fail to capture the intrinsic worth of certain stocks. By using methods of fundamental analysis, a sharp investor could determine which stocks were undervalued and then exploit the discrepancy between price and value.
According to Graham, every stock goes on sale once or twice a year. Just as a consumer will wait to purchase a TV until it is on sale, a savvy investor should wait until stock is on “sale” to purchase it.
It sounds simple, doesn’t it? It doesn’t take a shrewd investor to remember that the purpose of investing is to buy low and sell high. But in the early twentieth century, Graham’s idea was revolutionary.
As Warren Buffett later remarked, “If I hadn’t read that book in 1949, I’d have had a different future.”
Buffett, like many other investors, has been shaped by Graham’s legacy. Although the billionaire can trace many lessons from Graham’s teaching, there are two lessons that Buffett has employed through the course of his career.
Stay in It for the Long Run
Patience, Benjamin Graham reminded his students, is the key to investing success. An investor who is focused only on tomorrow and not looking years down the road will be quickly disappointed.
Another student of Benjamin Graham, the investor Marshall Weinberg, once said this about Graham’s teaching:
“One sentence changed my life…Ben Graham opened the course by saying: ‘If you want to make money in Wall Street you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher.’
When he said that, I nearly jumped out of my course. What? I suddenly look up, and he said, and I remember exactly what he said: ‘Spinoza said you must look at things in the aspect of eternity.’ And that’s what suddenly hooked me on Ben Graham.”
Buffett has embodied the principle of viewing things in the aspect of eternity. His firm, Berkshire Hathaway, has a long history of investing in companies and holding those positions for multiple decades. Here are a few examples of Berkshire Hathaway’s longest-held positions:
- Coca-Cola — 32 years
- Wells Fargo — 31 years
- American Express — 27 years
- M&T Bank — 24 years
- Moody’s — 20 years
Benjamin Graham taught that public opinion would sway a stock’s price in the short run. In the long run, however, the true value of the stock would be revealed. A shrewd investor would be able to foresee into the future, looking past public opinion and relying solely on fundamental analysis to determine a company’s value.
As Morningstar explains:
The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine — tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine — assessing the substance of a company. The message is clear: What matters in the long run is a company’s actual underlying business performance and not the investing public’s fickle opinion about its prospects in the short run.
As Buffett’s example has shown, investment patience — and a willingness to invest for a long period of time — will ultimately yield successful results.
Investor Psychology Matters
Graham taught that an intelligent investor should be aware of the influence public opinion has on the price of stocks. Investors can be irrational and make decisions that lack judgment, and those decisions can cause prices to fluctuate wildly. When such fluctuations occur, a shrewd investor can capitalize on market sales.
As Graham told his students:
“You can have an extraordinary difference in the price level mainly because not only speculators but because investors themselves are looking at the situation through rose colored glasses rather than dark blue glasses.”
Volatility can be intimidating, but a knowledgeable investor can use fluctuations to his advantage. Daniel Myers of Investopedia explains this:
“Put another way, the market will fluctuate — sometimes wildly — but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued [and therefore expected to drop].”
By studying investor psychology and understanding how it influences stock price, Warren Buffett has been able to capture stocks when they are undervalued or overvalued.
Why This Matters for You
You might be an aspiring investor, or maybe you have no interest in delving in the stock market. Whatever the case may be, Graham’s teachings are applicable to any entrepreneur, business leader, or student.
Graham reminds us that we must know the value of our own projects. If you are hoping to start your own business, you must understand the value of your competitors within the industry. You must gauge the intrinsic worth that your company holds to successfully advance in the future.
As many entrepreneurs would likely be quick to admit, it is easy to jump into a project and focus on tomorrow. We want to capture an audience now, we want to begin making a profit now, and we want our company to be successful immediately. We rarely look ten years down the road, nor do we always have the patience to continue with a project for a long period of time. But patience and long-term thinking are valuable attributes for any entrepreneur to employ.
As project leaders, we must learn to look past the voices of public opinion. While people around us may be spouting optimism or pessimism, we must look at the story behind the numbers. We must make our own analyses and determine if irrational voices have clouded the truth.
Although it has been 45 years since Graham passed away, the legendary investor’s legacy is still alive and thriving. Perhaps, as Graham suggested, some lessons truly can be viewed in the aspect of eternity.
© Aaron Schnoor 2021
