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By bx111a
November 18, 2003

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Hi All,

In the Summer of 1997, I was accepted for a place at a business school. I am still a student of this school. The degree title included the words investment and insurance. I wanted then and still to this day want to be an investor.

However before enrolling at this business school I had read a number of Berkshire's Chairman's Letters to Shareholders on the Berkshire website and had purchased Ben Graham's Intelligent Investor and read a few passages.

During that hot Summer of 1997 I stumbled across an office of Berkshire and had the opportunity to speak to one of the employees and quiz him about Berkshire.

The employee was open, honest, polite, generous with his time and as sharp as a tack. He did not give me any amazing insights, inside information, he just left me with an everlasting favorable impression of himself and Berkshire.

I also was given two past Berkshire Annual Reports - 1996 and 1995. I read these hardcopy annual reports and I found in the 1996 copy the following passage:


"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices."

Shortly before I enrolled I bought a reprint of the original 1934 Edition of Graham and Dodd's Security Analysis although it took me nearly five years to fully appreciate the sagacity of Chapter IV - Distinctions Between Investment and Speculation.

After enrolling I was given a handbook with full details of my course and there it was: Beta, efficient markets, modern portfolio theory, option pricing and emerging markets no courses entitled How to Value a Business or even How to Think About Market Prices.

I followed the course, went to the lectures, but I continued to read and reread the writings of Graham, Fisher, Buffett, Munger.

However in the back of my mind I was always testing Warren Buffett's above affirmation from the 1996 letter.

I found the Motley Fool Berkshire Hathaway discussion board especially valuable. It pointed me to new sources of information: books, speeches, newspaper articles and opened new vistas for discovery.

When I enrolled in 1997 it was near the beginning of the dotcom irrationality. The S&P was at about 900 (well away from it's 1500 peak in early 2000), the NASDAQ was at 1500 (well away from it's 5000 peak in early 2000).

Over the four years of my degree I asked various academicians about Buffett and the other Graham and Doddsville Superinvestors and came up with reactions ranging from blank stares to barely disguised disdain. In two notable cases there was open hostility.

It is partly because of the open hostility from the two academicians that I was determined to pursue the Graham Fisher Buffett Munger approach as the subject of my final dissertation.

At one point at the beginning of my second year, just before Christmas I even went to Omaha, Nebraska to have a look at Nebraska Furniture Mart and Borsheim's Fine Jewelry to see that they existed as described.

At that time the dotcom irrationality was in full swing. Many of the people on my course and many people I knew were involved in IPOs, day trading, some even trying to set up dotcoms.

At that time it felt like everyone around me believed that the earth was flat and that only a few people were keeping the memory and reality of sailing around the earth alive. The academicians continued to torture reality so it would fit their models.

During my time studying I was trying to prove to myself (firstly not by fooling myself in the Richard Feynman sense) but absolutely convincing myself that what the Graham and Doddsville Superinvestors had achieved was replicable, even repeatable.

I initially submitted a partly completed dissertation in my final year. It was incomplete because I refused to submit ten thousand words simply repeating back the academic dogma of the modern finance curriculum of my business school.

Even though it was my final year and I had completed all my exams I was given the opportunity to resubmit a complete version of my dissertation.

I am conscious of the fact that the academicians marking my dissertation will be biased in their view, because of simple psychological denial, bias from commitment and consistency tendency, bias from over-influence by social proof, maybe even bias from envy/jealousy.

(Link: Charlie Munger, on the Psychology of Human Misjudgment)

This is why I have decided initially, to post the outline of my dissertation and invite feedback, opinions, suggestions and criticism both negative and constructive.

It may even foster some debate. Debate I found which was suppressed and discouraged at my business school.

Then I will post each chapter as it is completed. Again inviting all responses and hopefully these postings will educate, enrich and amuse Motley Fool readers.

This will also help to fill in any holes or inaccuracies in my work and thus when I submit it for assessment it will be very difficult for any of the academicians to rationally disprove it.

Below is the outline of the first chapter, which I respectfully submit to the readers of The Motley Fool.

Many thanks.


Sincerely,

bx111a

** ** **
Chapter 1. Investment versus Speculation

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money."
- Warren Buffett

The title of this chapter Investment versus Speculation is taken from a chapter of the same title from the seminal 1934 work Security Analysis by Graham and Dodd and the above quotation is from one of Graham and Dodd's most successful students, Warren Buffett.

Some sixty six years later one of his most successful students is addressing the very same issue - the distinction between investment and speculation and how this distinction can become blurred.

Looking back over last five or so years' folly and destruction of capital it is clear that not only did rationality become sedated but in some cases the terms investment and speculation seem to have become interchangeable.

I want to revisit and re-examine this distinction and to try and bring something useful to the table - a mental framework that will aid the intelligent investor to keep the distinction clear in his own mind especially when that mind is subjected to the super-contagious emotions that swirl around the market-place.

***


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