Today, many of us admire Warren Buffett and try to follow his investment style. That's why it might be hard to imagine the billionaire, in our shoes, looking up to a great investor.
But that's how Buffett got his start, and he continues to give credit to this top investor and author today. His book changed Buffett's life because it inspired him to become a value investor. That's how Buffett built his fortune -- and the fortunes of others through his leadership at Berkshire Hathaway.
You might recognize the name of this book and its author because, though published in 1949, it's still a top seller. Today, it's ranked No. 176 in all books on Amazon. I'm talking about The Intelligent Investor, by Benjamin Graham. Buffett even talked about Graham during Berkshire Hathaway's recent shareholder meeting.
Could this book change our lives, too? Probably. Let's find out how.
The Buffett-Graham relationship
First, a bit of background on the Buffett-Graham relationship. As a young man, Buffett liked Graham's book so much that he chose to study under the author at Columbia Business School. He eventually worked for Graham at the investment company Graham-Newman.
And, importantly, Buffett followed in his mentor's footsteps down the path of value investing. This involves buying stocks that are trading at a lower value than their true worth.
At the shareholder meeting earlier this month, Buffett called The Intelligent Investor a "little book that changed my life."
"Everybody keeps bringing out new books and saying a lot of other things, but they aren't saying anything that's as important as what he said in 1949 in this relatively thin, little book," Buffett said, according to a Yahoo! Finance report.
Following what he learned in The Intelligent Investor, Buffett focuses on snapping up stocks at a great price and holding on for the long term. The billionaire, like his mentor, studies a company's financial reports and evaluates that business' prospects. He doesn't let the whims of the market sway his ideas. As Graham might say, Mr. Market doesn't dictate Buffett's choices.
For example, Buffett bought shares of Coca-Cola (KO 0.29%) over a period of seven years from the late 1980s through the early 1990s. He believed the stock was cheap considering the company's earnings and dividend growth.
Buffett's purchase of Coca-Cola
The stock market crash in 1987 had left Coca-Cola shares in the doldrums, trading for only a couple of dollars. But Buffett believed in the company's long-term prospects. He bought and hasn't sold. Including dividends, this investment has climbed more than 6,000%.
Clearly, following Graham was a great move for Buffett and did change his life. How can it do the same for us? Like Buffett, we should spend time considering a company's true value -- and not jump in to buy a stock just because the rest of the market is doing that. Using the same idea, we shouldn't fear investing when everyone is fleeing the market.
In fact, as if foreshadowing his Coca-Cola purchase, Buffett wrote in the Berkshire Hathaway 1986 shareholder letter, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
At that time, Buffett cautioned against going along with the current market "euphoria."
How we can use this advice
Today, we can use the advice this way: Instead of being scared off by the current economic turmoil, we could go bargain hunting in the stock market. We can happily pick up a stock at a discount, knowing that its overall financial picture is solid and its long-term prospects look bright.
A potential candidate is Etsy (ETSY 4.15%). The e-commerce company has grown its quarterly gross merchandise sales in the triple digits over four years. And its capital-light business model helps it transform most of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) into free cash flow. Today, Etsy trades for 22 times forward earnings estimates, down from more than 48 a year ago.
Etsy is just one example. Today's market offers us plenty of buying opportunities across various industries.
Let's get back to Buffett and Graham. Buffett had to make enough right choices to truly increase his wealth. But Graham's book set him on the right path. If we use these two investing giants as models, we, too, could set off on that path -- during bear markets or bull markets.
