Graham was too focused on price at the expense of quality. Of course, this is an oversimplification. Graham also took account of other factors, such as growth or stable results, although he didn't put as much emphasis on them.
Most investors today pay attention to other drivers, such as growth or business quality, assigning increasing weight to them over time.
Philip Fisher
Philip Fisher played a pivotal role in the transformation undergone by many investors. It was under the influence of his partner, Charlie Munger, that Buffett first became attracted to Fisher's philosophy.
Fisher put his money on investing in long-term growth stocks, with very robust competitive advantages that were capable of being sustained and increased over time. The price paid for them was not as important, since if the company performed well it would be able to sustain a high multiple.
This idea is less intuitive and therefore harder to digest than simply buying something cheap; it means paying seemingly expensive prices for something that will only yield results after a period of time.
This is ultimately the road that Buffett has gone down. Thus, most value investors are also indirectly indebted to Fisher to some degree or another.
For those who have maintained a certain unshakeable bias towards investing in cheap assets, whose quality was not always proven, it can be a challenge to change their ways, especially when this mix had produced good results.
Every investor develops at their own pace.
Joel Greenblatt
Joel Greenblatt's short book, The Little Book That Beats the Market, gives empirical proof that quality shares bought at a good price will always outperform other stocks.
To do so, he classifies each stock according to two criteria:
Greenblatt uses a numerical classification for both return and price: 1, 2, 3,4,...., with 1 being the stock with the highest ROCE under the return criteria and 1 being the highest free cash flow under the price criteria. He then adds the points obtained by each share in both rankings to produce a definitive classification, which he calls the 'magic formula'.
The exceptional results obtained by Greenblatt is surprising, but logical: good companies bought at reasonable prices should obtain better returns on the markets.
The problem with applying this approach is that the formulas deliver over the long term, but they can also underperform for relatively long periods, for example, three years this makes it though for both professional and enthusiast investors to keep faith when things are not working.
Most investors today pay attention to other drivers, such as growth or business quality, assigning increasing weight to them over time.
Philip Fisher
Philip Fisher played a pivotal role in the transformation undergone by many investors. It was under the influence of his partner, Charlie Munger, that Buffett first became attracted to Fisher's philosophy.
Fisher put his money on investing in long-term growth stocks, with very robust competitive advantages that were capable of being sustained and increased over time. The price paid for them was not as important, since if the company performed well it would be able to sustain a high multiple.
This idea is less intuitive and therefore harder to digest than simply buying something cheap; it means paying seemingly expensive prices for something that will only yield results after a period of time.
This is ultimately the road that Buffett has gone down. Thus, most value investors are also indirectly indebted to Fisher to some degree or another.
For those who have maintained a certain unshakeable bias towards investing in cheap assets, whose quality was not always proven, it can be a challenge to change their ways, especially when this mix had produced good results.
Every investor develops at their own pace.
Joel Greenblatt
Joel Greenblatt's short book, The Little Book That Beats the Market, gives empirical proof that quality shares bought at a good price will always outperform other stocks.
To do so, he classifies each stock according to two criteria:
- quality, measured by ROCE (return on capital employed) and
- price, measured by the inverse P/E ratio (price to earnings, the price that we pay for each unit of earnings). [You can also use FCF yield, that is, FCF/price, instead of inverse P/E].
Greenblatt uses a numerical classification for both return and price: 1, 2, 3,4,...., with 1 being the stock with the highest ROCE under the return criteria and 1 being the highest free cash flow under the price criteria. He then adds the points obtained by each share in both rankings to produce a definitive classification, which he calls the 'magic formula'.
- The companies with the lowest sum of both factors deliver the best long-term returns.
- Furthermore, the same is true throughout the ranking; companies situated in the lowest 10% post a better return than the second 10%, the second decile outperforms the third, and so on until the last 10%.
The exceptional results obtained by Greenblatt is surprising, but logical: good companies bought at reasonable prices should obtain better returns on the markets.
The problem with applying this approach is that the formulas deliver over the long term, but they can also underperform for relatively long periods, for example, three years this makes it though for both professional and enthusiast investors to keep faith when things are not working.
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