Growing Rich - Arabictrader.com

KIRK KAZANJIAN
Papp considers many of Graham’s teachings to be outdated, but some
of the lessons Davis learned continue to serve him well today.
“I was out in California in 1974 and called Graham, the father of
value investing, at his home in La Jolla,” Davis reflects. “He was
gracious enough to see me, and we had tea together. Graham was the
dean of security analysis. I studied his work while preparing for the
CFA exam. It was sort of the bible for analysts. In the late 1960s,
when the market went straight up, people said he was too old-fashioned,
since he didn’t crank growth rates into stock valuations. He
just looked at net asset values or intrinsic value. His detractors argued
that market pricing was based on supply and demand, and if there
were more buyers than sellers, prices would go up. They got away
from the fundamentals. What he told me changed my life. He said,
‘Don’t be discouraged. Just keep doing your work. There are plenty
of bargains out there.’ By then, he was becoming bullish. He was
pretty old, but full of wisdom.”
Graham revealed to Davis that his best investment ever was Geico,
the insurer later bought out by Warren Buffett’s holding company
Berkshire Hathaway. (Buffett has long admitted to being a disciple of
Graham’s as well.) Geico was a terrific growth company without a lot
of assets. “What I learned is that a high return on equity is a wonderful
thing for a company to have,” Davis says. “If you pay 50 times earnings
for a stock, you’re only getting a 2 percent return on your equity,
because you’re not buying it at book value. That may be justified if
a company is young and growing dynamically, or even if it has startup
problems that are expected to go away quickly. Otherwise, you’re
playing with fire. From then on, that kind of high-multiple investing
became the exception for me, rather than the rule. I still always have
an open mind. I’m not one of these guys who will never buy a smallcap
or a mid-cap stock. I’ll buy anything. I’m a little like Peter Lynch
in that respect. But over the years, I have developed mental screens
that keep me out of a lot of stocks. I don’t have to hear more than a
minute’s worth of a story before I know I’m never going to buy it.”
THE BOTTOM LINE
You must be willing to alter your investment process to keep up
with the changing times. Stock market techniques and theories that
worked decades ago may no longer be relevant. Failing to adapt to
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