Benjamin Graham – The investor who inspired Warren Buffett and Michael Burry

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• Warren Buffett and Michael Burry have a common role model
• Both stock market stars rely on value investing
• Personality determines different investment approaches

51-year-old hedge fund manager Michael Burry has garnered a lot of attention for predicting the 2007 housing bubble bursting and making a million-dollar profit thanks to his short bet. He became known to the general public after being played by Christian Bale in the film “The Big Short”. He also saw the current sell-off coming and warned of the “biggest speculative bubble of all time” in a tweet in the summer of 2021. He is very active on Twitter and has repeatedly irritated with cryptic tweets.

The stock market guru Warren Buffett, who is around 40 years his senior, is much calmer and more discreet. The “Oracle of Omaha” is certainly the best-known value investor in the world and has made this investment strategy, which has been very successful for years and has made him one of the richest people in the world, known worldwide.

But as different as their personality and investment behavior are, they have one thing in common: Both were strongly influenced by the US economist and investor Benjamin Graham and his book “The Intelligent Investor”. Buffett, who as a student attended Graham’s lectures at Columbia University, called The Intelligent Investor “by far the best book ever written on investing.” He even went so far as to say the following about his teacher: “To me, Ben Graham was much more than an author or a teacher. More than any other man, with the exception of my father, he influenced my life.” But Michael Burry also swears by Graham’s stock market bible and has it at the top of his book list.

value investing

Benjamin Graham, who embarked on a career on Wall Street after graduating in 1914, quickly became a master at stock analysis, able to spot undervalued companies in the stock market. When the stock market crashed in 1929, Graham also posted heavy losses, but he kept his nerve and used the setback to make acquisitions. Shaped by these experiences, he developed a special investment strategy, now known as value investing, which he wrote in “The Intelligent Investor”.

With this investment philosophy, investors rely on stocks that they believe are undervalued because the intrinsic or fair value of the company is higher than their stock market price. Graham determined intrinsic value using fundamental criteria such as price/earnings ratio, debt ratio, dividend yield and other facts. According to Graham, however, since buying and selling decisions are often not based on rational considerations but on emotions, the share price of a company often does not correspond to its true value. Now the art of value investing is to buy stocks of quality companies at a good price.

Apple – Value or Growth Stock?

But splitting into value and momentum stocks isn’t always easy. This is particularly evident in the example of Apple. The tech group, which thanks to its strong growth was the first US company to reach the trillion mark in the stock market valuation, is the growth or momentum stock par excellence for many investors. Surprisingly, however, many defensive investors also invest in Apple, because the mega-company now has such an enormous market capitalization that investors could sell it if necessary without triggering significant price losses.

Buffett has also become a real fan of the iGroup: “It’s probably the best company in the world that I know,” said the Oracle of Omaha 2020 in a CNBC interview. Meanwhile (as of the end of June 2022), Apple accounts for around 40 percent of the stock portfolio of its investment company Berkshire Hathaway. One of the reasons Buffett is so excited about Apple may also be the management: “Stocks are simple. You just buy shares in a great company with the highest integrity and capable management for less than its intrinsic value. Then you keep those shares for always,” the star investor once said. Michael Burry, on the other hand, was still betting on a price slump at Apple until recently. As a result, the largest position in his portfolio was at times a bet against iGroup.

Personality plays a big role

Both Buffett and Burry have inherited their focus on companies’ intrinsic value, so both are very skeptical about growth stocks. However, they use value investing very differently and yet successfully: Buffett prefers long-term investments and acts according to the motto “buy and hold” – even though Graham took the view that stocks should be sold if they are over 50 percent or after two years. On the other hand, Burry often relies on short-term investments and also sells short shares. In addition, he does not shy away from derivatives such as options or futures, which Buffett or Graham strictly reject.

Both Buffett and Burry don’t simply copy Graham, but have developed their own approach. The investment style of both star investors is strongly influenced by their personality. For example, Cash quotes Michael Burry as saying, “If you want to be a great investor, you need to match your style to your personality.”

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