“In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.” – Benjamin Graham
Legendary value investor Warren Buffett, the chairman of Berkshire Hathaway, once again cited the abovementioned maxim of Benjamin Graham in his FY2017 letter to shareholders.
What is so endearing about this quote of the late Benjamin Graham, the man known widely known as the father of value investing? Warren Buffett is of course the best known disciple of Benjamin Graham.
In the FY2017 letter, Warren Buffett said: “The connection of value-building to retained earnings…will be impossible to detect in the short term. Stocks surge and swoon, seemingly untethered to any year-to-year buildup in their underlying value. Over time, however, Ben Graham’s oft-quoted maxim proves true.”
Explaining, Mr Buffett said: “Charlie (vice-chairman of Berkshire Hathaway) and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits.
“Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.”
To illustrate, Mr Buffett said: “From our stock portfolio – call our holdings “minority interests” in a diversified group of publicly-owned businesses – Berkshire received $3.7 billion of dividends in 2017. That’s the number included in our GAAP figures, as well as in the “operating earnings” we reference in our quarterly and annual reports.
“That dividend figure, however, far understates the “true” earnings emanating from our stock holdings. For decades, we have stated in Principle 6 of our “Owner-Related Business Principles” (page 19) that we expect undistributed earnings of our investees to deliver us at least equivalent earnings by way of subsequent capital gains.
“Our recognition of capital gains (and losses) will be lumpy, particularly as we conform with the new GAAP rule requiring us to constantly record unrealized gains or losses in our earnings. I feel confident, however, that the earnings retained by our investees will over time, and with our investees viewed as a group, translate into commensurate capital gains for Berkshire.
That led Warren Buffett to say that “the connection of value-building to retained earnings that I’ve just described will be impossible to detect in the short term” as stocks surge and swoon, but “over time, however, Ben Graham’s oft-quoted maxim proves true”