In Robert Hagstrom’s book – Warren Buffett: Inside the Ultimate Money Mind, there’s a great passage on the evolution of value investing, which includes thoughts from Warren Buffett and Charles Munger on why investors need to change their thinking on traditional value investing, as originally defined by Ben Graham. Here’s an excerpt from the book:
The evolution of value investing, Gayner said, can be seen as a segue from spotting value with a snapshot to understanding that value unfolds over time like a movie. Charlie Munger concurs. “The days of locating stocks selling at a 25%—50% discount to some liquidating value, a price that someone else would pay to buy the business, when it was easy as moving your Geiger counter over low multiple stocks is over. The world has wised up. The game has gotten harder. You have to get into Warren’s thinking.”
So let us say that how Warren thought about the intrinsic value of Coca—Cola was very much like watching a movie directed by Goizueta as it unfolds.
Moving from Stage One to Stage Two value investing is challenging. The fundamental movie—making in Stage Two is more difficult than taking a snapshot in Stage One. Financial missteps can be made if an investor’s version of how they think their movie will turn out differs from reality. Even so, fundamental movie-making is the key component in understanding Stage Two value investing.
“lt’s extraordinary how resistant some people are to learning anything,” said Charlie. “What’s really astounding,” Warren added, “is how resistant they are even when it’s in their self-interest, to learn”. Then in a more reflective tone, Warren continued. “There is just an incredible resistance to thinking or changing. I quoted Bertrand Russell one time saying, Most men would rather die than think. Many have. And in a financial sense, that’s very true.”
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