You wouldn’t think the quantitative world of finance and the heavily academic art of philosophy would have much in common, or much overlap at all. But the two practices have found a happy relationship with each other. We get the word, “philosophy” from the ancient Greek word, philosophia, which literally translates to, “love of wisdom”. Philosophy is of course a much older practice than the art of investing. Will Durant, author of The Story of Philosophy dates philosophy’s origins back to ancient Egypt, approximately 2880 BCE. In the subsequent 5,000 years, philosophers like Aristotle, Plato, Kant, and Nietzsche have argued, discussed, and evolved the craft into myriad subcategories. Yet, in its most basic form, philosophy is a framework for human understanding, logic, and life. It’s no accident that we attribute certain philosophies for their “guiding” principles and describe those respective philosophers as thought “leaders”. It’s a tricky and sometimes dark world, and philosophy provides us with a torch.
When Warren Buffett began his now legendary business career, he was a boy. He had a newspapers route, he worked in his grandfather’s grocery store stocking shelves, and he organized his friends to help him collect lost golf balls to resell them for a profit. Buffett’s obsession with money-making at an early age inspired him to read every business and investing book in the local Omaha library. But it wasn’t until late in his teens when he stumbled on a book that would change his life forever. The Intelligent Investor, by Benjamin Graham formed the basis of Warren’s investing philosophy, the very philosophy that has guided his remarkable career for the 65 years and counting.
Together with Security Analysis, another one of Benjamin Graham’s books, The Intelligent Investor gave Buffett and countless other investors a new mental framework for thinking about investment opportunities. Until Graham, many investors lived and died on speculation. Investors just bought any stock that looked or sounded interesting and hoped that other investors would bid the price up. This is the precise strategy that Graham explains is a foolish trap. In chapters 8 and 20 of The Intelligent Investor, Graham lays down the core tenets of intelligent investing, what we refer to today as, “value investing”. First, the market is your friend and not your master. It tells you the price, and you decide if it’s fair. Second, stocks are minority shares of real businesses, not lottery tickets. When you purchase a share, think of yourself as the owner of that business. Finally, always invest with a margin of safety. Graham believed whole-heartedly, perhaps even more so than than Buffett, in finding and purchasing companies at steep discounts. Whether it was trading below book value, or just going through a rough patch, Graham sought out “cigar butt” companies, and hung on for the final puff.
When financial economists claimed there are no such things as market inefficiencies, via the Efficient Market Hypothesis, Buffett was quick to respond with evidence in the form of select investment track records of those who studied and practiced Benjamin Graham’s philosophy of value investing. Much like Aristotle’s Peripatetic, Graham had unofficially established his own school of value investors, who still use and practice his core teachings today. Thus in the same way that philosophy serves as a navigational tool for life, “investment philosophies” provide fundamental decision-making frameworks for navigating difficult and complex investment opportunities. The common thread here is that if you’ve planted strong roots in an ideology, you’re less like to be blown around recklessly by the hurricane-force winds of confusion in whatever you’re doing: investing or living your life.
Nearly every money management firm has adopted a guiding investment philosophy. Many share them openly on their websites, not only as a way to attract prospective clients, but also as a way to openly declare a relationship with those guiding ideas. Writing and sharing an investment philosophy is like saying: “Here’s what I stand for. Everything we do here is a reflection of the following ideas.” And similar to the way philosophy has its many subcategories, every investor has his or her own interpretation of what works best.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” – Bruce Lee
The formation of your personal investing philosophy takes time, patience, and a generous amount of experience. Bruce Lee, the world famous martial artist, had a lot to say on this particular topic. In martial arts, there are endless variations and styles all claiming to have discovered the definitive best method. But one of the things that made Bruce Lee stand out, was that he believed the true best way, is having “no way”. For example, here are his comments on forming his own style which he later called, Jeet Kune Do:
I have not invented a “new style,” composite, modified or otherwise that is set within distinct form as apart from “this” method or “that” method. On the contrary, I hope to free my followers from clinging to styles, patterns, or molds. Remember that Jeet Kune Do is merely a name used, a mirror in which to see “ourselves”… Jeet Kune Do is not an organized institution that one can be a member of. Either you understand or you don’t, and that is that.
Every artist or practitioner of a craft is inspired by those greats that came before her. As the genius Sir Isaac Newton so eloquently put it, “If I have seen further, it’s by standing on the shoulders of giants.” But there comes a point in life where you must go beyond mere imitation of your masters and start forming your own practice. After college, Buffett wanted nothing more than to go to work for Benjamin Graham, which he ended up doing for several years. At the Graham Newman Investment Co. he was mentored by his investing hero. But eventually, Buffett learned everything he needed to learn from Graham, and in 1956 he decided to move back to Omaha to begin his own partnership.
François Rochon of Giverny Capital believes it’s absolutely essential to form your own investment philosophy. Not only that, but that philosophy has to also resonate with your personality. In our interview, François talks about the unique modifications he’s made on Graham’s original ideas:
I just think that you have to have an investment philosophy that is in tune with your own personality. And my personality like when I get interested in art is to find the best of the best. I’m like Oscar Wilde that says, ‘I have the simplest of taste and I only like the best.’ That’s me, that’s how I am. I like to buy great assets, I like to buy great works of art and I know that you have to pay a little bit for quality. Sometimes you get good quality at a very good price but sometimes a great quality at a reasonable price which is okay also.
And I don’t like the idea of owning a company and hoping for the P/E to go up. The company’s not doing well, it’s not growing, it’s not creating shareholder wealth but it’s so cheap, I hope that at some point it’s going to be bought out or the management will do something to increase shareholder value. I’m a patient man but I don’t like this attitude. I like the attitude of being partner with someone that’s really building a company. That over ten years, earnings will increase by 500%. I like that, it’s not that I consider myself as a growth investor, I like to find companies that create wealth.
(Watch the full conversation in The Manual of Ideas Members Area.)
The investing philosophy on the Giverny Capital website elaborates further on Rochon’s ideas, and very clearly reflects his interests in art and gardening:
I often compare the craft of a money manager with that of a gardener: To have a great garden takes decades, not a few months. To successfully grow great trees and flowers, you have to understand your environment and capabilities (you can’t grow the same flowers in Quebec than in Florida). You have to know the soil, the temperatures, the orientation of the sun, etc. And to build a garden is a dynamic process: you have to continually take great care of your plants.
But the most important ingredient of all is PATIENCE. As I always say: “You won’t get much of a garden, if you remove a tree after six months because it hasn’t grown fast enough”. A portfolio needs the same patience. Great companies weren’t built in a few years. Like trees, they need decades to blossom.
Note that Rochon capitalizes patience as the most important ingredient. Unlike the philosophy of a speculative trader, who looks for the quick flip, Graham’s school of intelligent investors believe that in order for the magic of compounding to take effect, you must give good investments time. David Foster Wallace once said, “The most obvious, ubiquitous, important realities are often the ones that are the hardest to see and talk about.” In money management, that reality is time.
The Best Philosophy is the One You Practice
Here’s a story about photography. Novice photographers always like to ask professional photographers what kind of cameras and equipment they use. While this information can be helpful logistically, the moral of the story is that the absolute best camera, is the one you have on you. In other words, if you walk outside carrying your camera, it doesn’t matter what kind of camera you own. You have to practice taking photos, even on cheap disposable cameras, to actually make any progress. Imagine asking a lottery winner how they won the lottery to which they respond: “Here are my numbers, it worked for me.” The point is that it’s easy to fixate on irrelevant information. Unlike knowledge, which can be accumulated, philosophy, “the love of wisdom” must be practiced. If we can take anything away from Graham and Buffett, and other great value investors of today like François Rochon, it’s that there is no “one way”. It takes tremendous courage to stand behind your own ideas, but ultimately this is the path to discovering and establishing the philosophy that works best for you, in life or in investing. You can learn a lot from studying the past, and from the giants who preceded you, yet the torch of all this wisdom now finds itself in your hands. Who will you pass it to, where will you take it?