Big & Sure Money – Warren Buffett Explained in 1967 Letter
In 1967 Letter to partners Buffett explained the great points, in today’s equity analysis world, people divided in two groups qualitative and quantitative analysis, but Buffett suggest something different, let’s look what he said……
The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say. “Buy the right company (with the right prospects, inherent industry conditions, management, etc.) and the price will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money can be made with either approach. And, of course, any analyst combines the two to some extent – his classification in either school would depend on the relative weight he assigns to the various factors and not to his consideration of one group of factors to the exclusion of the other group.
Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this no one has come back from recess – I may be the only one left in the class), the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a “high-probability insight”. This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side – the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.
The analysis of securities for investment purpose has a mixture of qualitative and quantitative factors. You can use both or either one, as suitable for you, In the investment world people and expert say, who belongs to qualitative school, Buy the right company and price will take care of itself, but here is a probability you can get this company at a very rich valuation, because everybody knows the quality of the business, you will be more profitable, if you find such company in unknown small cap world, where big players such as mutual fund and insurance company not invested, or these companies not on the radar of the mainstream media, where valuation is cheap.
Whereas, quantitative analyst says, buy the right price and stock will take care for itself, In qualitative side you required High Probability insight, you have to know the business very well, or Buffett might think about the “Competitive advantage of the Business” but in quantitative side you have to consider the figure only, you can find such companies in across the market cap, you will make money where the stock price affected by temporary reasons, which may be of any kind, company related, economy or sector related, you have to watch for the right spot, and hit the ball.
You as an investor can make money by both the approaches, no doubt about that, or you can make a mixture of both the approaches.
Warren Buffett find himself primary in quantitative approach, but as years gone by till 1966 the bargain available is vanished, so Buffett has ultimately move to new approach called qualitative approach.
The beauty is you can make Big Money in qualitative approach but if you want Sure money you can have quantitative approach, if you are even smart you can mix both the approaches, qualitative and quantitative factors, find small cap companies, with strong qualitative factors, available at reasonable valuation.
In India, I find one guy who mix both the approach, he called it as “Peaceful Investing” the name of the guy is Dr. Vijay Malik you can find his work on (www.drvijaymalik.com) His investing approach is incredible, simple and required very hard work… As Howard Marks write in his memo “Its not easy”
“In 2011, as I was putting the finishing touches on my book The Most Important Thing” I was fortunate to have one of my occasional launches with Charlie Munger, As it ended and I got up to go, he said, something about Investing and I keep going back to: “Its not supposed to be easy. Anyone who finds it easy is stupid”
(Disclaimer: All figures and data used from Buffett Partnership Letter 1967, I am not genius or clever to understand all things, I may be wrong in interpreting the data and letter, take your decision on your own)
To Your Success with Lot of Love!
Harish S Kawalkar
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