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good things so joel you you mentioned buying things for a lot less than they're worth and that that um provides the margin of safety would you say that those are the core uh elements in value investing and and do you want to enhance that definition uh any or is that enough um well one other question you mentioned that you didn't think it would be a great idea for your in-laws to try to find the next picasso would you analogize that to growth investing um sometimes i mean uh my definition of value investing is figure out what it's worth pay a lot less it has nothing to do with low price book or low price sales and so that's how a lot of people like russell or morningstar would classify value investors and so they probably wouldn't classify me as a value investor or a growth investor they kind of don't know what to do with us and you know as buffett has said you know growth and value or are tied at the hip i mean uh part of what makes value is is by investing in a business that can grow over time so they're they're not two different uh way they're classified by let's say morningstar russell maybe there's much lower growth in value and and much higher growth than growth and that they they make it that way but i i'm looking for good businesses that are cheap you know ben graham said figure out what it's worth pay a lot less leave a large margin of safety uh between those two big space between those two things warren buffett is best student made one little twist that made him one of the richest people in the world buffett simply said if i can buy a good business cheap even better part of good is a business that can grow over time and so um i slowly gravitated not not fast enough i you know certainly in my first decade of investing gravitated more towards the way that warren buffett invests he's looking for good and cheap businesses and growth is is part of uh sometimes being good but at the beginning buffett wasn't so entranced with good businesses he was famous for starting off with the cigar butt approach where he wasn't looking for quality he was just looking for cheapness but then he too made a transition yeah i mean my master's thesis at wharton or it turned into that uh with uh my friend rich pizzina and bruce newberg was a paper we wrote that eventually got published in the journal portfolio management about buying cigar butts you know they were called net nets buying stocks selling below their liquidation value uh and showed that just buying if you bought it cheap enough you could make nice money and and that's sort of the way warren buffett started but when you think about why we move to towards quality let's say you find a stock that's worth ten dollars and it's selling at six it's pretty cheap uh but if you're not controlling the business uh and it's not in a good business your margin of safety may erode over time meaning that ten dollars could turn to eight if you're not really controlling those assets and what you're really looking for businesses or what looks better to me anyway or businesses where that 10 might be growing to 11 or 12 increasing your margin of safety so uh i might take a lower margin of safety if i thought that was growing uh but there's there's more buying things cheap works i mean cheap alone works i have nothing against it it's just that you have to get out of it so buffett who runs a hundred billion dollars or some number like that it's not easy to go spend five billion and then go sell it to some other guy who's gonna you know pay you more than the 5 billion it's too big so when he was and he said as recently as uh you know around year 2000 he said well if you give me a million dollars i can make 50 a year on that there's plenty of opportunities your opportunity set shrinks as the businesses become larger if you can invest in anything you know if you don't have a lot of money you can invest in thousands and thousands of businesses buffett is now looking at the top 300 businesses in size because uh the smaller ones aren't they won't move the needle so there's a lot you can do in special situations one thing a lot of my students asked me uh you know when it happened it happens every year now probably for the last five or six years and they and uh the question they asked me at some point in the semester is that you know when you were younger because you're really old they leave that part out but you're really old and when you were younger things were easier it goes unsaid well i just said it but anyway uh uh things were easier there was less competition there were less hedge funds there were less computers there were less uh smart guys going into this business i mean when i got into it i was telling howard before market hadn't gone up in 13 years by the time i got to wall street so it wasn't a place that really was attracting lots of people uh so they said it used to be easier for you but you know it must be harder for you know hey you stupidly wrote a book about this and there's a lot of uh people doing this now not just because of that obviously um you know it's harder for us you know you you got the easy stuff and so my response is this people who are very good especially in a special situation i have two responses one is uh people who are good at special situation investing really looking off the beaten path uh for liquidations or recapitalizations or spin-offs or any of those things many of them are liquidity constrained you know warren buffett started making a lot of money doing those things but he grew too big and so i asked i tell them that listen you know what happens to people who get very good at analyzing businesses in this area uh what happens to them is they make a lot of money and they get too big to stay in this area so there's always a new group of people who can come in and look at some of those smaller situations because the guys who are really good at it get too big to to really take advantage of some of the smaller or more obscure situations and so there's always room for new people to come in that area and then on a larger scale uh you know because people still teach efficient markets and they'll say hey you know active investing doesn't work and even warren buffett's saying go buy some etfs or you know indexes and and everything else and what i'll say is uh that for most people that's true because they don't know how to value businesses but i will give you a counter and this is what i tell my students and most of my students are around 27ish or something like that so i said i tell them all let's go back to when you were roughly 10 years old where you might start noticing some of this thing and let's go look at the most followed market in the world and that would be the united states and let's go look at the most followed stocks in the most followed world in the most followed market in the world and that would be the s p 500 stocks to a large extent let's take a look at what happened since you were 10 years old take a look at the s p 500 from 1996 to 2000 it doubled from 2000 to 2002 it halved from 2002 to 2007 it doubled from 2007 to 2009 it halved from 2009 till today it's basically tripled that's my way of saying people are still crazy and that's really unfair thing to say because this s p 500 is an average of 500 stocks there's huge dispersion going on within that average between stocks that are in favor that people love emotionally and stocks that people hate so it's really much worse than what i just described there's huge dichotomy between things people like and people don't things that are in favor out of favor within that that is all this noise is going on within that average that averages smoothing things so if you believe what ben graham said is you know here's fair value and here's what the market prices are it's like a wave around fair value and if you have a disciplined way to value companies and buy more than your fair share when they're down here and sell some maybe if you're shorting and when and you're very disciplined i mean uh i make two guarantees to my students first day of class first guarantee is this if they do good valuation work i guarantee them the market will agree with them i just don't tell them when could be a couple weeks could be two or three years uh but i tell them the market will agree with them and the and the corollary to that is this and it's very powerful i tell them in 90 of the cases for an individual stock two or three years is enough time for the market to recognize the value they seek if they've done good work when you put together a group of companies that actually on average is actually happening quite a bit faster so um you know both those are very powerful just says good work will be rewarded so i don't think the reason people don't beat the market is because the market is efficient or even close to efficient or not emotional it's very emotional or that it can't be done there's all kinds of institutional and agency reasons and tons of other reasons why they don't do it but because prices are efficient if you just pick up the paper or observe what's going on or listen to what i told my students since you know when they were 10 years old it's pretty clear that people are still crazy and there's opportunity out there
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