A recent article in Forbes outlines what Warren Buffett frequently cites as the central themes of his investing approach—which can be found in two of his favorite books: The Intelligent Investor, by Benjamin Graham, and General Theory by John Maynard Keynes.
The article breaks down the three themes as follows:
- Investment vs. Speculation: Graham’s book differentiates between investing, which consists of “buying stocks for less than they are fundamentally worth,” and speculation, which is “trying to predict the timing and nature of uncertain future events.” The problem with speculating, Graham writes, is that it requires forecasting, which is extremely difficult for the average person to do successfully. Instead, Graham focuses on companies that trade at a discount to their historic earnings and current assets.
- Margin of Safety: Buffett also highlights the importance of what Graham describes as a “cushion to tide you through adversity.” This, the article explains, circles back to the idea that forecasting is difficult, and “any company can hit hard times, nonetheless with a margin of safety you have an ability to weather these storms without necessarily losing money because you purchased at a discount to what the company is really worth.”
- Long-term Investing: The article cites Keynes’ book, in which the author “talks about the dangers of frequent trading and the benefit of thinking long-term in the markets,” adding that the author “argues that markets may perform better if the costs of trading are higher, so investors are forced to become more long-term in their thinking.” The core of Keynes’ message, the article notes, is that “long-term investors are likely to have more success, though a long-term investor must tolerate price swings caused by short-term investors.”