Initially, we were Graham believers, and we achieved some success through this method. But over time, our investment eye became sharper.
Breaking Graham’s Limitations
We found that some stocks, even though their price is two or three times their book value, are still very cheap. This is because these companies possess unique market positions and hold the potential for sustained growth. Perhaps a specific company manager is exceptional, or the entire management system is outstanding. By breaking through Graham’s limitations and employing some quantitative methods—which might make Graham uneasy—to find undervalued stocks, we began focusing on higher-quality enterprises.
The Value of High-Quality Companies
It is worth noting that the hundreds of billions of dollars in assets of Berkshire Hathaway largely stem from these high-quality companies. The initial two or three hundred million dollars were acquired by searching everywhere, much like using a Geiger counter. But the vast majority of our wealth comes from investing in those great companies.
Seizing Opportunities Precisely
Rather than always pretending to know everything, it is better to seize a few opportunities that you are certain about. If you choose to do feasible things from the outset, instead of pursuing infeasible ones, your chances of success will greatly increase. Isn’t that obvious?
Investing in Corporate Quality Rather Than Management
Betting on the quality of the company is more prudent than betting on the quality of the management team. In other words, if a choice must be made, one should prioritize the company’s growth prospects over the manager’s intelligence.
The Impact of Taxation
Let’s discuss the impact of taxation. Suppose you make an investment over 30 years with an average annual compound return of 15%, and you ultimately pay 35% in income tax. In this scenario, your after-tax average annual compound return will drop to 13.3%.
The Impact of Tax Burden on Returns
Conversely, if you invest in the same project but pay 35% income tax every year after realizing the 15% return, your compound return rate will become 15% minus 35% of 15%, resulting in 9.75% annually (15% - 15% × 35% = 9.75%). The difference in returns between these two scenarios is more than 3.5%. For a 30-year investment, the profit generated by an extra 3.5% return each year will absolutely astound you. If you can hold the stocks of those great companies long-term, the savings from reduced income tax alone can generate massive wealth for you.