Global Value Investing

HOME     INVEST   |   VALUE   |   SAFETY   |   FADS   |   NEW   |   FAQ


A multifaceted approach to value investing with stock valuation based on intrinsic value estimated from cash returns, appraised value of assets, and other facets of value.




Intelligence, knowledge, and experience combine to form judgment and common sense. Regardless of a person's intelligence, he or she can stay within his or her "sphere of competence" where he or she has specialized knowledge and thereby acquires continuing expertise. The concept of a sphere of competence was presented by Philip A. Fisher in Common Stocks and Uncommon Profits (pages 235 and 203-204). See the citation in Special Books.

Unlike the fantasy world of Lake Woebegone, not all investors are above average in their performance year after year. Over time and across all investments, the intelligent investor is more likely to outperform the unintelligent investor, and the more intelligent investor is more likely to outperform the less intelligent investor. Benjamin Graham's best-selling book, entitled The Intelligent Investor, emphasizes the dominant role of intelligence. See the citation in Special Books.

In a speech in Boston in 1997, Warren Buffett discussed humility and integrity. Buffett said that he looks for three desirable qualities when considering an individual for a key position: character, intelligence and energy. He warned that in the absence of outstanding character, the other two qualities may become liabilities. Buffett also discussed his investment philosophy. He considered his worst investment failures as errors of omission rather than commission: "The things I could have done and didn't do have cost us billions of dollars," he said. He recalled passing up opportunities in 1991 to invest in Microsoft. "But I don't mind," he said, "because those things [high technology companies] are not within my circle of competence. What I do mind is not acting on something that is within my circle of competence." As the Chairman of Berkshire Hathaway, he wrote in his letter to the stockholders in one of his annual reports: "Unlike the Lord, the market does not forgive those who know not what they do." He is also attributed with saying "Don't confuse brains with a bull market", which brings to mind the Wall Street saying "All ships rise on an incoming tide." See the citation in Special Books. It is not insignificant that Warren Buffet has special talents for his chosen profession: five-sigma measured IQ, photographic memory, and intense almost monomaniacal interest in investing.

One of the best ways for an investor to insure that he knows what he or she is doing, beyond investigating before investing, is to narrow the focus of investigations to those companies, industries, and sectors in his or her sphere of competence and stay with what he or she knows about and is interested in. Each investor will have a different sphere of competence containing different kinds of common stocks as candidates for investigation. In addition, investors will differ in the size of their sphere of competence.

As John Burr Williams wrote in The Theory of Investment Value on page 36: "No one man can hope to be an expert in everything, and if he ventures to speculate outside his own special field he takes the chance of finding that he has bet not with but against experts, for which impudence he must pay dearly." See the citation and description in Special Books.

John Maynard Keynes, The Collected Writings, pages 81-83, wrote: "I am quite incapable of having adequate knowledge of more than a very limited range of investments. Time and opportunity do not allow more. Therefore, as the investible sums increase, the size of the unit must increase. I am in favour of having as large a unit as market conditions will allow and, apart from a small group of securities, this generally means a smaller unit than would be made necessary by the size of the investible fund. ... My objection is that I have no information on which to reach a good judgment, and the risks are clearly enormous. To suppose that safety-first consists in having a small gamble in a large number of different directions of the above kind, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy." See the citation in General Books.

The concept of intelligence is ambiguous and socially defined. One definition is that intelligence is what is measured by age-scale methods (IQ testing) or correlational methods (factor analysis), both of which are circular mathematical abstractions. Tests of supposed general intelligence such as the Stanford-Binet Intelligence Scale and the Wechsler Intelligence Scale for Adults do not measure creativity, persistence, sense of humor, leadership, or other qualities that may contribute to success and happiness.

Spearman’s g, as measured by IQ tests, is merely a mathematical abstraction and an artifact of arbitrary statistical methodology. It has major political implications when reified as a single real factor that is innate or genetic, general, cognitive ability. IQ, an acronym that stands for Intelligence Quotient, is mental age divided by chronological age and multiplied by 100 to eliminate the decimal point. IQ and other test measures of intellectual ability can be compared by using standardized scores, z-scores, measured in units of standard deviation called sigma. IQ is standardized at a mean of 100 and a standard deviation of 15 or 16.

Most IQ tests do not measure scores higher than five sigmas. The significance of intelligence testing and measurement is discussed in The Mismeasure of Man by Stephen Jay Gould, and intelligence is mentioned in The Extended Phenotype by Richard Dawkins (page 26). See the citations in General Books.

High intelligence in itself does not guarantee immunity from what may be called stupidity. Stupidity is a socially taboo topic of discussion and has two different meanings. In the more common meaning, stupidity is low intelligence and may be indicated by a low measured IQ. In its other meaning, stupidity is not the opposite of intelligence but rather a complementary human attribute. The phenomenon of stupidity is analyzed in two books entitled Understanding Stupidity and The Story of Stupidity, both by James F. Welles. He presents stupidity as a schematically generated, self-deceptive breakdown of the feedback mechanism between behavior and the environment. See the citation in Special Books. A similar book about behavioral finance is Why Smart People Make Big Mistakes -- And How to Correct Them by Gary Belsky and Thomas Gilovich. See the citation in General Books.

There is a difference between credentialism and meritocracy, between certificates and education, between flattering self-esteem and rewarding achievement as discussed in. The Culture of Narcissism by Christopher Lasch. See the citation in General Books. Academic degrees may confer some kind of status, but they do not necessarily guarantee ability. Persons with advanced degrees from even the most prestigious elite schools are commonly indoctrinated, generally "socialized" into the unique value system of academia, and often trained for a job but not necessarily educated. Similarly, dogs and ponies can be trained for a task or a trick and even may be pedigreed, but they cannot be said to be educated.

Copyright 1996-2003. All rights reserved.