CaptainJJack

Buffett's Lessons: More Appropriate than Ever

While I've read a lot on Warren Buffet, my all time favorite book on the subject of investing is The Intelligent Investor by Benjamin Graham who, as most people know, was Buffet's teacher, and endorsed this book as "By far the best book on investing ever written".

I cannot tell you how important that book was to me during the crisis of last fall and this spring.

Graham developed the concept of intrinsic value, and he was also the first to point out how difficult it was to obtain. He said that its only real usefulness occurs when there is such a separtion between the market value and the intrinsic value that even allowing for enormous error in your estimate of intrinsic value, you still conclude that the market price is wrong.

He called this the margin of safety.

While I also like and use concepts like ROE and ROIC, I recognize that the market capitalization may be so much higher than the book value, they may have no meaning -- which is just another way of saying that even good companies, with good managements may be poor investments if the price is too high.