Here is an interview with my friend Bud Labitan – a physician, author, and value investor. Bud has published 2 books on value investing and is a well known figure in the value investing community. In fact, if you go to Omaha this year – I’m certain you will run into him.
Miguel: Bud thank you for joining us for this interview. We are here to talk about your new book – Price To Value: Intelligent Speculation Using The Decision Filters of Munger and Buffett. This book seems to focus on decision making and particularly decision framing.
Bud Labitan: Thanks Miguel. You are correct. I applied the decision framing aspects of my previous book to the topic of “Intelligent Speculation.”
Miguel: Why? What motivated you to do this?
Bud Labitan: A few years ago I read the ten lectures that Ben Graham gave his students in 1946. It is up on the Wiley website. And, it was a good review into Graham’s teaching style. Many of your readers will know that Ben Graham was the author of The Intelligent Investor and Security Analysis, and that he was also Warren Buffett’s teacher at Columbia University. It was that tenth lecture that grabbed my attention.
Miguel: Interesting. What was it about the tenth lecture that moved you?
Bud Labitan: In that tenth and last lecture, Graham is basically saying goodbye to his students. He says “The final talk is going to be something of departure, for it will address itself to speculation — speculation in relation to security analysis.”
Miguel: I see. Most people do not think of Benjamin Graham as a speculator. What did you learn? Give us some insights.
Bud Labitan: In that lecture, Ben Graham repeated his definition for “speculation.” The distinction between investment and speculation is this: “An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” Then, he goes on: ” The second point is that there is a real difference between intelligent and unintelligent speculation, and that the methods of security analysis may often be of value in distinguishing between the two kinds of speculation.”
Miguel: So, are you saying that your book is about distinguishing between intelligent and unintelligent speculation?
Bud Labitan: Sort of. My book is about applying the “decision framing aspects” of the Buffett and Munger innovation to the area of intelligent versus unintelligent speculation.
Miguel: Interestingly creative. How did you go about your research?
Bud Labitan: Well, a lot of the research was already done for my first book “The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance.”
So the challenge was to take what Graham had said about intelligent versus unintelligent speculation, and integrate into the modern Buffett + Munger decision filter framework. And, also look at the decision filter grouping of Catalyst/Conditions.
Miguel: I read your book and I liked the way you reviewed Buffett and Munger’s decision making process. I believe that you reiterated different ways they repeated their four step seeking process. Something like. a search for: “1. Understandable first class businesses, with 2. enduring competitive advantages, accompanied by 3. first-class management, available at 4. a bargain price.”
Bud Labitan: Yes. You would be amazed at how that has been repeated over the years in several ways. For example, sometimes Buffett will say to students:
“I want to find a business that I understand with good economics.” Well that is step #1. Then he may something like: “with sustainable competitive advantages” instead of using the word enduring. Next, he may say “able and trustworthy managers” instead of “first-class managers.” Finally, it always ends up with a bargain price relative to the business’ intrinsic value.
Miguel: How did you apply that to intelligent versus unintelligent speculation?
Bud Labitan: Well, some of my relatives and friends are in the home building industry. They are very skilled at framing houses. And, to watch an experienced crew build a house is fascinating to me. They have built so many that they know how to do their jobs in a careful, efficient, and professional manner. The idea of good framing just stuck with me.
Since the decision filters of Munger and Buffett weigh the relevant facts necessary for business success, I wondered if the same process could be applied to framing an intelligent business speculation. Can the addition and subtraction of qualitative factors raise the odds for speculative success?
Miguel: Can they?
Bud Labitan: I think so. I think my book will show the reader that framing an intelligent versus unintelligent speculation in a 5 step decision model will help them make the decision to speculate or not to speculate.
In 1992, Takemura showed that the effects of traditional decision framing are likely to be lower when subjects are warned in advance that they will be required to justify their choices. Takemura also showed that the effects of framing are lessened when more time is allowed for making choices. So, my book urges readers to break down their decisions into sensible groupings.
Miguel: What do you think is the key takeaway from your book?
Bud Labitan: Imagine combining five decision groups of important factors together in order to make a better structured speculation. In both investing and speculation, the ideal strategy is to minimize irrelevant and distracting factors. Acquiring this ability can raise your attitude and thinking effectiveness.
Miguel: Can you summarize the steps for your decision framing model in this “Price To Value” book?
Bud Labitan: Sure, 1. Economic Understanding. 2. Short or long advantage or the “variant perception.” 3. People involved (individuals or herd behavior?) 4. Price/Value match or mismatch detected. And 5. Catalyst/Conditons for success or failure.
Miguel: I hear that you have some interesting cases in the book. Can you say
something about them?
Bud Labitan: Well, I don’t want to give too much away right now. However, I will say that “Price To Value” has some added cases or “items of interest” from Frank Betz, Paul Lountzis, James Altulcher, and Joe Koster. It also has a list of over 100 human biases. I try to reward my readers with added “easter eggs” in my books.
Miguel: Bud thanks again for joining us. I appreciate you taking the time to answer our questions. Do you have any final thoughts for our readers?
Bud Labitan: My pleasure Miguel. Thanks for having me. I will leave your readers with this quote from Ben Graham: “there is a real difference between intelligent and unintelligent speculation, and that the methods of security analysis may often be of value in distinguishing between the two kinds of speculation.
Miguel: If you enjoyed this interview, take a look at - Price To Value: Intelligent Speculation Using The Decision Filters of Munger and Buffett. The book is currently available in paperback, hardcover, and large print version from Lulu.com and soon on Amazon.com. His first book “The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance” is also available via Amazon.
This article was written by