Selecting common stocks for investment by utilising the Graham-Buffett contrarian focus value investment approach

De Witt, Sarel Jacobus (2007-03)

Theses (MBA)--Stellenbosch University, 2007.

Thesis

ENGLISH ABSTRACT: This study project concentrated on the investment approach of one individual that consistently achieved above average investment returns over a period of fifty years and became the second richest person in America primarily through the use of his unique investment skill and philosophy. He managed to increase a $100 personal investment in 1956 into a personal net worth of $46 billion in 2006. This person is Warren Buffett, and the primary goal of the study project was to integrate and summarise the main features of his investment approach and philosophy as described in the many books, articles and essays written about him . The study project further strove to use findings from contemporary scientific works to support and validate the scientific soundness of his investment approach and principles. Finally, the investment approach and techniques described in the study project were used to systematically analyse and select a common stock for future investment. In the author's opinion, the study project was successful at identifying and highlighting the essential principles of Warren Buffett's investment approach . The investment framework presented in Chapter 3 could serve as a guideline for an investor to apply Buffett's investment approach in a systematic manner. The framework was successfully utilized by the author to analyse and identify a so-called "Buffett company" that was trading at a significant discount to its underlying value. A hypothetical purchase decision by an investor in this company's common stock would have yielded a significant return on investment over the long term. An investor that had knowledge of this investment framework at the time could have "spotted" this opportunity and capitalised on it. The above conclusion assumed that this hypothetical investor had been operating within the same "circle of competence" as the author. What might seem "simple" or "logical" to one investor, might seem completely complex or irrational to another. In the author's opinion, Buffett's unique "circle of competence" is the missing "ingredient" to his success formula. A person's "circle of competence" evolves as a result of the unique blending of that person's knowledge, experience, personality, attitude, intelligence and external influences. It is thus unique to an individual and almost impossible to duplicate by others. Buffett's "circle of competence" could be viewed as his durable competitive advantage that gave him the insight to invest successfully. To lend credibility to the merits of Buffett's approach, the author presented scientific literature that supported Buffett's investment principles. Many of Buffett's principles were related to concepts that were named differently, but essentially had the same meaning. It appeared that Buffett's investment success stemmed from integrating and utilizing these concepts in an effective and coherent way, consistent with his "circle of competence" principle.

AFRIKAANSE OPSOMMING: Hierdie studieprojek fokus op die beleggingsbenadering van 'n individu wat konstant oor 'n tydperk van vyftig jaar bogemiddelde beleggingsopbrengste behaal het. Hy het deur sy unieke beleggingsvermoens en filosofie die tweede rykste man in Amerika geword. Hy het dit reggekry om 'n $100 persoonlike belegging in 1956 te vermeerder na 'n persoonlike nettobatewaarde van $46 biljoen in 2006. Sy naam is Warren Buffett en die primere doel van hierdie studie is om die belangrikste kenmerke van sy beleggingsbenadering en filosofie, soos beskryf in vele boeke, artikels en verhandelings te integreer en op te som. Hierdie studie streef ook om van kontemporere wetenskaplike bevindings gebruik te maak om te bewys en te ondersteun dat sy beleggingsbenadering wetenskaplik gegrond is. Daarna is hierdie beleggingsbenadering en tegnieke prakties gebruik in die stelselmatige analise en seleksie van 'n gewone aandeel vir 'n moontlike toekomstige belegging. Volgens die skrywer se mening slaag hierdie studie daarin om die belangrikste beginsels van Buffett se beleggingsbenadering te identifiseer en uit te lig. Die beleggingsraamwerk in Hoofstuk 3 kan dien as 'n riglyn vir 'n belegger om Buffett se beleggingsbeginsels stelselmatig toe te pas. Hierdie beleggingsraamwerk is suksesvol deur die skrywer toegepas om 'n sogenaamde "Buffett maatskappy", wat verhandel het teen 'n aansienlike afslag tot sy onderliggende waarde, te analiseer en te identifiseer. 'n Hipotetiese aankoopbesluit deur 'n belegger van hierdie maatskappy se gewone aandele sou oor die lang termyn 'n beduidende opbrengs gelewer het. 'n Belegger wat kennis gedra het van hierdie beleggingsraamwerk kon die beleggingsmoontlikheid ge"identifiseer het en so daarop gekapitaliseer het. Die bogenoemde gevolgtrekking veronderstel dat die hipotetiese belegger binne dieselfde "kring van bevoegdheid" as die skrywer funksioneer. Wat logies en eenvoudig vir een belegger voorkom, Iyk dalk totaal kompleks en irrasioneel vir 'n ander. Na die skrywer se mening is Buffett se unieke insigte en vermoens (kring van bevoegdheid) die ontbrekende bestanddeel tot sy suksesformule. 'n Persoon se "kring van bevoegdheid" ontwikkel as gevolg van 'n unieke vermenging van daardie persoon se kennis, ervarings, persoonlikheid/ houding, intelligensievlak en eksterne invloede. Dit is dus uniek tot elke individu en bykans onmoontlik om deur 'n ander te dupliseer. Buffett se "kring van bevoegdheid" kan dus gesien word as sy volhoubare kompeterende voordeel wat aan hom die insig verskaf om suksesvol te belê. Om geloofwaardigheid aan Buffett se benadering te verleen, het die skrywer wetenskaplike literatuur verskaf wat sy beleggingsbeginsels ondersteun. Baie van Buffett se beginsels stem ooreen met reeds bestaande konsepte, slegs met ander benamings. Dit wil voorkom of Buffett se beleggingssukses uitvloei vanaf sy integrasie en gebruik van hierdie konsepte in 'n doelmatige en samehangende manier, wat verenigbaar met sy "kring van bevoegdheid" beginsel is.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/85262
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