Warren Buffett and the Interpretation of Financial Statements

The Divergent Styles of Warren Buffett and His Mentor

In the 1950s, an economist and professional investor named Benjamin Graham served as a mentor to Warren Buffett, who went on to become one of the world’s wealthiest people. Graham pioneered the practice of value investing – that is, buying into companies with low stock prices. Buffett, Graham’s student at New York’s Columbia University, later worked as an analyst at Graham’s Wall Street investment firm.

When he started his own investment business, Buffett altered the Graham method of value investing in several ways. For one, Buffett ignores the Graham rule of selling stocks after they appreciate by 50%, because sometimes their prices will rise much more. Graham would buy a stock based primarily on its cost – the lower, the better. Buffett favors high-quality companies with predictable cash flows, so he is inclined to pay a “fair price” for their shares, not necessarily the lowest amount possible. Graham espoused the importance of holding a diversified portfolio of stocks, increasing the odds that moneymaking stocks would offset losers. Buffett prefers a portfolio concentrated on a few stocks that he regards as excellent...