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This is a common misunderstanding. Buffett Partnership Ltd., Buffett's initial hedge fund, was very much was guided by the cigar butt style investment principles of Graham.

When Buffett bought Berkshire Hathaway a few years after closing the partnership, his investment philosophy had changed. Your best bet to understand his investing is to simply read his letters.

He may come across as a bit folksy or country bumpkin, but he's fairly clear in his methodology.

Here are some links you may find helpful: http://www.rbcpa.com/WEB_letters/WEB_Letters_pre_berkshire.h...

http://www.berkshirehathaway.com/letters/letters.html

Enjoy.

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I mean, much of Graham's "investment philosophy" has been thoroughly invalidated by the Modigliani-Miller theorem published in the 1960s. But like Deepak Chopra, he's still around!

I'm not sure how a theorem is even supposed to invalidate a philosophy. Invalidation is normally done by experimental evidence not making up a theorem.

Aside from that modigliani-miller's theorem "that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed." has basically nothing to do with Graham's idea that in the real world with bankruptcy costs, agency costs, asymmetric information, and an inefficient market you should seek a margin of safety in investment. Graham's ideas have much empirical evidence and are completely unlike Chopras nonsense. See The Superinvestors of Graham-and-Doddsville for details, written by Warren Buffett who has quite a good record in this stuff https://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-a...

http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....

How well do the assumptions behindd modigliani-miller match what happens in the real world?

I think 'invalidated' is a little strong. Do be aware that within economic models, the map is not the territory.

Well, it assumes no taxes (so it would only apply to Apple et al.), and also symmetric information and an efficient market (which are both debatable).

The assumptions are extremely strong, and the theory is not robust to changes in those assumptions. Agree?

There is a reasonable case that 'value' (low beta) stocks exhibit excess returns in equity markets. See Fama & French

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.459...

M&M says there shouldn't be 1st order implications for a firm's dividend payout ratio on its stock price (there are potential effects caused by taxes, agency and signalling that they assume away for simplicity).

However, other popular value metrics such as low price to earnings, market cap to book value, historic beta or past/future earnings growth are not affected by M&M. The efficient market hypothesis is an assumption rather than an implication of the theorem and there is a good empirical case for the combination of value investing and leverage.

Thank you, now this thread is going somewhere. Popcorn time

What's your take on it?

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