Back to top

Image: Shutterstock

This Book Changed Warren Buffett's Life

Read MoreHide Full Article

  • (1:00) - Breaking Down The 2022 Berkshire Hathaway Shareholder Meeting
  • (12:15) - The Book That Changed Warren Buffets Life: Buying Below Fair Value
  • (22:35) - Creating A Margin of Safety In Your Portfolio
  • (32:45) - Episode Roundup: CVX, OXY, ATVI, ANDE, KBH, NVTA, SHOP


Welcome to Episode #280 of the Value Investor Podcast.

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

On Apr 30, 2022, Berkshire Hathaway held its annual meeting in Omaha. It was the first “live” meeting in three years. It was attended by both Warren Buffett, age 91 and Charlie Munger, age 98.

Buffett disclosed that Berkshire had bought over $20 billion worth of oil giant Chevron (CVX - Free Report) in the first quarter.

Berkshire had already owned some shares, but this was a big buy in Chevron. Chevron is now the fourth largest holding in the portfolio after Apple, Bank of America and American Express.

Chevron is cheap, with a forward P/E of just 9.6.

The Book that Changed Buffett’s Life

During the 5-hour question and answer period with shareholders, Buffett shared the background about how he became a value investor.

He started buying stocks at 11 and as a teenager was mostly a trader, not an investor. He played the chart.

But in 1950, at age 19, he read Benjamin Graham’s 1949 book “The Intelligent Investor” and said it changed his life. He realized he had been doing it all wrong. He specifically cited Chapters 8 and 20 as having the most influence on him.

Chapter 8: The Investor and Market Fluctuations

Ben Graham talks about the difference between “timing” the stock market and “pricing.” In “timing” you are anticipating a certain action in the stock market, like a rally or a sell-off.

In “pricing” you buy stocks when they are quoted below fair value and sell them when above fair value. You aren’t trying to “time” it.

1.       The Andersons (ANDE - Free Report)

The Andersons is a current example of buying through “pricing.” The Andersons recently missed on earnings in Q1 due to a loss in its commodities trading group. Shares plunged over 30%.

But The Andersons is now trading at 1x book value when competitors trade for 2x.

Is The Andersons a mispriced stock?

2.       KB Home (KBH - Free Report)

KB Home, one of the large home builders, has seen its shares fall over 25% year-to-date on fears about rising mortgage rates slowing the housing market.

KB Home is so cheap it’s now trading under book value.

Is Wall Street mispricing KB Home too?

3.       Shopify (SHOP - Free Report)

Shopify was a big pandemic winner but shares have plunged in 2022 and are down 67%.

Yet shares are still expensive on a P/E basis with a forward P/E of 152. It also has a high price-to-book ratio of 5.

Is Shopify a “timing” trade or a “pricing” one?

Chapter 20: Margin of Safety as the Central Concept of Investment

Ben Graham describes the margin of safety concept in Chapter 20 as lying in the expected earnings power being considerably above the going rate for bonds.

Bond yields were rising in the 1970s. In a 1972 speech, Graham discussed the possibility of a negative margin of safety as bond yields rose. No stocks may have a margin of safety under those conditions.

Are we going to enter into a period similar to the 1970s?

4.       Invitae (NVTA - Free Report)

Invitae shares have had a devastating 1-year drop falling 82% over that time period. Shares went from nearly $60 in 2021 to under $6 in 2022.

But Invitae has negative earnings. It’s expected to lose $2.98 in 2022.

Has the risk been taken out of Invitae after such a large stock sell-off or does it still have a negative margin of safety?

What Else do you Need to Know About the Intelligent Investor and Value Investing?  

Tune into this week’s podcast to find out.