The Business of Value Investing: Six Essential Elements to Buying Companies Like Warren Buffett

Chapter 4. Establish a Sound Investment Philosophy: THE FIRST ELEMENT

Value investing is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.

—Seth Klarman

The vast majority of information about any particular investment is merely noise. Successful businesses usually are identified by a handful of meaningful variables or data points; everything else is secondary to the success or failure of the business. Warren Buffett has often remarked that he never uses a spreadsheet or calculator when making investment decisions. It is also true that Buffett has a gifted mind for numbers and remembering data. The point is not against the use of spreadsheets (or a calculator). Spreadsheets and calculators are tools that can add value to any analysis. The point is that elaborate spreadsheets with hundreds of formulas and ratios have so many built-in assumptions that most likely offer no additional value to the investment analysis. After the first several major pieces of data, any additional variables offer very little significant value to the analysis.

Consider Buffett's 1973 investment in the Washington Post Company. An often cited example by value investors, the investment illustrates the elegance of a straightforward, businesslike approach to investing. In a 1984 speech at Columbia University, Buffett discussed his attraction to the company: "The Washington ...