The Old Warren Buffett on Generals and Value Investing

Warren Buffett's investment style changed quite significantly. During his time running the partnership he used to invest in three categories.

1. Commons = Generally undervalued stocks where he would take a minory stake
2. Work Outs = Kind of arbirtrage strategy 
3. Control Situations = Taking a majority stake in the company; actively influencing business operations

During the Berkshire times, I don't think that "work outs" are being done anymore. He rather concentrates on "control situations" and in a lesser extent on "commons". 

Personally, most interesting is how he used to handle the "commons" section in the partnership. It is my bread and butter business and his investing approach was much closer to mine.

Everyone is well aware of his (more recent) remarks concerning great businesses, moat, buying a fantastic business at a reasonable price, etc. I call that the Fisher-Buffet. It is much closer to the philosophy of Philip Fisher than Benjamin Graham, e.g. qualitative issues concerning a stock vs. quantitative.

But this hasn't been always the case. Although always being aware of the importance of qualitative issues concerning a stock, he used to give more weight on quantiative issues (e.g. the Graham-Buffett) than on qualtiative factors at the beginning of his career (e.g. while running the partnership).

•  Generals – A category of generally undervalued stocks, determined primarily by quantitative standard, but with considerable attention also paid to the qualitative factor. ==> main qualification is a bargain price; that is, an overall valuation on the enterprise substantially below what careful analyisis indicated its value to a private owner to be. Again let me emphasize that while the quantitative comes first and is essential, the qualitative is important. We like good management – we like a decent industry – we like a certaine amount of “ferment” in previously dormant management or stockholder group. But we demand value.
   
• (BPL; 18.01.1964)

•  Generally undervalued securities (=Generals) ==>  no timetable as to when the undervaluation may correct itself; sometimes these work out very fast; many times they take years. Difficult at the time of purchase to know any compelling reason why they should appreciate in price. However, because of this lack of glamour or anything pending which might create immediate favourable market action, they are available at very cheap prices. A lot of value can be obtained for the price paid. ==> substantial excess of value ==> comfortable margin of safety in each transaction. Combining this individual margin of safety with a diversity of commitments creates a most attractive package of safety and appreciation potential

• The generals tend to behave market-wise very much in sympathy with the Dow. Just because something is cheap does not mean it is not going to go down. During abrupt downward movements in the market, this segment may very well go down percentage-wise just as much as the Dow.

• By buying assets at a bargain price, we don’t need to pull any rabbits out of a hat to get extremely good results. 

(BPL; 18.01.1963)