In 1968, Tom Knapp and Ed Anderson, also a Graham disciple, along with one or two other fellows of similar persuasion, formed Tweedy, Browne Partners, and their investment results appear in Table 2.  Tweedy, Browne built that record with very wide diversification.  They occasionally bought control of businesses, but the record of the passive investments is equal to the record of the control investments.



            Table 3 describes the third member of the group who formed Buffett Partnership in 1957.  The best thing he did was to quit in 1969.  Since then, in a sense, Berkshire Hathaway has been a continuation of the partnership in some respects.  There is no single index I can give you that I would feel would be a fair test of investment management at Berkshire.  But I think that any way you figure it, it has been satisfactory.



            Table 4 shows the record of the Sequoia Fund, which is managed by a man whom I met in 1951 in Ben Graham's class, Bill Ruane.  After getting out of Harvard Business School, he went to Wall Street.  Then he realized that he needed to get a real business education so he came up to take Ben's course at Columbia, where we met in early 1951.  Bill's record from 1951 to 1970, working with relatively small sums, was far better than average.  When I wound up Buffett Partnership I asked Bill if he would set up a fund to handle all our partners, so he set up the Sequoia Fund.  He set it up at a terrible time, just when I was quitting.  He went right into the two-tier market and all the difficulties that made for comparative performance for value-oriented investors.  I am happy to say that my partners, to an amazing degree, not only stayed with him but added money, with the happy result shown here.



            There's no hindsight involved here.  Bill was the only person I recommended to my partners, and I said at the time that if he achieved a four-point-per-annum advantage over the Standard & Poor's, that would be solid performance.  Bill has achieved well over that, working with progressively larger sums of money.  That makes things much more difficult.  Size is the anchor of performance.  There is no question about it.  It doesn't mean you can't do better than average when you get larger, but the margin shrinks.  And if you ever get so you're managing two trillion dollars, and that happens to be the amount of the total equity valuation in the economy, don't think that you'll do better than average!



            I should add that in the records we've looked at so far, throughout this whole period there was practically no duplication in these portfolios.  These are men who select securities based on discrepancies between price and value, but they make their selections very differently.  Walter's largest holdings have been such stalwarts as Hudson Pulp & Paper and Jeddo Highland Coal and New York Trap Rock Company and all those other names that come instantly to mind to even a casual reader of the business pages.  Tweedy Browne's selections have sunk even well below that level in terms of name recognition.  On the other hand, Bill has worked with big companies.  The overlap among these portfolios has been very, very low.  These records do not reflect one guy calling the flip and fifty people yelling out the same thing after him.



            Table 5 is the record of a friend of mine who is a Harvard Law graduate, who set up a major law firm.  I ran into him in about 1960 and told him that law was fine as a hobby but he could do better.  He set up a partnership quite the opposite of Walter's.  His portfolio was concentrated in very few securities and therefore his record was much more volatile but it was based on the same discount-from-value approach.  He was willing to accept greater peaks and valleys of performance, and he happens to be a fellow whose whole psyche goes toward concentration, with the results shown.  Incidentally, this record belongs to Charlie Munger, my partner for a long time in the operation of Berkshire Hathaway.  When he ran his partnership, however, his portfolio holdings were almost completely different from mine and the other fellows mentioned earlier.



            Table 6 is the record of a fellow who was a pal of Charlie Munger's -- another non-business school type -- who was a math major at USC.  He went to work for IBM after graduation and was an IBM salesman for a while.  After I got to Charlie, Charlie got to him.  This happens to be the record of Rick Guerin. Rick, from 1965 to 1983, against a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which probably because he lacks a business school education, he regards as statistically significant.



            One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately to people or it doesn't take at all.  It's like an inoculation.  If it doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference.  They just don't seem able to grasp the concept, simple as it is.  A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he's applying it five minutes later.  I've never seen anyone who became a gradual convert over a ten-year period to this approach.  It doesn't seem to be a matter of IQ or academic training.  It's instant recognition, or it is nothing.



            Table 7 is the record of Stan Perlmeter.  Stan was a liberal arts major at the University of Michigan who was a partner in the advertising agency of Bozell & Jacobs.  We happened to be in the same building in Omaha.  In 1965 he figured out I had a better business than he did, so he left advertising.  Again, it took five minutes for Stan to embrace the value approach.



            Perlmeter does not own what Walter Schloss owns.  He does not own what Bill Ruane owns.  These are records made independently.  But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying.  That's the only thing he's thinking about.  He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything.  He's simply asking: what is the business worth?



            Table 8 and Table 9 are the records of two pension funds I've been involved in.  They are not selected from dozens of pension funds with which I have had involvement; they are the only two I have influenced.  In both cases I have steered them toward value-oriented managers.  Very, very few pension funds are managed from a value standpoint.  Table 8 is the Washington Post Company's Pension Fund.  It was with a large bank some years ago, and I suggested that they would do well to select managers who had a value orientation.



            As you can see, overall they have been in the top percentile ever since they made the change.  The Post told the managers to keep at least 25 percent of these funds in bonds, which would not have been necessarily the choice of these managers.  So I've included the bond performance simply to illustrate that this group has no particular expertise about bonds.  They wouldn't have said they did.  Even with this drag of 25 percent of their fund in an area that was not their game, they were in the top percentile of fund management.  The Washington Post experience does not cover a terribly long period but it does represent many investment decisions by three managers who were not identified retroactively.



            Table 9 is the record of the FMC Corporation fund.  I don't manage a dime of it myself but I did, in 1974, influence their decision to select value-oriented managers.  Prior to that time they had selected managers much the same way as most larger companies.  They now rank number one in the Becker survey of pension funds for their size over the period of time subsequent to this "conversion" to the value approach.  Last year they had eight equity managers of any duration beyond a year.  Seven of them had a cumulative record better than the S&P.  The net difference now between a median performance and the actual performance of the FMC fund over this period is $243 million.  FMC attributes this to the mindset given to them about the selection of managers.  Those managers are not the managers I would necessarily select but they have the common denominators of selecting securities based on value.



            So these are nine records of "coin-flippers" from Graham-and-Doddsville.  I haven't selected them with hindsight from among thousands.  It's not like I am reciting to you the names of a bunch of lottery winners -- people I had never heard of before they won the lottery.  I selected these men years ago based upon their framework for investment decision-making.  I knew what they had been taught and additionally I had some personal knowledge of their intellect, character, and temperament.  It's very important to understand that this group has assumed far less risk than average; note their record in years when the general market was weak.  While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.  A few of them sometimes buy whole businesses.  Far more often they simply buy small pieces of businesses.  Their attitude, whether buying all or a tiny piece of a business, is the same.  Some of them hold portfolios with dozens of stocks; others concentrate on a handful.  But all exploit the difference between the market price of a business and its intrinsic value.



            I'm  convinced that there is much inefficiency in the market.  These Graham-and-Doddsville investors have successfully exploited gaps between price and value.  When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally.  In fact, market prices are frequently nonsensical.



            I would like to say one important thing about risk and reward.  Sometimes risk and reward are correlated in a positive fashion.  If someone were to say to me, "I have here a six-shooter and I have slipped one cartridge into it.  Why don't you just spin it and pull it once?  If you survive, I will give you $1 million."  I would decline -- perhaps stating that $1 million is not enough.  Then he might offer me $5 million to pull the trigger twice -- now that would be a positive correlation between risk and reward!



            The exact opposite is true with value investing.  If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case.  The greater the potential for reward in the value portfolio, the less risk there is.



            One quick example: The Washington Post Company in 1973 was selling for $80 million in the market.  At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more.  The company owned the Post, Newsweek, plus several television stations in major markets.  Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.



            Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater.  And to people that think beta measures risk, the cheaper price would have made it look riskier.  This is truly Alice in Wonderland.  I have never been able to figure out why it's riskier to buy $400 million worth of properties for $40 million than $80 million.  And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles of $8 million each.  Since you don't have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that's not a difficult job.



            You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses.  But you do not cut it close.  That is what Ben Graham meant by having a margin of safety.  You don't try and buy businesses worth $83 million for $80 million.  You leave yourself an enormous margin.  When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it.  And that same principle works in investing.

            In conclusion, some of the more commercially minded among you may wonder why I am writing this article.  Adding many converts to the value approach will perforce narrow the spreads between price and value.  I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it.  There seems to be some perverse human characteristic that likes to make easy things difficult.  The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years.  It's likely to continue that way.  Ships will sail around the world but the Flat Earth Society will flourish.  There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.