Quality vs Statistical CheapnessCopy Anchor Link

Quality vs Statistical CheapnessCopy Anchor Link

Quality versus statistical cheapness is the fork in the value-investing road: buy a wonderful business at a fair price, or a mediocre business at a bargain price. The corpus's lineage runs from benjamin-graham's statistical cheapness, through warren-buffett's early cigar-butt practice of it, to the quality pivot that charlie-munger forced on him.

The pivot is documented in Buffett's own words. Munger's blueprint was simple: forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices. The 1972 purchase of sees-candy — high returns on modest tangible assets, durable pricing power — became the standing example of what quality buys. See moats.

Damodaran reframes the same divide as a taxonomy of value investing. The Graham-school passive screeners — those who "screen for stocks that have characteristics that you believe identify under valued stocks" — are the modern statistical-cheap camp, and he notes their defining tic: "Value investors may be the last believers in book value." Against them sit contrarian and activist investors who target the business, not just the multiple.

Munger's own accounting of the distinction is sharper still, and it is a statement about where intrinsic value lives. Comparing Wesco to its parent he writes that "each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway", because "the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway." The point is that a dollar of book value is not a dollar of value — its worth depends on the quality of the business that owns it, which is precisely what a statistical screen ignores.

The resolution the corpus converges on is that quality and cheapness are not opposed inputs but two halves of one decision. A quality business protects against permanent-loss-of-capital through its durability; a cheap price protects through the buffer of margin-of-safety. Munger's formulation — "a fair price for a good business that the Chairman could pretty well understand" — requires both, and treats price as a constraint on quality rather than a substitute for it. See intrinsic-value and capital-allocation.

See alsoCopy Anchor Link

• terry-smith-fundsmith
• francois-rochon-giverny
• mohnish-pabrai
• bruce-greenwald
• factor-investing
• what-has-worked-in-investing

SourcesCopy Anchor Link

• berkshire-hathaway/Letters-Markdown/2014 - Letter to Shareholders.md
• damodaran/markdown/OmahaValueInvesting.md
• investor-letters/MungerWesco/Letters-Markdown/2007 - Wesco Letter to Shareholders.md
• buffett-partnership/Letters-Markdown/non-buffett-2014_Letter(3)_20150227_Charles T. Munger.md