When I do something, I tend to first experience it by actually doing it. That said, when prior material exists, I try to take it in as fully as I can. In particular, if there is advice from someone who succeeded in circumstances similar to mine, or from someone who went before me, I make a point of following it. I tend to hold even more strictly to the “things not to do” they advise than to the “things to do.” Whatever choice I make, I value minimizing risk while still learning through experience in my own way.

For example, in my life there is no one whose conditions are exactly identical to mine. So even in situations with no clear answer, I tend to act first and to take on the challenge with courage. And even if I fail, I do not blame myself, because I think I have merely “erased one path that does not lead to success.”

Now let us take stocks as an example. When it comes to stock investing, countless people have already left behind their prior experiences and results in books and lectures. I think there is a great lesson to be drawn from this. Our economic system has advanced compared to 100 years ago. But when it comes to the act of trading stocks, I believe human nature has not changed by even 1%. Our reactions to investing, fear and greed, herd mentality, and irrational behavior are still being repeated. It is true, however, that thanks to technological progress, more investors now acquire information quickly and competition in the market has become fiercer. Yet that does not mean every investor makes wise choices. Rather than dismissing it with “the era we live in is different,” I think it is the wiser approach to observe and understand the behavior and environment of prior investors and to organize the patterns of behavior I should adopt for myself.

So when people around me start investing in stocks or in other forms, I recommend that they gradually expose themselves to the market through a minimum of knowledge (reading) along with a “test investment” (on the order of a few million won). This is not simply about making money; it is a process of understanding the world of investing.

What I am about to introduce is my own thinking about investing. This thinking is not something I created myself; it is a “replicated worldview” assembled from the ideas and principles of great investors and interpreted in my own way. As a child, I entered the world of investing by reading The Intelligent Investor, a book recommended by Warren Buffett. After that, through the writings and lectures of Benjamin Graham, Philip Fisher, Peter Lynch, Howard Marks, Charlie Munger, and Warren Buffett, I learned the fundamentals and, through my own experience, connected that knowledge organically. In that way, I am following their “Legacy.”

I have no children yet, but one of my dreams is that later, when my child is around the sixth grade, I want to explain investing to them in the same flow as this piece. I want to pass on the wisdom the great investors left behind and the countless failures I have experienced, in a way that helps reduce their mistakes a little. In that spirit, I have written down everything that I learned from various places such as books and interviews and that forms my foundation.

What I am about to introduce is the foundation and the entirety of my understanding of investing, learned indirectly from the great investors up to now.

What is Investing?

First, let us look at how the great investors define it.

Benjamin Graham
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

Philip Fisher
Investment is about buying truly outstanding stocks and holding them for the long term.

Warren Buffett
Investing is laying out money now to get more money back in the future.

Charlie Munger
A great business at a fair price is superior to a fair business at a great price.

Howard Marks
The most important thing is to understand and control risk.

The investment philosophies of these five people are all different, but when it comes to “investing,” they all ultimately aim to deploy capital (the wealth one holds) effectively in order to create long-term wealth. It is quite intuitive and simple. I have nothing further to add to the definition.

Why Should You Invest?

When many people talk about investing, the first reason that comes to mind is probably “to make money.” Now I want to address economic structures beyond the goal of making money.

I believe that, economically, the two reasons below weigh very heavily in making investing essential.

First, because of inflation (rising prices), the value of money continuously declines.

If we simply leave money in the bank, its purchasing power shrinks as time passes. If 1,000 won from ten years ago is now worth only 800 won, then merely by doing nothing we are taking a loss.

Second, we must make use of a system in which money earns money, that is, the Compounding Effect.

As time passes, investment returns grow exponentially, and over the long term the wealth gap between someone who invested steadily and someone who did not widens uncontrollably. For example, if you invest for ten years at a 10% annual return, the principal grows 2.6 times. If you had invested 1 dollar in the S&P 500 in 1950, it would have become about 1,617 dollars by 2024.

In other words, not investing is not merely a loss of opportunity; it is like wasting time. We work every day to earn money, but if we learn how to make money work on its own, our lives can become far more comfortable.

Why Stocks Among Many Investment Options?

People considering investing have a variety of options. There are many investment assets such as real estate, bonds, and cryptocurrency, but over the long term I believe the most powerful investment asset is stocks. This is not simply a matter of returns; it is because of the intrinsic characteristics that stocks possess.

1. Stocks are an asset that can directly receive the benefits of economic growth.

When the economy grows, companies grow, and when companies grow, the value of stocks rises. Warren Buffett defined stocks as “an asset that can directly receive the benefits of economic growth.” This means that a stock is not merely a financial product but ownership of a part of a company.

By contrast, a bond is structured to pay a fixed amount of interest and is unrelated to a company’s growth. No matter how much a company grows, the bondholder receives only the promised interest. Stocks are different. As a company’s profitability grows, it invests with the cash accumulated within the company or pays dividends. And accordingly, the share price rises. You can directly enjoy the benefits of that growth. Therefore, a stock is a Productive Asset whose returns increase together with economic growth.

2. Stocks are an asset that can hedge against inflation.

Savings carry the problem that the value of money declines as time passes. When inflation persists, the amount of goods and services that can be bought with the same amount of money decreases. Real estate has an inflation-hedging function, but its investment efficiency can fall due to maintenance costs, taxes, and lack of liquidity.

By contrast, stocks are highly likely to naturally increase in value even in an inflationary environment, because companies can adjust their prices. When the prices of the products and services a company produces rise, this leads to higher revenue and is ultimately reflected in a higher company value. Through this mechanism, stocks become a powerful asset that can hedge against inflation over the long term.

3. Stocks can maximize the effect of Compounding

Compounding is the key factor that grows investment returns exponentially as time passes. Charlie Munger emphasized that “stock investors receive the benefits of compounding as time passes.” If you invest for ten years at an average annual return of 10%, the principal grows 2.6 times; after 20 years, 6.7 times; and after 30 years, 17.4 times. Bonds can also apply compounding, but because interest rates are low the effect is limited. In the case of real estate, there is rental income, but because maintenance and reinvestment costs are large, the compounding effect is relatively small.

Stocks are an asset that can maximize the compounding effect, because when a company’s profits increase the share price rises, dividends increase, and these are reinvested. In particular, when invested over the long term, the power of compounding becomes even stronger, which makes stocks an asset well suited to long-term investing.

4. Stock investing is not merely asset accumulation but a process of learning and growth.

Stock investing goes beyond being a means of making money; it offers investors the opportunity to understand the world more deeply. Philip Fisher said, “If you invest in great companies, you can learn and grow together with them.”

In the process of analyzing stocks, an investor comes to research particular industries and companies. For example, if you are interested in the automobile industry, you come to analyze companies such as Tesla, Toyota, and Hyundai, and through this your understanding of the flow of the automobile market and future technologies deepens. In the process of researching the fields one is interested in, such as the tech industry, healthcare, or consumer goods, an investor can cultivate insight into the economy as a whole.

Also, because holding a stock means owning a part of a company, you naturally come to understand how the company makes money and grows. This goes beyond simple asset accumulation and becomes a process of developing the ability to read the economy and the market. Therefore, it gives the investor an opportunity to grow. I think this is such an important factor that, had factor 4 not existed in investing, many of the great investors would have disappeared or been replaced by others.

What Kind of Investor Will You Be?

Investors fundamentally face the choice of whether to follow the market average or to try to beat the market. Depending on this choice, they can be divided into the Conservative Investor and the Aggressive Investor.

The conservative investor chooses Passive Investing. They accept the market return as it is and follow a strategy of maximizing the compounding effect over the long term.

By contrast, the aggressive investor chooses Active Investing. To beat the market, they analyze individual stocks and pursue an active trading strategy.

Benjamin Graham and Philip Fisher both distinguished between the defensive (conservative) investor and the aggressive investor, but the perspectives from which they viewed them differed. Graham distinguished investors with risk avoidance and safety at the center, while Fisher divided investors based on growth potential and long-term value creation.

Now, let us look at the difference between conservative and aggressive investing through these two perspectives.

Benjamin Graham: A typology of investors centered on risk management
Benjamin Graham emphasized that “the most important goal of investing is to prevent losses.” He divided investors into conservative investors (passive investors) and aggressive investors (active investors), and this distinction arose from differences in risk appetite and return expectations.

The Defensive Investor (Passive Investor, Conservative Investor)
The conservative investor prefers investments that are as safe as possible and tends to follow the market return as it is. They build a portfolio centered on assets with low volatility and stability.

Characteristics
– Protection of principal is the top priority
– Among undervalued stocks, prefers companies with high financial soundness
– A portfolio centered on bonds and dividend stocks (low equity weighting)
– Prefers investment methods that track an index, such as the S&P 500 ETF
– Sets a large Margin of Safety
– Avoids short-term volatility and maximizes the compounding effect over the long term

Representative strategies
– Index investing such as the S&P 500 ETF and the Dow Jones ETF
– Dividend-stock investing and increasing the weighting of bond holdings
– Investing centered on asset value, such as net worth and net current assets

The Aggressive Investor (Active Investor, Aggressive Investor)
The aggressive investor aims for returns higher than the market and actively seeks out and trades stocks. They do not merely look for undervalued stocks; they look for companies with high growth potential and expect high returns.

Characteristics
– Takes on a certain amount of risk for higher returns
– Invests not only in undervalued companies but also in companies growing faster than the market
– Has a strong interest in high-growth industries (tech, bio, etc.)
– Makes investment decisions by continuously researching company analysis and market trends
– Accepts short-term price volatility while selecting stocks with high intrinsic value through thorough analysis

Representative strategies
– Direct investment in individual stocks and active rebalancing
– Investing centered on growth industries (tech, bio, innovative companies)
– An aggressive bottom-buying strategy during market corrections

Philip Fisher: A typology of investors centered on growth potential

Philip Fisher divided investors from a different perspective than Benjamin Graham. He saw that the conservative investor who avoids short-term market volatility might in fact be more dangerous. Whereas Graham’s conservative investor mainly prefers stable dividend stocks, bonds, and blue chips, Fisher’s conservative investor was one who relied on past results and overlooked future growth potential.

The Conservative Investor (Passive Investor, Conservative Investor)

Characteristics

• Tries to avoid short-term volatility but is highly likely to miss long-term growth opportunities
• Prefers stable companies that pay dividends
• Places excessive importance on past results
• Gives insufficient consideration to a company’s R&D, innovation, and potential for market-share growth
• Highly likely to invest even in companies that lack technological innovation

The Aggressive Investor (Active Investor, Aggressive Investor)

Characteristics

• Does not merely look for undervalued companies but seeks out companies with high future growth potential
• Finds and holds great companies over the long term to maximize the compounding effect
• Thoroughly analyzes R&D, market-share growth, and management capability
• Is not swayed by short-term volatility and focuses on long-term growth potential

Representative strategies

• Invests in companies driving technological innovation
• Invests in companies with excellent management
• Prioritizes long-term growth potential over short-term price corrections

In the end, from Fisher’s perspective, the conservative investor risks missing big opportunities by clinging excessively to stability,
while the aggressive investor follows a strategy of accumulating wealth over the long term by recognizing a company’s growth potential.

So, now, what kind of investor will you be? First, let us look at the data.

Looking at the actual data, passive investing (the conservative investor) often records higher long-term performance than active investing (the aggressive investor). Many investors trade actively and try to find particular stocks in order to beat the market, but it is extremely rare for such strategies to succeed over the long term. By contrast, passive investors who simply follow the market record performance that beats most active investors.

According to the SPIVA (Active vs. Passive Investing) report, over a ten-year period 85 to 90% of active funds failed to beat the S&P 500. Analyzing data over a longer, 20-year period, more than 95% of active funds failed to outperform the index. In other words, it shows that even the majority of professional fund managers find it nearly impossible to beat the market consistently. The situation is not much different for individual investors.

According to the Dalbar Research report, over the past 20 years the average annual return of individual investors was only around 3 to 5%. Considering that the average annual return of the S&P 500 index over the same period was 8 to 10%, individual investors, far from beating the market, are in fact paying a considerable opportunity cost over the long term. This is the combined result of emotional trading, failed attempts at market timing, and excessive trading costs.

This data suggests an important fact. A conservative investor, simply by following a strategy of tracking the index, has a high likelihood of placing in the top 10 to 20% of all investors. Many investors struggle to beat the market, but maintaining a passive strategy is, with higher probability, more likely to guarantee success over the long term. Therefore, an individual investor who wants to maximize investment performance may find that, rather than going out of their way to outperform the market, the most efficient strategy is to enjoy the compounding effect steadily through passive investing.

Alpha (α) and Beta (β) theory from the perspective of market returns

When analyzing investment performance, the concepts of alpha (α) and beta (β) play an important role in understanding an investor’s disposition and strategy.
The passive investor aims to follow the market return as it is (β=1), while the active investor aims to generate returns in excess of the market (α>0).

1. Beta (β): the degree of movement together with the market

Beta (β) is an indicator of how closely a stock or portfolio moves in sync with the overall market. This is an important factor in assessing an investor’s risk appetite.

• β = 1 → the return of the stock (or portfolio) moves identically with the market.
• β > 1 → it shows greater volatility than the market. (e.g., if β = 1.5, when the market rises 10% the stock rises 15%)
• β < 1 → it has lower volatility than the market. (e.g., if β = 0.5, when the market rises 10% the stock rises 5%)
• β < 0 → an asset that moves in the opposite direction to the market (e.g., gold, some bonds)

For example, growth stocks such as Tesla and Netflix have a β greater than 1 (β > 1) and thus have greater volatility than the market. By contrast, defensive stocks such as Coca-Cola and P&G have a β less than 1 (β < 1) and thus have lower volatility than the market. The passive investor (conservative investor) generally chooses a strategy of tracking the overall market with a beta close to 1 (β ≈ 1).

This is a stable approach that follows the market return while not taking on excessive risk. By contrast, the active investor (aggressive investor) prefers high-beta (β > 1) stocks or tries to adjust the portfolio by taking advantage of market volatility.

2. Alpha (α): excess return (Active Return)

Alpha (α) refers to the degree by which a portfolio’s actual return exceeds the expected return of the market (or benchmark).
In other words, it is an indicator of whether the investment beat the market (Positive Alpha) or fell short of it (Negative Alpha).

Alpha (α) calculation formula:

α = actual return − (risk-free return + β × market return)

• α > 0 → recorded a higher return than the market → excess return (Positive Alpha)
• α = 0 → the same performance as the market
• α < 0 → recorded a lower return than the market → underperformance (Negative Alpha)

For example, if a fund manager records a higher return than the market, they have generated positive alpha (α > 0); conversely, if the market rose 10% but the portfolio rose only 8%, the alpha (α) is negative. The active investor aims to generate alpha (α) and strives to obtain returns in excess of the market.

However, considering the fact, mentioned earlier, that over the long term more than 95% of active funds fail to beat the market, you can see how difficult it is to generate alpha consistently. The passive investor does not aim to generate alpha. Instead, they choose a strategy that simply reflects the market return and focus on maximizing the compounding effect over the long term.

So, now is the moment of choice. Am I willing to take on the additional opportunity cost and invest my time to do active investing? Am I prepared to analyze financial statements, study industry trends, and study the market endlessly? In fact, even without the process of agonizing over investing and without any understanding of financial statements, you can earn sufficient returns simply through index investing. Going further, simply by investing in the index, you can over the long term achieve performance that beats most investors. So which choice is more efficient?

The answer depends on each individual’s disposition and goals. If, even after recognizing all of these facts, you still intend to make the effort to pursue alpha (α), then you may proceed to the next explanation. However, you must be sure to consider that the opportunity cost required in that process may be far greater than expected. You must not forget that active investing is not simply an investment but is more like a job.

Things to Bear in Mind to Become an Aggressive Investor

Active investing (aggressive investing) aims to generate returns in excess of the market (alpha, α). However, the “Opportunity Seeking Cost” that an investor must bear in order to do so is considerable.

This cost includes not only purely monetary costs but also time, psychological stress, and even the opportunity losses caused by mistaken judgment. The following organizes the main opportunity-seeking costs that an aggressive investor must bear.

1. Research Cost

Finding a good investment opportunity requires an enormous amount of time and effort. The aggressive investor does not simply follow the market; they must seek out individual stocks. This inevitably requires processes such as company analysis, industry research, review of financial statements, and comparison with competitors.

In this process, the investor takes on the following burdens.

• It takes a considerable amount of time to analyze a company’s earnings reports, 10-K (annual report), and financial statements.
• One must research the trends, competitive landscape, and innovation potential of a particular industry.
• One must continuously monitor market news, analyst reports, and investor conferences.
• The aggressive investor spends a lot of time looking for investment opportunities, but that cost does not guarantee excess returns.

2. Transaction Cost

The more trading there is, the more fees and taxes pile up. The aggressive investor tends to trade frequently in order to respond to market volatility. But frequent trading increases transaction costs and can cause larger-than-expected losses.

• Stock trading fees and Bid-Ask Spread costs arise
• Capital gains tax and transaction tax are imposed (in particular, the tax burden increases with short-term trading)
• The possibility that frequent trading continuously eats away at portfolio returns
• In particular, in the case of investors who use a high-frequency trading (commonly, day trading) strategy, transaction costs can surge, and it is not easy to generate enough excess return to overcome them.

3. Emotional Cost

The aggressive investor is always paying attention to the market and is under psychological pressure. The active investor must directly experience the market’s volatility, and this can bring emotional stress and psychological pressure.

• In a plunging market they engage in Fear Selling, or
• In a surging market they are highly likely to make irrational purchases out of the fear of missing out (FOMO, Fear of Missing Out).
• The burden of having to monitor the market all day long grows.
• Emotional stress is, in the end, highly likely to induce inefficient investment decisions.
• In particular, repeated emotional trading can become an obstacle to maximizing the long-term compounding effect.

4. Misjudgment Cost

You can be wrong no matter how hard you analyze. The active investor invests after predicting that a particular stock or industry will surge, but if that prediction is wrong they are highly likely to suffer a large loss.

• Predicting a company’s future growth is inherently difficult.
• Buying at the wrong timing (Timing Risk) can have a fatal impact on investment performance.
• They use complex strategies, yet may end up recording lower returns than simple index investing.
• In the end, no matter how outstanding an investor is, not all of their judgments can be correct,
• and as wrong investment decisions accumulate, they become more likely to suffer losses, far from beating the market.

5. Liquidity Risk Cost

If you invest in assets with low liquidity, it can be hard to convert them to cash when you need to. The aggressive investor often prefers stocks with low liquidity, such as high-growth industries, small- and mid-cap stocks, and new companies. But these assets carry the risk that they cannot easily be converted to cash when the market is poor.

• During a recession, even if you want to sell a stock, there may be a shortage of buyers.
• In certain industries (e.g., biotech, startups), there is a risk that liquidity drops sharply.
• There is a possibility that asset value plunges due to a sudden liquidity crisis.
• It can be hard to convert to cash when the market is poor.

6. Opportunity Cost of Capital

Investing aggressively can in fact result in lower performance than index investing. The aggressive investor selects individual stocks and expects high returns, but over the long term they are highly likely to record lower performance than index investing (S&P 500, ETFs).

• According to research, only 10 to 20% of investors beat the market over the long term.
• Most investors, while trying to beat the market, in fact record below-average performance.

What Are Stocks? How Should You View a Business?

This sentence said by Warren Buffett is not simply investment advice. It is a philosophical message that we must change our fundamental attitude toward investing. Many people see stocks only as “mere numbers, charts, and price movements.” But Buffett emphasizes that “a stock is not a mere ticker (symbol) but a part (ownership) of a real company.”

In other words, buying a stock is “not buying a number that seems likely to go up in the short term, but owning a part of an actually operating business.”

Let me give one example.

One day, I decided to start a small gimbap business. I would sell gimbap each morning in an area dense with offices. Every morning, I prepare fresh ingredients and make gimbap, and I sell it to office workers on their way to work. One roll of gimbap costs 1,000 won, and I can sell about 10 rolls a day. This way I generate revenue of 10,000 won a day, but the money that actually remains in my hands is different from the revenue.

To make gimbap, ingredient costs are needed. Buying basic ingredients such as rice, seaweed, eggs, spinach, and pickled radish costs 500 won per roll of gimbap. To make 10 rolls, 5,000 won in ingredient costs is needed. Also, to sell the gimbap I have to take the subway every day to move near the offices, which costs 100 won a day in transportation. Many of the customers who buy gimbap prefer to pay by card, so I also have to consider card payment fees. About 200 won a day in card payment fees arises.

Once all these costs are calculated, the money that remains in my hands each day, that is, the net profit, is 1,500 won. If I earn a net profit of 1,500 won a day, that is about 45,000 won in a month, and in a year (365 days) I can earn a net profit of about 547,500 won.

But I wanted to grow this business further. I wanted to expand the variety of gimbap and increase daily sales to 20 rolls, 30 rolls. To do that, however, initial capital was needed. Money was needed to buy more ingredients, and to do business in a good location I also had to consider rent. So I decided to recruit investors.

Recruiting investors means selling a part of my business. The investors invest money in my gimbap business, and in return they come to own a part of my business. So at what price would the investors want to buy the stock of my business?

If this business steadily generates a net profit of 540,000 won a year, then by simple calculation it can earn about 2.7 million won in profit over five years. So would investors be willing to buy this gimbap business for 2.7 million won? Or, seeing the possibility that the business grows further, might they pay a higher price?

But on the other hand, there is no guarantee that this business will necessarily succeed. What if people no longer buy gimbap? Or what if a competitor appears and sells gimbap that is cheaper and tastier than mine? What if ingredient costs rise and profits shrink? Considering these risk factors, investors will want to buy my stock cheaply.

This process is precisely the essence of stock investing. A stock is not a mere number but a process of understanding a real business and assessing its value. When buying a stock, an investor must not simply look at charts and numbers but analyze how the company makes money and whether it can grow in the future.

In the end, the question “which stock should I buy?” is the same as the question “which business do I want to own?” Buying a stock is not guessing at mere price movements but owning a part of a company. The investor must deeply understand how the company they invest in makes money, what growth potential it has, and what risks it carries. If we understand this principle, we will be able to make wiser investment decisions.

The following is an example Buffett gave in his shareholder letter.

“A bird in the hand is worth two in the bush”

Intrinsic value is a concept that has been discussed for a long time. In fact, the first person to put forward this concept could be said to be Aesop (the author of Aesop’s Fables). The maxim he spoke around 600 BC, “A bird in the hand is worth two in the bush,” captures its very essence.

In other words, certain money right now (the one bird in the hand) can be more valuable than uncertain money that may be obtained in the future (the two birds in the bush). What matters is finding the answers to questions such as: How certain are the future cash flows? How far away is that bush? How will future interest rates (the discount rate) change?

As we review countless companies, we assess how many birds (cash flows) each company can give us in the future. And it is the process of deciding which “bush to buy.”

The first question to ask when investing is not “Is this stock expensive or cheap?” Instead, you must consider, “What is the intrinsic value of this stock, and is it undervalued compared to the current market price?” In the stock market, Price and Value do not always coincide.

Warren Buffett said, “Price is what you pay, and value is what you get.” In other words, there is a belief that price is shaken in the short term by the market’s emotions and psychology, but over the long term a company’s intrinsic value is reflected in the share price. Therefore, an investor must not simply buy because the current price looks cheap, but must analyze whether the company is trading at a price below its intrinsic value.

What Is Intrinsic Value?

What is Intrinsic Value?

Intrinsic value is the real value that an asset essentially possesses. – Warren Buffett

Benjamin Graham did not define intrinsic value mathematically and precisely, but the concept is close to the philosophy that “you should evaluate a company in the same way you would buy a private business.” Intrinsic value can be defined not as mere share-price movement but as the present value of all the cash flow a company earns.

In other words, if we could perfectly predict the future, the intrinsic value would be all the money the company will earn going forward converted into present value. But because it is realistically impossible to predict the future 100%, investors use various methods to estimate intrinsic value.

The difference between intrinsic value and market price

A company’s intrinsic value and the share price at which it trades in the market do not always coincide. For that reason, an investor must take the strategy of buying when a company is trading at a price below its intrinsic value and waiting until it reaches its intrinsic value.

Characteristics of Intrinsic Value

• An objective value determined by comprehensively evaluating a company’s held assets, profit-generating ability, cash flow, and growth potential
• An essential value that does not change with the market’s emotions (fear and greed)

Characteristics of Market Price

• A price that fluctuates in real time in the stock market
• A number that swings sharply according to investor psychology, supply and demand, news, and changes in interest rates
• The market forms prices emotionally in the short term, but over the long term the price is adjusted to match the company’s results and intrinsic value.

When analyzing companies, investors can broadly take two perspectives.

First, the method of thoroughly analyzing a company’s current financial condition and intrinsic value to find undervalued stocks.
Second, the method of analyzing a company’s qualitative factors and long-term growth potential to find companies that will grow greatly in the future.

The figures who represent these two approaches are precisely Benjamin Graham and Philip Fisher. Graham emphasized thorough, numbers-based analysis, while Fisher placed importance on a company’s qualitative factors and growth potential. The two men’s investment philosophies are different, but they were identical in the point that “investing is a process of comparing the current price with future value.” Nevertheless, which method is better still depends on the investor’s choice. To borrow Buffett’s example, where Ben Graham focused on whether birds really existed inside the bush, Phil Fisher considered it important how much the birds inside that bush would increase.

Graham vs. Fisher: which approach is better? Graham’s and Fisher’s investment philosophies differ greatly, and it is difficult to conclude that either one is absolutely right. But the prevailing view seems to be that, as has been demonstrated in many respects, Ben Graham’s method is hard to apply in large-scale investing.

At first I was strongly influenced by Benjamin Graham and placed importance on quantitative factors. But Charlie Munger told me that this alone was not enough. He said he had learned more from studying law than from studying finance, and he emphasized that in investing too one should give more consideration to qualitative factors. As a result, I realized that Charlie and Philip Fisher’s view was right.

Warren Buffett

Discount Rate

When deriving intrinsic value, I mentioned the part about “interest.” In calculating future cash into present value, the interest rate is very important. To explain the discount rate as it is used in the area I am responsible for at work, it is very complex, but setting aside the difficult explanation for now, many people often ask Warren what percentage discount rate he uses. The answer is as follows.

When we assess intrinsic value, we set the discount rate based on the long-term risk-free rate (that is, the government bond rate). This is a method of converting a company’s future cash flows into present value, using the yield of a safe investment asset (e.g., U.S. Treasuries) as the benchmark.

Warren Buffett

But I think the important takeaway is not simply that he uses the long-term U.S. Treasury rate. The truly important point is that we should give weight to a remark like the following.

We simply look for “one-foot bars” that we only need to step over and step over them. We do not have the ability to jump over seven-foot bars, but at the very least we can judge “whether this bar is one foot or seven feet.”

Warren Buffett

The way I think about how Berkshire derives intrinsic value is this: it does not make decisions where the answer goes back and forth ambiguously by finely adjusting the discount rate. At a past shareholders’ meeting, Buffett said that while he holds the method of a DCF calculation in his head, no staff member (employee) actually computes it. What we should think about is not whether Warren applies an 8% discount rate or a 9% one, but that the point is to stay away from such decisions.

Example of Intrinsic Value Calculation Methods

The following is the way Warren Buffett explained most concretely, during a shareholders’ meeting, how to derive intrinsic value. I have organized it here. I think he taught a more concrete framework for calculating intrinsic value than any other famous investor.

An intrinsic value assessment method using a farm as an example: suppose we are trying to buy a farm.

• From our research, we found that an acre can produce 120 bushels of corn or 45 bushels of soybeans.
• We know the fertilizer costs, property taxes, the labor cost we would pay the farmer, and so on.
• Calculating this conservatively, we assume that, from the owner’s standpoint, we can earn 70 dollars per acre while doing nothing.

So how much should we pay for this 70 dollars of income per acre?

• Will agricultural productivity gradually improve?
• Will the prices of agricultural products rise?

We must consider such factors conservatively.

Now, we must set a target return.

• If we want a 7% return, we can pay 1,000 dollars per acre.
• If the farmland price is 900 dollars per acre, we would consider buying.
• On the other hand, if it is 1,200 dollars per acre, we would look for another investment opportunity.

We evaluate a company like a “Corporate Farm.” When we evaluate a company, we use the same approach as when evaluating a farm. To do so, we must assess the following.

• The company’s Competitive Position
• Can this company maintain its edge in the market going forward?
• The Dynamics of the Business
• What changes will this industry undergo over the long term?
• The Outlook for the Future
• How far into the future can we see?

However, for some companies it is nearly impossible to predict the future. We must take as investment targets only those companies whose future we can be relatively certain about.

Which Company Should You Invest In?

The most central question when evaluating a company is: when and how much cash will come back to me from the cash I put in? Whether you buy Tesla, McDonald’s, NVIDIA, or any company, the essence of investing ultimately lies in predicting cash flows and appropriately assessing the price for them. When viewing a company as a single asset, the most important factors are as follows.

• Is additional capital injection needed?
• From when does cash start to flow in?
• What is that cash worth now? (What is the appropriate discount rate?)

Only by finding the answers to these three questions can you make a rational decision as an investor.

A company’s cash flow is just like the interest on a bond. The cash flows a company will earn going forward play a role similar to the interest on a bond. In the case of a bond, the investor invests a certain amount and, in return, receives a fixed amount of interest over a set period.

But a company differs from a bond in that the investor must directly predict the future cash flows themselves. If a company’s future earnings are stable, that company will behave like a bond with a fixed rate. By contrast, if a company’s future cash flows are uncertain, it becomes an investment target for which the investor must take on additional risk.

We must invest only in companies whose business we understand and can predict. The key to investing is not simply “Is this a good company?” It is more important to analyze “Will this company continue to generate steady cash flows going forward?”

We cannot precisely calculate the intrinsic value of every company. But for companies we understand well, we can estimate an approximate range. In other words, our goal is not to derive a perfect number but to make investment decisions within a reasonable margin of error.

• Does a company have the potential to continuously generate profits even 10 or 20 years from now?
• Is its cash flow steady and predictable?
• To what extent can an investor trust the company’s future?

Looking at Warren Buffett’s investment portfolio, there are many brand and consumer-goods companies. He has at times spoken about why he acquired them. He explains the reasons he invested as follows.

Gillette razor blades: They hold 70% of the global razor market. Even 100 years from now they will still be a powerful brand. How a razor blade is made, where they buy the steel, how distribution is done, are all known facts, but the reason they still hold 70% is that people do not easily switch brands.

Coca-Cola: 19 billion cases are sold a year. Will people still drink Coca-Cola 10 years from now? I would stake my life on the answer to this question.

See’s Candy: 35 million people live in California. Most of them have a memory of See’s Candy. In the chocolate market, Snickers was number one 10 years ago and number one 20 years ago as well. People do not easily switch their chocolate.

How to Make Investment Decisions?

Charlie Munger

We do not need to evaluate every company

We do not have a system that can evaluate every company.
Most companies are too complex or too hard to predict,
so we put almost every company in the “Too Hard” basket and simply give up.

What we do is a process of filtering out the simple ones.
That is, finding a few investment opportunities that we can judge easily.

If you want “the ability to evaluate every investment opportunity precisely,” we cannot offer that kind of help.

Investing is the process of considering all opportunities and making the choice most suitable for oneself. At Berkshire’s shareholders’ meetings and at investors’ lectures, the question “How do you derive intrinsic value?” never fails to come up. Many people expect that there must be a simple formula that lets you solve investing like a math problem. But I imagine that great investors such as Warren Buffett, Charlie Munger, and Howard Marks must have felt frustrated whenever they received this question.

Because I think intrinsic value is not a mere number but the result of complex thinking. Many people want a “precise number” in investing. But in reality, it is impossible to derive intrinsic value with a single precise formula.

• Intrinsic value must comprehensively consider many factors, such as a company’s current earnings, future growth potential, economic Moat, the capability of management, and the market environment.
• Indicators such as DCF (discounted cash flow), P/E, and P/B are merely reference material; they do not provide an absolute answer.
• Blind faith in mathematical models can in fact be dangerous in investing.

“There is no perfect model. But a roughly right model is better than a completely wrong one.”
John Maynard Keynes

As Keynes said, investors too must admit that there is no perfect model. Investing is a process of dealing with uncertainty, and what matters is not arriving at a precise answer but making “the most reasonable judgment.” Our goal is not a complex formula but having a complex way of thinking. If there were a formula to derive intrinsic value mathematically, everyone would become rich. But reality is not so. Investing is not a simple equation but the result of decision-making based on logical thinking and experience.

When Should You Invest?

When it comes to stock market cycles, I think Howard Marks’s explanation is the most fitting. In particular, Howard interprets the stock market through human psychology rather than financial factors.

The stock market is driven by emotion. Greed and fear distort investors’ judgment, and when these two emotions run to extremes the market overheats or slumps. When most investors are optimistic, the market has likely already reached a peak; conversely, when everyone is pessimistic, there are many undervalued opportunities. Therefore, an investor must go against the herd mentality and maintain a cool-headed attitude when the market moves emotionally.

When to be cautious about investing: when herd mentality is excessively optimistic

When the market overheats, investors take on an irrationally optimistic attitude. Wariness toward investing disappears, and everyone jumps into the market. The belief spreads that the stock market will keep rising in the short term, and investors do not consider a margin of safety.

The features of a period when herd mentality is excessively optimistic share several things in common.

First, market participants surge. Interest in stock investing rises, and inexperienced individual investors actively jump into the market. An atmosphere forms in which “everyone is making money,” and you start to hear “now is the opportunity” said frequently around you.

Second, the logic of “this time is different” appears. Existing investment principles are ignored, and the claim arises that a new paradigm dominates the market. During the past dot-com bubble there was the logic that “internet companies do not need profits,” and during the real estate bubble the belief spread that “real estate prices never fall.”

Third, share prices surge regardless of corporate results. Even companies that are not making profits are granted high valuations, and expectations rather than results drive prices up. When the market ignores basic company analysis and focuses only on short-term momentum, a bubble is highly likely to form.

Fourth, investors are seized by FOMO (Fear of Missing Out). In the news and on social media, the message “if not now, it will be too late” spreads, and people are easily swept up even by unverified information.

Finally, leverage increases excessively. More people invest with borrowed money, and margin trading explodes. When the market is rising, large profits can be made, but once it starts to fall, rapid liquidations occur and market volatility grows.

In such a period, you need to slow down the pace of investing and take a conservative approach. Even while herd mentality is pushing the market up, it is important to assess companies’ intrinsic value and to avoid stocks whose price is excessively higher than their value.

When does the investment opportunity come? When herd mentality is excessively pessimistic

Conversely, when the market is extremely pessimistic, undervalued investment opportunities appear. The time when most people flee the market can in fact be the best buying timing.

First, all the news turns negative. Negative outlooks for the market pour out, such as recession, rising unemployment, and interest rate hikes. You frequently hear “the stock market is finished,” and investors assess the market’s chance of recovery as low.

Second, investors feel extreme fear. The fear index (VIX) surges, institutional investors sell in large quantities, and individual investors engage in panic selling. When the market falls irrationally, investors who respond emotionally rush to sell in order to avoid losses.

Third, people start saying “the stock market will never recover again.” Investors doubt a long-term market recovery and think it is safer to hold cash than stocks. After past financial crises, this atmosphere spread when the market reached its low.

Fourth, large-scale liquidations and bankruptcies occur. Investors who used leverage are forcibly liquidated, and some companies or funds go bankrupt. When such situations occur, the market is greatly shaken in the short term, but from a long-term perspective it can become an opportunity for bargain buying.

Historically, the best investment opportunities appeared amid extreme fear. When the market recovered after financial crises, and when it rebounded after the sharp plunge in the early days of the COVID pandemic, a similar pattern repeated. However, even in situations where herd mentality is extremely negative, it is important to assess a company’s intrinsic value carefully. The point is not to invest simply because the price is low, but to go through the process of analyzing whether the price is cheap relative to value.

The relationship between herd mentality and changes in multiples

Herd mentality is closely related to changes in the market’s multiples.

• When herd mentality is positive → the market’s multiples rise → overvalued stocks increase → a time to be cautious
• When herd mentality is negative → the market’s multiples fall → undervalued stocks increase → a long-term investment opportunity

Investors who participate in the market are highly likely to be swept up by short-term emotional swings. But when herd mentality runs to an extreme, moving in the opposite direction can bring better investment performance over the long term.

This graph shows the relationship between the S&P 500’s Forward P/E Ratio and the Annualized Total Return over the following ten years. The graph shows a clear negative correlation: the lower the P/E ratio, the higher the expected return over the next ten years, and conversely, the higher the P/E ratio, the lower the long-term return tends to be. The current market level sits at a P/E of about 23 times, which historically is highly likely to mean a low future return. In other words, in the current market the long-term return that can be expected may be relatively low due to high valuations, which can be interpreted as a signal that investors need a cautious approach.

As a statistical result, we cannot ignore historical cycles, and we must approach market cycles carefully. But the point is that even this cannot tell us when or which cycle will come.

Thoughts on Leverage (Debt) Investing

Leverage is a powerful tool that can maximize investment returns, but at the same time it can cause irreversible losses. Based on decades of investing experience, Warren Buffett and Charlie Munger emphasized that not using leverage is an essential element of long-term investment success. They saw that leverage amplifies profits in the short term but, over the long term, makes it impossible to withstand unpredictable market volatility.

Leverage can ruin even a good investor.

Leverage causes an investor to hold a position larger than they can handle. When the share price rises, profits are maximized, but conversely, when it falls, losses also grow exponentially. If even one large correction comes, an investor can be forcibly liquidated without even a chance to recover.

Historically, there are many cases of excellent investors going bankrupt because of leverage. In 1998, Long-Term Capital Management (LTCM) was a fund run by geniuses who had won the Nobel Prize in Economics, but because of excessive leverage it could not recover from the Russian default crisis and collapsed. During the 2008 financial crisis, large financial institutions such as Lehman Brothers and Bear Stearns also had high leverage dependence and ultimately went bankrupt.

We must keep in mind that we are doing long-term investing. If you leave the game in the middle, it is not easy to come back.

The market cannot be predicted, and leverage makes this even more dangerous.

The stock market moves in unpredictable directions. Short-term corrections (a 10 to 20% drop) can happen at any time, and if you use leverage you can suffer serious damage even from such corrections. In particular, leveraged investors are often gripped by fear in a falling market and forcibly liquidated.

In the early days of the 2020 COVID pandemic, the S&P 500 plunged more than 30% in a short period. Most investors who used leverage were liquidated, and they did not get the chance to participate again even when the market subsequently rebounded. Leverage is a powerful tool in a rising market, but in a falling market it lowers an investor’s chances of survival to the extreme.

Leverage induces emotional decisions.

Excluding emotion from investing is a key element of success. But if you use leverage, it becomes even harder for an investor to control their emotions. With leverage, a far larger amount than usual is invested, so even small price movements cause extreme psychological anxiety. Even with the slightest drop in the share price, an investor becomes more likely to make a decision that locks in a loss, and to trade irrationally amid fear.

After the 2021 tech bubble, many individual investors invested in 3x leveraged ETFs (e.g., TQQQ, SOXL). But when the market correction came in 2022, most leveraged ETF investors suffered serious losses and were forced out of the market.

Should You Always Hold Stocks for the Long Term?

Among the key principles of investing, compounding is the most powerful concept. The “strategy of finding the best companies and holding them for a long time,” emphasized by Philip Fisher and Warren Buffett, is also the most efficient investment method that today’s Berkshire Hathaway maintains.

But Buffett did not use a long-term holding strategy from the beginning. From the 1950s through the 1960s, Buffett used Benjamin Graham’s short-term value-investing strategy and rapidly accumulated his initial capital. Later, together with Charlie Munger, he embraced Philip Fisher’s Growth Investing philosophy and gradually shifted to long-term investing, and ultimately, after acquiring Berkshire Hathaway, he established an ultra-long-term holding strategy that maximizes a company’s long-term growth.

In the 1950s and 1960s, Benjamin Graham’s investment principles were absolute for Buffett. Graham emphasized the method of “buying stocks trading too cheaply and selling them once the value normalizes.” Through this strategy, Buffett recorded high returns and rapidly accumulated capital.

Investment method

• Buying stocks with a P/B of 1 or below (that is, stocks cheaper than book value)
• Selling immediately once intrinsic value is reached (selling after value recovery rather than long-term holding)

Characteristics and returns

• In the 1950s and 1960s, Buffett’s average annual return reached about 50%.
• The market’s average return (beta) at the time was around 7%, and Buffett generated alpha (excess return) of more than 40%.
• However, he held most of his investment stocks for a relatively short period.

In this period, Buffett used the method of buying thoroughly undervalued stocks and then selling once they recovered to normal value. In other words, it was not a strategy of “holding for a long time” but of “finding undervalued companies and quickly realizing gains.”

From the mid-1960s, Buffett gradually began to move away from the short-term value-investing strategy. What he realized was that “rather than buying a good company cheaply, it is better to buy a great company at a fair price and hold it for a long time.”

Why is the long-term holding strategy more advantageous?

• Because a company’s value can increase as time passes, and
• Because great companies provide a compounding effect that, over the long term, overwhelms the market return.

After this, the concept that “once you find a good company, holding it for life is the best strategy” began to take root in Buffett’s investment philosophy. After he acquired Berkshire Hathaway, Buffett’s investment strategy shifted to an even more long-term approach.

Because Berkshire itself became an investment company, its investment principles changed to a method that focuses on a company’s long-term growth rather than trading aimed at short-term value recovery.

The changed investment strategy

• Once you discover a great company, hold it forever.
• Not fretting over short-term price movements, focusing on the rise in a company’s intrinsic value
• Holding companies such as Coca-Cola, Apple, and American Express for decades

Why Does Berkshire Hold Investments for the Long Term?

Apart from the fact that, due to the various factors mentioned earlier, a strategy of investing in excellent companies over the long term is superior, I think Berkshire’s long-term investment strategy has its own reasons. Beyond a certain investment scale, the way you manage funds has to change. In particular, at a scale like Berkshire’s, an even greater range of investment methods is constrained. So they cannot take the kind of quick, diverse approach to investing that we, who manage small amounts of capital, can.

In the investment business, trust and credit are the most important assets. As Berkshire has grown larger, it has had the limitation of being unable to move quickly, but in exchange it has secured a differentiated competitive edge with the image of “an investor who guarantees a long-term partnership.” Holding large amounts of capital is a tremendous competitive edge, but investors with such financial power exist in many forms around the world.

From the standpoint of those acquiring and selling companies, there are not many investors who will hold a company for the long term and cooperate with management, compared to the typical financial investor who aims for short-term returns. And the need to sell a company to such an investor exists even more strongly from the founder’s standpoint. In particular, Berkshire does not, after an acquisition, manage the company as a subsidiary or get involved in its management. There is no such department or staff either.

With this trust and culture added to its formidable financial power, there is the very great merit that it can close deals with excellent companies that other investors find hard to access. That is why Berkshire always emphasizes long-term partnership. An important lesson I feel while working in the field of M&A is that money cannot solve everything, and that as a transaction between people, the element of “humanity” plays a very important role.