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The Super Investors Of Graham-and-Doddsville

There are actually many economists who explain the tremendous success of Warren Buffett, who is the chairman of Berkshire Hathaway Inc, in one word: luck.

To the economist, it seems that with more than 7 billion people in this world, statistically, there has to be one person who would be lucky enough to accumulate this much wealth by sheer luck.

They even use a simple example to illustrate their theory.

Imagine if every monkey in this world was to flip a one dollar coin every morning and those which flipped “head” would win and those who flipped “tail” would lose.

The coin collected from the losers would then be redistributed to all the winners. Given that the probability of a coin toss is 50%, every morning, the wealth of the winners would roughly double. This experiment goes on every day until there is only one monkey remaining, and that monkey would be a very rich monkey.

Although the explanation seems logical, Warren Buffett made a famous speech in defence of his many friends of value investing. The speech is now famously known as “The Super Investors of Graham and Doddsville.”

Buffett also used the example of the monkeys. However, he moved one step further from the economists’ explanation.

Buffett argued that there is more than one of him. He also knows many successful investors who have seen impressive investment results throughout the past decade. In fact, he gave example of nine such investors, including himself.

According to Buffett, as the coin toss continues, you would realise that many of the monkeys that have been winning are all from the same town – his metaphor for all his successful friends being disciples of the Graham and Dodd’s school of investing.

In the example, would this not count as an anomaly?

Should the economists not be studying what is going inside Graham-and-Doddsville and why are they producing such good coin flippers?

Foolish Summary

The message Buffett was trying to make was clear. Many of these successful investors practice do not own similar stocks. Yet, they are all successful in their own rights.

The only link is that they subscribe to the concept of value investing started by Benjamin Graham, the father of value investing. They all see the value of investing in businesses rather than simply buying a stock.

In other words, value investing works. Luck has little to do with it.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Berkshire Hathaway Inc.