To Graham-style value investors, it bears repeating, investing is most successful when it is rational; and it is most rational when it is most businesslike. “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” Accordingly, with respect to any security under consideration value investors ask and answer questions such as:

• is the underlying business understandable? does the business have a consistently-favourable operating history? are there any obvious and major factors which might affect adversely its prospects? is its management candid with shareholders? Does it recognise and correct its errors openly? do managers treat shareholders’ capital as if it were their own?
  
  
• do managers ‘eat their own cooking’? That is to say, have they used their own money (as opposed to shareholders’ funds) to invest in the company? Do they own a significant percentage of the company?

In answering these questions, value investors ground their analysis in simple mathematics, clear logic and hard evidence. (As the preface to the first edition of Security Analysis put it, “we are concerned chiefly with concepts, methods, standards, principles, and above all with logical reasoning.”) They tend to distrust the advanced mathematics, statistical models and computations which underlie contemporary financial analysis. Mr Graham’s views were quite clear: “in 44 years of Wall Street experience and study I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever [calculus] is brought in, or higher algebra, you could take it as a warning signal that the operator is trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.”

Mr Buffett has uttered similar sentiments. If they are correct, then a firm combining Nobel Laureates, extremely sophisticated computer algorithms, mountains of data and tens and perhaps hundreds of billions of borrowed dollars speculates on an unprecedented scale. Roger Lowenstein’s book, When Genius Failed: The Rise and Fall of Long-Term Capital Management (Random House, 2000, ISBN: 037550317X) analyses the causes and consequences of this phenomenon. Mr Lowenstein has also written the excellent biography Buffett: The Making of an American Capitalist (Doubleday, 1996, repr. ed. ISBN: 0385484917).

Similarly, value investors place no value upon others’ optimism and wishful thinking; and insofar as possible they exclude emotional considerations from their analyses. (Accordingly, and as set out in The Mass Media and Value Investing, they take at face value little of what they read in newspapers and magazines, accept without careful consideration even less of what they hear on radio and television, run as fast as their legs can carry them from ‘tips’ and never visit investment chat sites on the Internet). Although they do not do so fully, examples of the analyses, thought experiments, etc. which value investors routinely conduct are included in circulars to shareholders entitled ‘Irrational Exuberance’ in Australia and Reasoned Scepticism Versus Irrational Exuberance.