Fundamental truths and core principles of investing don't change. Only their application evolves with time, say famed Value Investor Warren Buffett and his mentor Benjamin Graham.
First Principles
A first principle is a proposition that forms the foundation for a body of knowledge. First principles cannot be deduced from other propositions or assumptions.
"As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble."
In Investing
Benjamin Graham — the founder of Value Investing — taught that the foundation of successful investing was the Margin of Safety.
Graham also wrote:
"The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate."
Interestingly, Graham also taught his students how his framework could be adapted to changing interest rates, as well as inflation rates.
Graham's most famous pupil — Warren Buffett — has reiterated on multiple occasions that the principles of sound investing have not changed one iota since his mentor first defined them nearly a century ago in Security Analysis (1st edition: 1934).
Buffett On Principles
In the 2018 Balance of Power interview for Bloomberg Markets, Buffett was quoted as saying:
"The principles haven't changed at all... It's exactly what Ben Graham wrote in 1949."
Jobs On Values
Steve Jobs explains why the core values that made a business successful should not change. This reasoning would apply to the business of investing as well.
Naval Ravikant on Science
Many of the misunderstandings and misquotes about Value Investing stem from a basic lack of understanding of what science is, and how it works.
Finance, after all, is a Social Science; with its own complexities. Technology itself is nothing but applied science, as Naval Ravikant — co-founder and chairman of AngelList — explains in the podcast below. In his other podcast on How to Get Rich, he also explains that computer programming is essentially applied mathematics.
The podcast covers multiple aspects of Scientific Thinking in general, and is great starting point for anyone wanting to understand its basic aspects and how to approach it correctly.
Some of the concepts covered here that are especially relevant to investing are — why one doesn't test theories without good explanations, and why entrepreneurs have to be rational optimists. The latter would also apply to investors, since entrepreneurs are essentially investors with zero diversification.
The podcast covers the concept of Axioms, or the First Principles referred to above, as well.
Submitted by GrahamValue. Created on Thursday 19th December 2019. Updated on Sunday 30th January 2022.