Buffett: The Making of an American Capitalist

by Roger Lowenstein

Left unresolved was the nagging question of what to do when a cheap stock, after its purchase, became even cheaper. For if prices were sometimes wrong, the authors admitted, it could take an “inconveniently long time” for them to adjust.23 The answer appeared the year before Buffett arrived at Columbia. The Intelligent Investor boiled Graham’s philosophy down to three words—“margin of safety.”24 An investor, he said, ought to insist on a gap—a big gap—between the price he was willing to pay and his estimate of what a stock was worth. This was identical to leaving room for error in driving an automobile. If the margin was great enough, the investor ought to be safe. But what if he was not? Suppose, that is, that the stock kept dropping. Assuming that nothing about the business had changed, Graham said, the investor should pay no heed to the ticker, no matter how grim its tidings.