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Class 1 and 2 Truths

June 15, 2013

I am reading The Snowball by Alice Schroeder. It is an excellent read about Warren Buffett.

Buffett’s mentor Benjamin Graham had a concept called Class 1 and Class 2 Truths.

A Class 1 Truth is an absolute truth, like the intrinsic value of a company. A Class 2 Truth becomes a truth by conviction, or what people believe to be the worth of a company.

If enough people believed a company to be worth X then it was worth X until enough people thought otherwise. All of this did not affect a company’s intrinsic value.

Where a Class 2 Truth view of a company’s value is less than its Class 1 Truth there may be an opportunity for substantial gains to the investor.

In other words, buy companies that are trading at less than they’re really worth.

Harder said than done!

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