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!