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!


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s