The Schools I: Graham to Buffett/Munger

Learning objectives

By the end you can:

1. State and defend the price–value distinction from first principles: define intrinsic value as the discounted value of the cash a business will hand its owners over its life, explain why market price diverges from it, and articulate why that divergence is the value investor's entire opportunity.
2. Deploy the Mr. Market parable as an operating discipline: describe Graham's manic-depressive business partner precisely, and convert the allegory into three standing rules (the market serves you, it does not instruct you; his mood is your opportunity, not your valuation; you are never forced to transact).
3. Reason about the margin of safety quantitatively: explain why it is the central concept (estimate fallibility plus adverse futures), and how much to demand by scaling the discount to the width of your Phase-3 valuation range and the durability of the business, applied to a conservative estimate rather than an optimistic one.
4. Compute and screen a Graham net-net: calculate net current asset value (NCAV = current assets − total liabilities), apply the two-thirds rule and the diversification requirement, explain why net-nets worked historically and why they are rare today, and identify the value-trap ("melting ice cube") failure mode.
5. Distinguish Graham's defensive and enterprising investors: recall the defensive stock-selection criteria (size, financial strength, earnings and dividend record, moderate P/E and P/B), state what extra work the enterprising investor takes on, and place yourself.
6. Explain cigar-butt investing and its limits: define the "one last puff" trade, show with the compounding math why it fails at scale and why time is the mediocre business's enemy, and name the transition point that pushed Buffett past it.
7. Narrate the Graham→Buffett evolution and Munger's role: give the three forces (scale, the compounding arithmetic of durable high returns, and Munger's quality turn), and use See's Candies as the hinge case that proved a franchise's economics to Buffett.
8. Apply the Buffett/Munger four filters (understandable business, durable moat, able and honest management, sensible price) to a real company, and reconcile owner earnings to the free-cash-flow work of M2.04, distinguish economic goodwill from accounting goodwill, and explain pricing power, float, and "the first rule is don't lose money" as the pillars of the quality school.

Prerequisites & connections

Builds on. M0.01: the five-questions spine and the ROIC>WACC master idea; the philosophy here is what tells you what to do once the spine is answered. M2.04, free cash flow and, specifically, §4.8's owner-earnings section: owner earnings is not re-derived here, but you will see why Buffett made it the unit of value and how it reconciles to the FCF you already compute. M3.04–M3.05, intrinsic valuation and, above all, the reverse DCF: the margin of safety is a discount applied to the Phase-3 valuation range, and "what is the price implying?" is the question every Mr. Market episode secretly asks. M4.04–M4.05, the moat: filter two of the four filters is the durable competitive advantage you learned to prove in the numbers, and See's economic goodwill is a moat expressed in balance-sheet language. M5.03, insurance float: the float section below is the philosophy behind that module's mechanics. M3.07, capital allocation and reading a proxy: filter three (able and honest management) is that skill, re-aimed at judgment rather than computation.

Feeds forward. M6.02 completes the schools (Fisher's scuttlebutt and growth, Lynch's GARP, Greenblatt's magic formula, Klarman's absolute value, Marks's cycles, Pabrai's asymmetry, and the Smith/Akre/Sleep quality-compounders). Every one of them is a variation, extension or rebuttal of the Graham→Buffett axis you fix here, which makes this the reference frame for that one. M6.03 formalizes circle of competence (filter one) and the ruin-avoidance behind "don't lose money." M6.05 turns every decision rule in this module into a line of your written checklist. Phase 8's teardown question 12 ("cheap or expensive vs quality?") and the deep-dive thesis both end in a margin-of-safety judgment that is pure M6.01. Competency C9 (investor's temperament and process) is founded here; C5 (value three ways) is given its philosophy here.