Where we start
Value investing is usually sold as a way to find cheap stocks. It is better understood as a way to think: a refusal to let a moving price stand in for a judgment about a business. Benjamin Graham built the discipline in the 1930s and 1940s; Warren Buffett, his student, spent sixty years of shareholder letters explaining it in plain words. The six Owner sessions teach the reasoning without a spreadsheet: what you own, why value is a range, why you leave a gap, where your knowledge ends, how to treat a price that shouts, and which mistakes come from your own head. The Analyst track does the same work with real filings.
Educational, not investment advice. Nothing on these pages recommends buying or selling anything. There are no market prices, no tickers and no price charts anywhere in the sixteen sessions. Where a price is needed to make a point, you type it yourself or the page says it is constructed.
★ What you walk out with tonight. A one-paragraph owner's description of a business that names what it sells, who pays and why they come back, what it must spend just to stay where it is, and what is left for the owners; the four questions Buffett set out in 1977 before any valuation; and the first habit of the discipline, which is to keep the price of a share and the value of a business in two different columns.
A share is a slice of a business
5 min livePicture the whole business as a machine. Customers pay money in. Suppliers, staff, landlords, lenders and the tax office take their share out. Some of what remains has to go straight back into the machine, because floors wear out, vans break and a shop that is never refitted stops attracting customers. Only what is left after that is the owners' money. A share is a fixed fraction of that last stream, and nothing else.
LiveOwner or ticket-holder: the same share, two ways to hold it3 min▶
Two people hold the same share. The first watches the price, and their question each morning is whether it went up. The second treats it as a part-ownership, and their question each year is whether the business is earning more for its owners than it was, and whether it is spending wisely to keep doing so. On most days the two questions have nothing to do with each other: a price can rise on a day the business had a bad month, and fall on a day it signed its best contract.
Buffett's 1977 letter to Berkshire Hathaway shareholders puts the second stance in one line: the firm chose its share investments much as it would evaluate buying the whole business. That is the move. Imagine buying all of it, then scale down. If you would not want the whole business at a given total value, a slice of it at the same proportion is no better.
Self-studyWhat sits between profit and the owners' money3 min▶
A profit figure is an accountant's estimate of what the year earned, spread fairly across the years the assets will last. Owners' cash is narrower. It is what could be taken out of the business at the end of the year without making the business smaller or weaker. The gap between the two is mostly the brass loop in the figure: the spending needed just to stand still. In a business with cheap, long-lived assets the loop is small and profit is close to owners' cash. In a business that has to re-buy expensive equipment every few years, the loop can eat most of the profit.
Buffett gave the gap a name in his 1986 letter: owner earnings. It is reported earnings, plus depreciation and other non-cash charges, minus the average yearly spending the business needs to keep its position and its volume. The Analyst track computes it from real filings in session 1. Here the point is only the shape: there is a loop, and it is spent first.
Reading the three statements themselves, and why cash and profit diverge, is taught properly in Finance: Reading the Numbers ↗. Here the statements are inputs to an owner's question.
Buffett's own example of the gap. In the 1986 letter, Buffett showed one company, Scott Fetzer, reported two ways. Before Berkshire bought it, its 1986 earnings were 40.2 million dollars. After the purchase, new accounting charges created by the purchase price cut reported earnings to 28.6 million, for the same factories, the same customers and the same cash. His point was that the owners' economics had not moved at all; only the accounting had. An owner reads through the reported number to the stream underneath.
You are paying for cash that has not arrived yet
5 min liveLast year's owners' cash has already been paid out or kept. Nobody buying today receives it. What a buyer pays for is the stream still to come: next year's, the year after, and so on for as long as the business lasts. Two things shrink each future payment before you can compare it with money in your hand today. It is later, and money later is worth less than money now. And it is uncertain, so it may not arrive at all.
LiveIntrinsic value, in one sentence you can say out loud3 min▶
Intrinsic value is the cash an owner can expect to take out of a business over its remaining life, with each year's cash shrunk to what it is worth today. Every word in that sentence does work. "Expect" means it is an estimate. "Take out" means owners' cash, not profit. "Remaining life" means the far future counts, which is why a business's durability matters so much. "Shrunk to today" means a rate has to be chosen, and the rate is a judgment about time and risk.
Two consequences follow, and the next two sessions are about them. Because every input is an estimate, intrinsic value is a range, not a number (Owner session 2). Because the estimate can be wrong, a careful buyer only pays well below it, leaving a margin of safety (Owner session 3). Why money later is worth less than money now, the price of time, is taught in Economics, Foundations session 5 ↗.
Self-studyPrice is a fact about a market, value is a judgment about a business3 min▶
A price is a fact: it is what one buyer and one seller agreed a moment ago. It is not a measurement of the business, and it can move a great deal while the business moves very little. Value is a judgment you make, with your own estimates, and it should move only when what you know about the business changes. Keeping the two in separate columns is the whole of the first habit.
This is why there are no market prices on these pages. Seeing a price before forming a judgment pulls the judgment towards it, a pull psychologists call anchoring (Owner session 6). The discipline is to estimate value first, write it down as a range, and only then look at what anyone is asking.
Halden Tiles, a constructed business. Halden is an invented family firm selling floor and wall tiles from three showrooms. A cousin offers you 10 percent of it. The first thing she tells you is that a neighbour paid "about a million" for a similar stake last year. That is a price, set by two other people, for a different business, in a different year. It is not information about what 10 percent of Halden will hand its owners. The six Owner sessions use Halden as the running case; every Halden number is invented and the page says so each time.
Four questions before any number
5 min liveBuffett's 1977 letter lists what Berkshire wanted in a business before it would buy shares in one: a business it could understand, with favourable long-term prospects, run by honest and competent people, and available at a very attractive price. The order matters. The first three are about the business and can be answered without any price at all. Only the fourth needs one, and most businesses never reach it.
LiveWhy the price question comes last3 min▶
If you ask about price first, every later answer bends towards it. A business that looks cheap invites you to understand it more generously than it deserves; one that looks dear invites you to find reasons it is not that good. Answering the three business questions first, in writing, before you know or type any price, protects those answers from the number.
The first gate does most of the work. "Can I understand it" does not mean "have I heard of it". It means you can say, in plain words, how the business makes money, why customers come back, and what would most plausibly break it. Owner session 4 calls this the edge of what you know. A business outside it goes in the too-hard tray, and the tray can hold almost everything without costing you anything.
Self-studyWhat "favourable long-term prospects" asks of you2 min▶
It asks for a view about durability: will customers still want this, will rivals be able to take it away, will the business need to keep pouring cash back in just to keep up? A business with a durable advantage keeps earning good returns for longer, and because value counts the far years, how long matters as much as how much. Moats as economics, network effects and switching costs, are taught in Economics, Foundations session 6 ↗. Here a moat matters only as an input: Analyst session 8 turns it into "how many years do the excess returns last".
Halden Tiles at the four gates, constructed. You can say how Halden makes money: it buys tiles from four importers, marks them up, and sells mostly to small builders who come back because the showroom staff know which tile suits which floor. Gate 1 passes. Prospects: new housing in the region is steady, but two of its builders have started ordering online direct from importers. Gate 2 is a question mark you write down. People: the cousin runs it honestly, but the books are kept in a way only she understands. Gate 3 is another question mark. You have not asked about price, and you already know what you would need to find out.
Read one business as its owner
★ 22 min · everyone works it throughNo code and no market prices. Halden Tiles is constructed, so every figure below is invented to make the arithmetic visible; the shape of the reasoning is the real thing. Work each step on paper, then do it again for a business you know. By the end you have the owner's paragraph, a first owner-earnings figure, and a list of what you would need to find out before any price could mean anything.
Step 1 · What does it sell, and to whom? One sentence, in words a twelve-year-old would follow. If you cannot write it, the business is in the too-hard tray and you can stop here without losing anything.
Step 2 · Why do customers come back? Repeat custom is the part of a business that makes the future less of a guess. Name the reason, and name what would end it.
Step 3 · What must it spend just to stay where it is? Not to grow: to stand still. Refitting showrooms, replacing vans, keeping the stock range current. This is the brass loop from Part 1, and it is the number you will be least sure of.
Step 4 · What is left for the owners? Start from reported profit, add back depreciation (an accounting charge that used no cash this year), subtract the step 3 figure. That is owner earnings in Buffett's 1986 sense.
Step 5 · What would a 10 percent slice receive? A tenth of the owners' cash, if the business paid it all out: about 0.10 million a year. Whether it does pay it out, or keeps it and reinvests it well or badly, is a question about the people (gate 3).
Step 6 · Write what you still need to know, before any price. The honest output of a first reading is not a value. It is a short list of what would change your estimate most. Owner session 2 turns this list into a range.
Keep the owner's paragraph as a standing rule. Four sentences: what it sells, why customers return, what it costs to stand still, what would break it. If any of the four is blank, no price can be attractive, because you do not yet know what the price would buy.
Before Owner session 2
30 min- Write the owner's paragraph for one business you know well, in the four-sentence shape of step 6.
- Find its standing-still spend in plain terms: what wears out, what has to be replaced, how often. A rough list is enough; the number will be a guess and that is the point.
- Run it through the four gates and mark each pass, fail or question mark. Write down what would turn each question mark into an answer.
- Notice one price you saw this week for anything, and write one line on whether it told you about the thing itself or about the people trading it. Session 2 turns your paragraph into a range.
Three questions
Clear all three and Owner session 1 gets stamped in your passport.
1 · What does one share of a company give its holder a claim on?
A share is a slice of the owners' stream. Last year's profit is already earned and either paid or kept; the price is what two traders agreed. The claim is on future owners' cash, which is why the spend needed just to stand still has to come out first.
2 · Halden Tiles (constructed) reports 1.10 million profit, 0.40 million depreciation, and needs about 0.50 million a year to keep its showrooms and vans as good as they are. What are its owner earnings, in Buffett's 1986 sense?
Adding depreciation back without subtracting the spend to stand still is the "cash flow" figure Buffett warned against in the same letter: it hides the money the business must keep reinvesting. The 0.50 is a guess, which is why owner earnings are an estimate rather than a reported fact.
3 · Before buying shares, Buffett's 1977 letter asks four things of a business. Why does the price question come last?
Price matters a great deal, which is why it is a gate at all, but it is the only gate that needs one. Asking it first lets a cheap-looking price soften your view of the business. Most candidates fail at "can I understand it", and the too-hard tray costs nothing.
What this session teaches, and where it came from
Every fact on this page, and its verification tier, is recorded in the course's source map.
Owner session 1 cheat sheet · pin this
You can now describe a business as its owner and put a first figure on what it hands its owners. Owner session 2 asks how much that stream is worth today, and answers with a range rather than a number: three honest views of Halden's future, the inputs that move the answer most, and why a single precise value is the least trustworthy thing a valuation can produce.