Value investing is certainly not new. But it is often overlooked by new investors in favor of pursuing much quicker profits. But all that glitters isn’t gold and sometimes the tried and true methods are genuinely more successful. So take a look at some words of wisdom from the more famous value-investors and see if it might suit your investing style.
Having spent the majority of my career as a financial planner before transitioning to the teaching of financial planners, it is no wonder that I’m constantly asked for advice. Somewhat like a Doctor, who when met socially, is barraged with a variety of medical symptoms requiring a free diagnosis. I too seem to attract a stream of financial inquiries demanding not only detailed responses but indeed, gratis as well. Damn!
But I must say, although inconvenient, and certainly to the chagrin of my wife, I am quite amenable to discuss anybody’s financial issues, anywhere, and at just about any time, “until the cows come home”. I certainly have a passion for financial markets and thoroughly enjoy any discussion centred on the topic.
So as a result, I thought it would be of interest to assemble some words of advice from others with a similar passion. But not just from anyone, rather, from some of the world’s most successful value-investors. Advice selected not only because of its inherent wisdom but also for the practical guidance offered, vital when formulating your own investment philosophy.
Quite amazingly, with just a couple of sentences, these guys have been able to explain some key principles required to build long-term wealth from share markets. As each quote is derived from extensive experience in every type of market condition imaginable. So read and reflect deeply on the sentiments being portrayed.
But remember it’s not solely participation that builds experience; you also need to be a keen observer. So before putting your money at risk, take time to do some careful watching of local and international markets, keep up to date via news and other media and always continue reading and researching.
So for all of you wanting to genuinely improve your investing outcomes, here are some ‘old hands’ who have been more than willing to share with you their experience. Oh, and it’s free as well!
So let’s start with a bloke named Seth Klarman who runs a hedge fund called the Baupost Group with over USD30 billion under management. He is the epitome of a traditional value investor as he looks for companies, bonds or real estate opportunities that trade below what he believes is their intrinsic value.
Most importantly, he demands that a ‘margin of safety’ must be incorporated in any investment before he will buy it. In fact, he even wrote a book titled “Margin of Safety’. A copy of which is reputed to sit on Warren Buffets desk. Accordingly, he will never chase a particular asset just because it’s the current ‘flavour of the month’. This alone is one very valuable rule to follow, think Bitcoin for a recent example.
Seth tells us that “generally, the greater the stigma or revulsion, the better the bargain.” From my own experiences as an advisor, I was astounded at the number of investors who were ‘champing at the bit’ to invest in the ‘flavour of the month’. The absolute opposite of what Seth is advocating. Boom times are very dangerous for the inexperienced investor.
They are very easily lulled into a false sense of security by following the crowd and falling for the endless good news. Unfortunately for them, they also end up falling over the proverbial cliff as well. For wise investors, going against the crowd is where the real value is found. Called contrarian investing, it literally means doing the opposite of what everyone else is doing. I’m comfortable with it, Seth certainly is, and so should you be.
But additionally, it’s not just about going against the crowd. You also need to be able to analyze the potential of an asset for growth. Therefore close examination of a company’s financials will reveal if a company is on the nose because it ’s a rotting ‘carcass’ or because it’s totally misunderstood by the majority of market participants. Always look for the latter. Or as our friend so succinctly says “Value investing is at its core the marriage of a contrarian streak and a calculator.”
Value-investing is also for the long term. And long-term can mean anywhere from five years to fore-ever. Time is the key that unlocks the value you have painstakingly discovered. So don’t throw it away at the merest hint of market volatility. Always remain determined to stay for the long term, no matter how painful market conditions get. As Seth would say
“… With the exception of an arbitrage or a necessary short-term investment, we enter every trade with the idea that we are going to hold to maturity in the case of a bond and for a really long time, potentially forever, in the case of a stock. Again, if you don’t do that, you are speculating and not investing…”
And his final words of wisdom to bring it all together, “While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.”
Now as far as value investors go, Benjamin Graham is probably one of the most familiar. Brought to our attention by the great Warren Buffett, who credits Graham’s landmark book The Intelligent Investor” as one of his greatest influences.
By the way, any would-be value investor worth their salt needs to have also read his book. Sure, it’s heavy going and tedious and there are plenty of calculations to get through. But if you want a genuine foundation for your value investment knowledge, Graham’s book is the one that will give it to you. Check it out here.
Anyway, his writing aside, Benjamin Graham was an economist and Professor whose research went on to form the basis of value investing. He is actually considered the father of value investing and when he speaks, we should listen!
More often than not, people mix up gambling (speculating) with investing. Not the specific action of actually making a bet, but rather, the chances of attaining a successful outcome. Value investors examine, assess and form strong opinions about certain assets and their probability for success before committing money.
Their investment funds are protected by risk management strategies and they have the patience to remain faithful for the long term. Gambling has none of these; it is a pure chance no matter how you look at it.
As Benjamin Graham so nicely puts it, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” My advice would be to benchmark your investment activities against Graham’s words before you proceed further
Graham too was very skeptical about crowd behavior-guiding an investment. During boom times, often the only’ research’ conducted by new investors is to find out what everyone else is doing and just follow. Remember as Graham so aptly said, “Buy not on optimism, but on arithmetic.”
And finally, any discussion on value investing really can’t be complete without mentioning the absolute epitome of the genre, and that’s Mr. Warren Buffett.
But his quotes and pearls of wisdom have been dispensed many times over, so I am leaving the final word to his business partner of 60 years Mr. Charlie Munger. Not only is he just as investment savvy as his better-known partner, he can also distill some pretty good advice into just a few words.
“All intelligent investing is value investing — acquiring more than you are paying for. You must value the business in order to value the stock.” Here here, Mr. Munger.
Now, of course, there are plenty of other helpful hints, quotes, and pearls of wisdom about value investing. And they all pertain to the same very simple and thoughtful investment rules. So if you want to become a value investor, do some research it will be worth it.
Thanks for reading and see you next time. Homepage.