What is Value investing: This is an investment philosophy, conceptualized by Benjamin Graham in 1949 in his book “Intelligent investor” . Benjamin Graham is known as the greatest investment guru of 20th century – mentor to legendary Warren Buffet. It’s an investing style which demands investing in assets/stocks available at a price which offers substantial discount or “margin of safety” with respect to its intrinsic or fair value.
Margin of safety: This concept has been considered as key cornerstone of value investing by big investors like Graham and Buffet. Margin of safety is the difference between intrinsic value of the asset and its market price . Bigger is the margin , better is the safety and returns of the investment. The return on investment is directly linked to the margin of safety you deploy.
Intrinsic Value: The actual or true value of a security or asset, which may not be equal to its market price or book value. It is ordinarily calculated by summing the future income/cash flows generated by the asset, and discounting it to the present value.
Intrinsic Value: The actual or true value of a security or asset, which may not be equal to its market price or book value. It is ordinarily calculated by summing the future income/cash flows generated by the asset, and discounting it to the present value.
I am going to present a compilation of best quotes (below) from the world’s most successful investors to provide more clarity on basic tenets/facets of value investing.
Relevant & key quotes from Investment gurus
“Price is what you pay and value is what you get” –Warren Buffet
“Don’t buy pieces of papers (stocks), buy great businesses underlying them” – Warren Buffet
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” – Warren Buffet
“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they are on the operating table.” – Warren Buffet
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”- Warren Buffet
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” -Warren
“Market is a voting machine in short term and weighing machine in long term”. (means markets are unpredictable in short term but eventually prices the value of the assets right in the long term) – Benjamin Graham
Mr. Market is a “manic depressive” guy who has frequent bouts of extreme mood swings and is either very ecstatic or depressed on a given day. If you get carried away by Mr. Market’s wild mood swings, you are doomed as an investor. However, if you learn to exploit his mood swings in a wise manner, you would be a winner” - Benjamin Graham
“Investing without research is like playing stud poker and never looking at the cards.” – Peter Lynch
“Only Buy what you understand”- Peter Lynch
“Absent a lot of surprises, stocks are relatively predictable over 10-20 years. As to whether they’re going to be higher or lower in two to three years, you might as well flip a coin to decide.”- Peter Lynch
“I am rejecting technical analysis as a method for investing .You must be a fundamentalist to be really successful in the market.”- John Templeton
“If you want to have a better performance than the crowd, you must do things differently from the crowd.” – John Templeton
“It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.”- John Neff
“I’ve never bought a stock unless, in my view, it was on sale.” – John Neff
“If you have good stocks and you really know them, you’ll make money if you’re patient over three years or more.” David Dreman
“When most investors, including the pros, all agree on something, they’re usually wrong.” – Carl Icahn
Its amazing that all the successful investors in the world (including the above gurus) who made billions of dollars from stock investing (except for one notable exception of George Soros who was more of a trader and speculator than an investor) have only one thing in common. They all followed the basic tenets of value investing with some adaptations. Despite their remarkable success in beating all the indexes and benchmarks consistently for last many decades, most of the market participants including institutional investors(FIIs, domestic mutual funds, leading brokerages and investment banks, retail investors etc.)still don’t follow the basic tenets of value investing(safe and long term investing) and only pay lip service to it.
I find it un-believable and shocking and can only ascribe the following reasons for this behavior
- Temptation/ greed to make a fast buck and fortune overnight(instant gratification)
- Focus on short term goals of beating the other mutual or hedge funds
- Herd behavior of most of the market participants including the big institutional buyers
- Lack of patience and discipline which is required by a long term investor
- Lack of conviction on one’s beliefs or stock picks leading to bouts of fear
In short , I would say that major reason almost all the market participants including us can’t follow the successful tenets of value investing is our lack of emotional discipline. There is a whole subject called “behavioral finance” which is dedicated to this theme. Sooner do we overcome this trait and show more patience, conviction and discipline, more successful we can be in investing and getting abnormal returns, beating the market consistently in long run. I will close this blog with the below quotes from Warren Buffet on importance of patience and discipline.
“Only when you combine sound intellect with emotional discipline do you get rational behavior.”
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Happy safe and long term investing
Cheers
Amar
