Surrounded by the sea of noise especially during this crisis period, it is extremely easy to get lost in the financial market. Most market participants spend the entire time being aimless, following the latest fads and end up burning their pockets repeatedly.
During any point in their investing journey, it is likely that they have encountered value investing but many dismiss it as old-fashioned and boring. They are right, what excitement is there in investing in boring and possibly unloved companies? Let’s not get started about the importance of sitting on cash and waiting for opportunities.
Value investing is a waiting game. It is also one that requires a huge amount of discipline and emotional intelligence.
We have specially picked out 5 key ideas espoused by great value investors to hopefully serve as reminders for you to remain steadfast and confident in your decisions.
Be a contrarian investor
“To be a better investor, you have to stand on your own. You just can’t copy other people’s insights.” – Li Lu
“Graham’s wonderful sentence is an investor needs only two things: cash and courage. Having only one of them is not enough.” – Seth Klarman
“We go where there is value, not where everyone else goes. Sometimes the best value is where no one else is at.” – David Herro
We have always encouraged our readers not to be afraid to think differently. This isn’t to say that you should always think differently but that you should not be influenced by the crowd.
Very often, the value investing approach will lead you to a conclusion that is antithetical to the market consensus and we are here to assure you that that is perfectly fine.
This does not mean that you should look at what the crowd is doing and do the opposite but to not be afraid of being different.
Investing isn’t 100% science
“…investing is at least as much art as it is science… emphasize how essential it is that one’s investment approach be intuitive and adaptive rather than be fixed and mechanistic.” Howard Marks on investing
Very often, many finance academics and hedge fund managers embark on their own journeys to seek out the secret algorithm or formula that can explain their returns.
As an innate attribute, we are constantly trying to find a convenient structure to routinize investing. We refuse to admit that businesses are run by humans, also as unpredictable as ourselves. They make mistakes too and sometimes even the best managers aren’t able to lead an excellent company to glory.
Hence, just as what Howard Marks has shared, we ought to place minimally an equal emphasis on developing an accurate judgement and on honing your quantitative skills.
Remember, your estimated range of intrinsic value is only possible with both numbers and assumptions. What determines the accuracy of your numbers are your assumptions.
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Risk first, then returns
Like the rest, if your obsession is with forecasting unrealistic growth and feeling good about it, you will probably be losing a lot of money in the stock market.
One of the most important investing principle you ought to adopt is to be risk-averse. Always refuse to risk a permanent loss of your hard-earned capital.
When the market tells you that so and so is going to be the next big thing, tell yourself that you can afford to pass on this opportunity. Stick to what you know because that’s where there’s the least risk of getting it wrong.
“Never invest in a business you cannot understand.” Warren Buffett
Stocks as businesses, not a lottery ticket
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Benjamin Graham
“Entrepreneurs are great at dealing with uncertainty and also very good at minimizing risks. That’s the classic great entrepreneur.” Mohnish Pabrai
Your attitude towards holding a company will influence your investing approach dramatically.
If you own a business, would you be thinking of selling it out after a few days of weeks of acquiring it? You bought with the intention to let it grow and grow your wealth for you, not to ‘gain’ any minuscule amount of coffee money.
Hence, there will also be greater emphasis on picking a stock from a business point of view. You will actively evaluate the traits and attributes of the business instead of following the consensus.
Thinking like a businessman will allow you to understand the industry and the business at a deeper level. The acquisition of knowledge will no doubt decrease the risks of your investments. Instead of going with the flow and threading on thin ice, you will prefer to go by the safer route instead.
You can’t predict the future
No one can, not even those professionals and experts that so blatantly claimed that they do. You have to discern the difference between gut feeling and cold hard facts.
Value investors recognize this limitation and refuse to play a losing game. We reduce this risk by taking on huge margins of safety. In other words, we choose to buy $1 with $0.50. If the company does well, we benefit a lot. If it goes bust, we benefit less.
What’s next?
If these insights resonate with your beliefs, we are more than thrilled to be sharing more with you. Value investing is a never-ending learning process. No matter how senior or advanced you think you are, you will always find yourself in need to learn and improve.
We hope that our articles will inspire ideas and discussions to facilitate lifelong learning. We strongly encourage you to check out some of our other articles to further your knowledge!
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