Hugo of www.vforvalue.blogspot.com
The father of the value investing philosophy, Benjamin Graham, (considered by Warren Buffett, the best investor of all times and, Buffett himself disciple of Graham) wrote the most important words ever written about investing: “Investing is most intelligent when it is business oriented.”
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Investment in stocks is more efficient, better analysed, better understood and has a better chance of being successful if it is viewed as a purchase of a piece of a business. When you invest in a given company by buying some of its shares you are entitled to a small part of its results, its balance sheet, its cash flows and dividends, because you actually own a small part of that company. For this reason it makes all sense to thoroughly analyze all aspects of the business, its profitability, margins, product and management quality, competitive advantages, estimates for the future of the business, competition, balance sheet solvency, its debts, the assets the company owns, etc., to determine whether there is value in that business / investment that has not been recognized by the market and thus may give rise to a profitable investment.
Entrepreneurs easily understand this point, because every day running their business they have to make dozens of decisions aimed at maximizing the efficiency and value of their companies. Decisions relating to operations, with marketing, human resources, payments, but also with the management of the cash in the balance sheet, with corporate financing, currency, interest rate and raw materials risk management, among others.
To all these questions, the best solution will certainly be found if the entrepreneur shows analytical skills, discipline not to make decisions in areas where he does not possess skills, patience and persistence to project the business into the future at the right time and the courage to invest, to accept risks but check for value in investments. All these are value investing characteristics, because actually we are talking about a common posture of rationality, hard work and temperament in face of the activity of investing in order to minimize risks and maximize results. Warren Buffett supported this idea of complicity between entrepreneurship and investing by saying: “I’m a better businessman because I’m an investor and I’m a better investor because I’m a businessman.”
However, these fundamental characteristics of big entrepreneurs / investors are deeply innate characteristics. You can not teach them in colleges, in courses of management or marketing. We can learn in a course how to analyze a business and how to evaluate it, and those lessons are in fact extremely valuable if done properly, but we can not learn to be patience, to not run after the fashion of the moment, to keep decisions simple and comprehensible, to have the courage to make a significant investment at the point of maximum pessimism and a significant disinvestment in a wave of total euphoria. We can not learn it if we d’ont understand it. This particular frame of mind has to be born with the person.
All investors and entrepreneurs are told that in order to obtain higher rates of return they are forced to take higher risks. Value investing strategies have demonstrated over time that it is possible to reduce risk and still get reasonably good returns. For this it is important to develop a sustained investment philosophy, a good research strategy and the specific analysis of all variables inherent to the business in question.
Certainly that it has never crossed the mind of the spanish entrepreneur Amancio Ortega, to divest or totally change the focus of Inditex’s operations, even taking into account all the major economic developments of the past two and a half years and its consequences, including devaluation, the company’s stock is up by more than 50%. However, Inditex remained active in seeking to strengthen its market leadership position, researching for new products and markets to grow, with the conviction that, ultimately, good outcomes would be achieved and the market would recognize the value of its shares. Its trading at all time highs.
Like the value investor, the entrepreneur mantains its way, always learning from its mistakes, but remaining steadfast in the face of its beliefs, focusing on its areas of competence, and having the persistence to continue, even in face of difficult circunstances, to work for value creation. This is the Entrepreneurial Investor’s philosophy.