Value Investing

Investing is simple, not easy

Warren Buffett remarked, “Investing is simple, not easy.”

There is a big difference between something being simple and something being easy.

The simple part is the approach, which is basically buying stocks when they are selling below the underlying worth of the company. It doesn’t take too much brainpower to buy a dollar’s worth of assets for seventy or eighty cents. That’s the simple part.

The “not easy” part is being able to value the business and then pulling the trigger and actually buying the stock. Many times the greatest opportunities occur in the midst of fear and panic.

A little less than eight years ago Lehman Brothers declared bankruptcy and the stock market went into a tailspin. You could’ve run your finger down the P/E column of the newspaper and found dozens of financially sound companies trading for single-digit P/Es.

It really wasn’t that hard identifying financially sound companies trading at a discount. However, it wasn’t very easy, for most investors, to actually buy those stocks in the face of a stock market that was plunging.

What separates the great investors from the pack is their ability to stay rational. They have a keen ability to think clearly and stay unemotional. When asked to describe what accounts for his success, Charlie Munger, vice chairman of Berkshire Hathaway, said, “I’m rational. That’s the answer. I’m rational.”

I would like to introduce you to investors who might not be household names, but who stand out among their peers. I have selected one insight from each that I keep in a journal on my desk. I’ve profited greatly from their insights.

Please note that the advice of these great investors is not difficult to understand, nor does it require an MBA from an Ivy League school. Instead, the advice is simple, clear, and to the point. The advice is simple to understand, but for most investors not easy to take.

Howard Marks is the chairman of Oaktree Capital Group, which has $76 billion in assets under management. His investment memos are must-reads for investment professionals. They were recently compiled in a book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor.

“The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”

It never ceases to amaze me how so much of investing is psychological, yet so few investors focus on that aspect. Instead, they spend their time hunched over spreadsheets or trying to find the next needle in the haystack.

The last five years have shown investors, once again, that the best buying opportunities happen when investors sell what they have to and not what they want to. These forced sellers find themselves selling into an emotionally charged panic. It’s at that moment that rational investors are able to pick up the best bargains.

John Templeton
was one of the pioneers in the mutual fund industry. He is noted for, during the Great Depression, buying 100 shares of each NYSE listed company that was then selling for less than one dollar a share (104 companies, in 1939), later making many times the money back when industry in the US picked up as a result of World War II.

In 1999 Money magazine called him “arguably the greatest global stock picker of the century.”

“Focus on value because most investors focus on outlooks and trends. You must be a fundamentalist to be really successful in the market.”

Instead of trying to project what the GDP would be next quarter, the unemployment rate for the previous month, or interest rate trends, Templeton focused on the fundamentals of the company. If he could buy one dollar’s worth of assets for eighty cents, he didn’t need to know much more than that to make an investment.

All the selections we’ve ever made in Hidden Values Alert in all our portfolios were based on the fundamentals of the company. Forecasting is a very difficult, if not impossible, endeavor. Economist Edgar Fiedler said, “He who lives by the crystal ball soon learns to eat ground glass.”

Seth Klarman is the founder of Baupost Group, a private investment partnership. Klarman’s book, Margin of Safety, currently out of print, goes for more than $1,000 on eBay. He’s sometimes called “the Warren Buffett of his generation.”

“Once you adopt a value-investment strategy, any other investment behavior starts to seem like gambling.”

Buying stocks based on the season of the year, chart patterns, or momentum is an approach that has made few investors rich. The list of billionaires on the Forbes 400 is filled with investors who have made their money from buying stocks when they were selling for less than the underlying worth of the business.

Once you take that approach, buying or selling stocks based on anything other than valuations is hard to swallow.

 

Instead of trying to predict what the future holds, we continued to stick to what we know best: finding financially sound companies trading at bargain prices. That strategy continues to pay off for us.