You have probably heard of investors who have beaten broad-based indices. They are called superinvestors. It turns out that they have one thing in common: they have been applying the principles of value investing.
Value investing requires mental toughness. It’s easy to point to the likes of Warren Buffett, the Oracle of Omaha, as having displayed this strength in character. But Buffett himself points to Benjamin Graham, the genius mentor and the patriarch of what he calls “a very small intellectual village”. Buffett also uses the term superinvestors when referring to Graham’s disciples.
Here are four key things you can learn from him and the superinvestors he taught and inspired:
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
Be mentally tough
Not only did Graham share his “secrets”; he also passed his strategies on to his students. Together with Dave Dodd, he wrote the classic Security Analysis. In the speech and article The Superinvestors of Graham-and-Doddsville, which came out during the celebration of the book’s 50th anniversary, Buffett says: “The patriarch (Graham) has merely set forth the intellectual theory for making coin-calling decisions, but each student has decided on his own manner of applying the theory.” Based on his experiences during the Great Depression, the investor indeed developed a long-term strategy that has helped others rise above the Standard & Poor’s index.
“When we invest in an asset-rich but low-returning business, time may be working against us,” says John Mihaljevic in his book The Manual of Ideas: The Proven Framework for Finding the Best Value Investments. In investing in deeply cyclical stocks, you will have moments in which you have to go where others won’t. It means you will be buying when others are selling and selling when others are buying.
How do you not get swayed by emotions? You need to think about how the stock market undergo four stages: expansion, peak, recession, and recovery. Though there is no way to predict when each stage will occur, you can estimate where the market is in now. A longer time frame will allow you to see it as “points in the distribution curve around average profitability,” as this blog piece puts it.
The second point leads to the third one: be patient. Again, Graham is echoed here. You will find out that the market is full of noise and chatter. There is that temptation to jump on the buy or sell bandwagon because, hey, everyone’s doing it -- and it seems fun. The antidote to such response is to remember that you are a part of the company you chose. When your stocks are sinking, you may immediately think that something must be wrong with your valuation. However, just go back to the idea of market cycles.
Further, assess the situation by asking if what the business is selling will be permanently gone. Or how high is the level of debt it incurred? How sustainable will it be after this unexpected turn of events subside?
Take confidence in the knowing
Analysts and brokers often give or sell you reports that say which stocks will be attractive in this period. There are those who say which days and months are best for buying and selling. Sure, let’s give credit to whom it is due. These are people who study financial statements, global trends, and the political climate. However, according to a report done by The Economist, market analysts made mostly wrong earnings prediction (almost 50%) during financial crises. This revelation challenges the premise that analysts will give better advice when the market is bearish. After all, it should be hard to peddle duds during bad times, right?
Now that you have been warned, remember that part of the value of value investing is knowing the intrinsic value of a business. At the outset, you should have a good grasp of the stocks you are adding to your portfolio. For instance, you are looking to add a wireless service provider to your portfolio. Analysts say your best bets this year include T-Mobile and Sprint. Because Verizon and AT&T are not on the list, should you ignore them altogether? Again, focus on the intrinsic value of each of these companies. Look at their assets and performance. Read relevant topics such as cell coverage in the best and worst locations in the US (I’m throwing in an infographic for you below). Complement that with finding the right strategy through reading about your options.