Investing Tips from top value investors By Paul Koger of FoxyTrades, full bio at the bottom
Value investors have been beating the market averages for almost a hundred years. Since the great Ben Graham, this style of investing has become more popular among investors. Despite knowing that it can yield in extraordinary returns, most people still try to chase for the latest trend in investing and thus find themselves receiving below average results.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
10 Investing Tips From Legendary Value Investors
Investors that are looking to outperform the market can rather easily do so by following the investment strategies and principles of value investing. Below you will find a list of 10 invaluable tips from some of the best value investors in the world.
- “The secret to investing is to figure out the value of something – and then pay a lot less.” – Joel Greenblatt.
This quote well catches the essence of value investing, which is equal to buying shares of a company at a discount. Now the real value is realizing what is a discount for a given stock. For the untrained eye, a 70% discount compared to the intrinsic value would go unnoticed, while value investors go in heavily to earn market beating results.
- “The single greatest edge an investor can have is a long-term orientation.”- Seth Klarman
It is hard to assess what a stock will do in short term. The difference in the underlying value of a stock and the current price can differ greatly in a short time span. In a longer time horizon, the two will eventually align in most cases, creating profits to investors that had the will power to hold through the rough patches.
- “If you can remember that stocks aren’t pieces of paper that gyrate all the time – they are fractional interests in businesses – it all makes sense.” – Seth Klarman
People tend to forget that the price quotes they follow and invest/speculate in actually represent a share of the business. Prices vary on news, rumors, fundamental changes and on numerous other factors, the investment decision should however be made on the underlying business that the shares represent.
- “When you build a bridge, you insist that it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing.” – Warren Buffett
What Mr. Buffett means is you need to have a margin of safety when making your investments. This margin is usually provided by the buffer between the price you pay vs the actual value of the company you have come up with. And as the latter is something based on your own expectations, it is reasonable to have a large enough buffer in price and value to minimize downside risk and increase upside potential.
- “Being a value investor means you look at the downside before looking at the upside.” – Li Lu
The essence of value investing is first protecting your capital and after that trying to grow it. It is harder to make back what you lost than it is to lose it. A 50% loss would require a 100% gain to make back for the loss. This is why value investors focus so deeply on capital preservation.
- “Fish deeper, fish alone.” – Paul Sonkin
It is very difficult to find undervalued companies that others have missed (reason for them being undervalued). In order to locate such an opportunity, one needs to dig deep into the fundamentals and specifics of the company, research it thoroughly and always have their own opinion before listening to anyone else.
- “Great investors are not unemotional, but are inversely emotional – they get worried when the market is up and feel good when everyone is worried.” – Bill Miller
Being rational when others are not has always been a great way to earn astronomical returns. Emotions should have little to do with investment decisions, although this is not the case for most investors. Even if you can’t avoid them, you can be mindful of their existence and adjust your decisions accordingly. Being a value investor in times of economic difficulties is like being a rich child in a candy store as Warren Buffet puts it.
- “You know, you never get the high and you never get the low.” – Walter Schloss
Trying to pick the absolute top or bottom of a stock is pure speculation and in most cases a matter of luck. It is more reasonable to act based on the relative price and value disparity instead. If a stock has reached near its intrinsic value, it is wise to sell it and look for another bargain instead of trying to pick the exact top of the move.
- “The low-risk, high-uncertainty situation gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much!” – Mohnish Pabrai
Disproportionate risk ratio is a key element to success as a value investor. You either lose little or win much, these are great odds to have in the long run. Short term you may suffer losses, but success is almost guaranteed in the long run, provided that you are diligent enough to assess the odds correctly.
- “Value stocks are about as exciting as watching grass grow. But have you ever noticed how much your grass grows in a week?” – Christopher H. Browne
The best value stocks tend to be boring and thus seldom spoken about in the media, but this is also why thrill-seeking investors neglect them and create wonderful opportunities for those who seek profits in lieu of adventures.
About the author:
Paul Koger is a swing trader and value investor. After working for a proprietary trading firm for three years, he quit and started trading with his own funds. Paul writes about his strategies, successes and pitfalls over at his blog https://foxytrades.com