The above is a statement by warren buffett. It is a very apt comment. Value investing does not require a major leap of faith. Most of us can find companies selling below intrinsic value. That is the simple part. The difficult part is ignoring your emotions and buying such a stock.
Value investing is even more difficult when the market is in a momentum phase, as it was during 2003-2007, when most of us could have made money by buying the hottest stock. Investors piled into real estate, infrastructure and other hot stocks and made good money as a result. Unfortunately very few have been able to hold on to the gains. Some may have suffered losses if they entered these stocks late in the game.
In addition a lot of these investors are now blaming the markets, the weather, the government and everyone else except themselves for the losses. I have personally learnt a key lesson over time – blame yourself for the losses and you will learn from the mistakes and not repeat them in the future.
Value investing is dumb
I frequently got mail or comments then, which went this way – My friend and my milkman have made a lot of money in the last 2 years. You keep talking of value investing, intrinsic value etc etc. All that is fine …but where are the results ? I think value investing is dumb !
My response typically was – Value investing is not a fad or a technique. It is buying something for less than it is worth. However this approach has to be combined with the temprament of not getting swept up in the euphoria of the markets. As much as one has to buy undervalued stocks, one has to avoid overvalued or fully valued stocks too.
So the reason value investing is diffcult is because one looks like a complete dumb a** buying stocks which have been dropping for some time, which do not have sexy prospects and which no one wants.
Price tracks value ..eventually
In the end price tracks value. Let me repeat – Price always tracks intrinsic value. This is the fundamental law of markets. The stock price may get disconnected from intrinsic value for some time, however it eventually converges to the intrinsic value of the company. So the key to making money is to buy below intrinsic value (preferably where the intrinsic value is also increasing) and sell when the stock sells above the intrinsic value. That’s all there is to value investing ..simple to understand but not easy to execute.
As an aside, I saw the following discussion on TED ( a discussion board on stocks) and liked what vivek had to say. I would recommend reading his response towards the end of the thread. I could not have said it better. Vivek’s response kind of demonstrates why value investing is not easy
‘A Balmer Lawrie is still available at these valuations, but can you go beyond ” Balmer Lawrie makes a 52-week low or What return the stock has given in the last 3 years”…..the answer will be a flat “No”…..
The thing is one needs to train his eyes….thats all’
your shares in dp are always safe as the dps are holding them as custodions hence the creditors have no recourse to the stocks held by dp.afterall the dps cannot have extraordinory losses as the banks by its nature.
Rohit,I agree, Value investing is easy to understand but its paninful to follow. Esp when you put lot of your networth.I am fortunate that my very first investment had fantastic swings (my emotional swings followed) and it was a good learning experience.RegardsVishnu
Hi RohitJust read the news on Yahoo that Berkshire investing in Goldman Sach. That means Goldman trading on attractive valuation. Can you throw light on Goldman’s current valuation. What made WB to take this decision?RegardsAni
Ani,WEB is not buying any stake at present in GS.He getting 10% coupon on his investment for next five years and has option convert to equity at any point of time in next five years for the price of US$115.He has done this kind of investments in the past and made a killing. Example- Salomon Brother in 90s. You know this his second investment on a wall street firm in his entire career; he is always vary of wall street firms.Not a real letter…just a mockery column..good readhttp://seekingalpha.com/article/85504-a-letter-to-warren-buffett
thanks sahadeva for your comment.hi vishnu – agree with you. looks easy ..but not easy on your emotions ..but then why should making money sitting on your ass being easy :)hi aniagree with kannan. Warren buffett is investing in preferred stocks with a free option. It is more of a hybrid – debt + option kind of investmentregardsrohit
Rohit,Another great post. I think one is able to control his emotions with experience..or shall I say with mistakes :-)Is there a path or list of steps that you can share with us? Like what should we read to know more about Value Investing. I know u have recommended some books. But some simple steps/process will help. These are big on American Finance Blogs. Easy to follow strategies.Thanks,Vikas
Rohit,I also read Vivek’s post that you had provided the link for.Have you analyzed any of other companies (meeting Sampat’s criteria) that he talks about? such as Good year, Abbott etc.Thanks,Vikas
Hi vikasi will to post on initial reading and steps for a new investor. not sure if i can come up with a few simple steps.there is an overlap between mine and vivek’s picks. however we have different approaches ..so there are differences too. i had a look at abbott ..however i already hold novartis and merck and hence do not want to add further to pharma. not sure if these companies are per C.sampat’s crtieria though. Mr sampat is a brilliant man ..he is great thinker and has tons of experience. however he shuns media , so diffcult to find much on him. however i think one should anything that he has to sayregardsrohit
Hi Rohit,Thanks for your repsponse. The theequitydesk has its XI Portfolio and lot of other sr members have also posted their portfolios.Are you fan of any one? Or consider any of these folks of good caliber (for value Picking)?Vikas
Value investing definitely works. Look at Warren Buffet. He recently put $5 billion into Goldman Sachs (GS). He doesn’t invest unless there is value.The thing with value-investing is you have to be patient and consistent. Unfortunately that is where most people go wrong. They either keep changing their strategy or are impatient and abandon their stocks at the wrong time.
Hi vikasi browse TED sometimes, though i dont post much. I like the thought process of some of the members like vivek sukhani, kulman,abhishek jain and a few others.i cannot comment on anyone’s caliber as i dont have access to anyone’s performance.i have seen some of the portfolios, though i dont look for any validations of my ideas on the board. one has to think independently and not go by what everyone else thinks
Hi daxtrue ..very few people have the patience especially when their style is not working for short periods of timeregardsrohit
Rohit,thanks.I understand one needs to do his own analysis and the criteria/filters would be different for each investor.But there should be common understanding regarding some stocks that each value investor would like to own. Vikas
Hi Rohit,I know you really have some good model/filters. I asked Vivek for his current Top picks and following is what he gave:ONGCGlaxo ConsumerITCCastrolBalmer Lawrie and its investment parentVoith paperFoseco indiaShipping CorporationGoodyearGreat eastern ShippingI know you had analyzed BL, can you pls do the same with others that you like from the above list. It is time for 2nd round of Rapid Fire..:-)I like the fact that Sensex, Nifty levels are touching new lows.I love your style of analyzing companies. Easy to understand, hopefully one day I can do the same.Thanks,Vikas
Hi vikasI will have a look at the list above. however i am tied up now and may not be able to do it soonregardsrohit
Hi Rohit,The list got reduced to following four for now:ONGCVoith PaperGoodyearHawkins Cooker (i remember u wanted to look at it)I believe you have already provided analysis for glaxo Consumer and Castrol (was short one).whenver u get to it.Thanks,Vikas
Rohit,I can’t see my previous post. If you can please add following three to your list (comes from Vivek) as well:ConcorTata TeaSavita ChemicalsI believe first two you had wanted to spend more time on.Thanks,Vikas