Saturday, September 27, 2008
Value Investing Today: Chp 13: Staying the Course
Posted by Reyer Barel
Brandes starts the chapter by reminding us that people have inherent psychological biases that if unchecked, can cause irrational investing behaviour. His suggestion is to follow a value investing approach and safeguard against irrational behaviour by writing down your investing rules to help us maintain consistent behaviour. He re-emphasizes that value investing works by capitalizing on the temporary differences between business value and market prices for shares.
Brandes refers to Graham's introduction of the fictional character Mr. Market. Graham suggests imagining that you own a $1000 stake in a business. Mr. Market is your business partner and every day "he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis". Brandes emphasizes that as value investors, we chose how and when we interact with Mr. Market. Mr. Market will tempt us to sell low and buy high but instead, we can choose to sell out to him at ridiculously high prices and buy at bargain prices.
Brandes advises investors to be as objective as possible in their decision making process. Stick to analyzing the fundamental of a company. Also, by having a deep understanding of ourselves (Socrates - know thyself!) we will be more cognizant of our biases and thus better able to safeguard against them. Hope and regret should have no place in investing. If you buy a company and the underlying business value falls significantly below the market price, selling is not wrong. The decision to buy and sell has to be as unemotional as possible. Brandes states that investing should only be based on a comparison between stock price and underlying business value, that's it.
Brandes believes that if you stick to value investing, at some point, you may look quite foolish in your stock picks, at least in the short term. Your portfolio may decline when others are surging. His advice is to avoid the temptation to abandon the value principles and above all, be patient.