Friday, November 21, 2008

Value Investing: Stay Strong!

No one said being a value investor was going to be easy. In fact, I've heard several different value investors make comments about how difficult it is and how much discipline it requires to be a value investor. For example, in this Morningstar article Larry Sarbit is quoted as recently saying that he is only 57 years old but feels like 87. That doesn't sound like a positive declaration for how easy it is to be a value investor. Obviously these market conditions are taking a toll on even the most seasoned of value investors.

Last year, while attending Prof. George Athanassakos' value investor speaker series at the Richard Ivey School of Business, I had the privilege to listen to the wisdom of Bob Tattersal, a very experienced and successful value investor. I was excited to learn that Bob was actually going to reveal his technique for finding "deep value" in securities. Then Bob said something which revealed his tremendous insight of human behaviour. Bob said, "I don't mind showing you these techniques because quite frankly, most if not all of you are not going to be able to follow my advice". Wow, that really hit me!

Bob knew that many people would go to other careers and would not have the time to diligently apply his methods if it wasn't their main job. He also knew that many others would obtain jobs in companies that would not have a value mandate. For those of us who would go on to work in a value shop, Bob also realized that many of those firms might eventually cave to client pressures when times got rough and eventually veer away from value investing. Even of the remaining few students that were deeply devoted to value investing and willing and able to follow its principles, he knew that even those people would likely not have the internal fortitude and discipline to stay the course. Basically, Bob knew that there were not many people in that classroom that would be able to stick it out as value investors and apply his methods.

Is it easy being a value investor? I think not. Its especially difficult to be a true value investor in a rapidly declining market like the one we are currently experiencing. In this kind of a market, value investors and their clients, have to be prepared to look silly in the short term. Buffett has said that in the short term, he has no idea what the stock markets will do, but in the long term, a company's share price will track remarkably well to the underlying economics of a business.

Warren Buffett also recognizes the difficulty in acquiring the requisite discipline to be a value investor. While Buffett was working for Graham, he learned the hard way the value of being selective and disciplined. In the book "The Warren Buffet Way", Buffett is quoted as saying he became frustrated when Graham shot down idea after idea that Warren presented to him. However, Warren acknowledges that he has benefited tremendously from his acquired discipline to buy only the best ideas. Buffet commented that Graham would only buy when he had all the factors working in his favor. That was an important lesson for Buffett to learn.

What does the most successful investor of all time advise us to do today? Warren Buffett advises us to invest in equities. He counsels that we can't just invest when we feel comfortable doing so and still hope to be successful investors. In this article, released last month, Buffett reveals that he feels now is the time to be buying equities.

As value investors we have to capitalize on the opportunities that Mr. Market offers us and often that means doing something different than the crowd is doing.


Matt said...

Nonetheless, I would be interested in hearing Mr. Tattersal's comments if you still have them.

George said...

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