There is nothing I can say about investing that hasn’t already been said before. More to the point, there is nothing I can say that hasn’t been said by someone wildly more successful than I am. There are endless investors whose net worth is a hundred times more than mine. Dare I say, quite literally, a million times more than mine. If you want an original opinion, you should look to them.
Here, back in Average Investor Land, I speak only of the things I have learned from others — the things I myself am struggling alongside everyone else to put into practice. Here in this domain, it is infinitely wiser to heed the advice of those who have backed their principles with a proven track record of success. Wiser still, it is even more important to not heed the jejune advice of those without one.
With this said, I confess that I am neither an expert nor an investor with a long and pedigreed track record of success. Unfailing optimism aside, I am, in truth, a wide-eyed twenty-four-year-old brashly stepping foot in the wild and undulating sea of investing. Saying that I am speaking to things above my head is an understatement. I am undoubtedly lost at sea without a paddle (to use a metaphor I didn’t make up). However, as is stupidly obvious when you are actually lost in a real ocean, I have learned that when you don’t know what you are doing, cling tightly to something that floats. As I have begun my journey as an investor, I have learned that the principles of value investing and the wise explicators of its principles are that something that floats. Cling to them, and you will survive.
So here in this brief little snippet, I make no attempt at original opinion. Here, I will simply attempt to point out a singular sage principle of value investing and leave your interest ever-so-slightly piqued. Being that this is a timeless principle which has been expounded upon to no end by countless others, it should be readily apparent why this principles is so valuable and why it has so patiently stood the test of time. It speaks for itself. It needs no justification from me. As you read, I hope you will instantly see its incredible import and will understand why, like myself, you should look to this principle before propounding opinions of your own.
A Snapshot of the Value Investor
Fundamentally, value investing is the art and practice of finding out the underlying value of an asset and buying it for less than it is worth. It is truthfully more art than practice. Put more precisely, and in the words of an actual authority, namely the estimable investor and author of Margin of Safety, Seth Klarman,
“[value investing] is simply the practice of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple.”
In the camp of value investors, you will not find messy-haired and scatterbrained millennial day traders hunched over a convoluted computer screen, with eyes darting back and forth between hourly market charts and wildly undulating line graphs. Nor will you find the well-dressed salesman come financial advisor boasting of his next great “unique investment opportunity.”
No, in my slightly fantastical imagination, I like to think that the value investor is a much different, more plodding, and invariant breed. Much more Warren Buffet than Jordan Belfort; more calculated than braggadocios. The value investor is one who is well-versed in the language of company financials and is unafraid — perhaps even a little giddy — at the thought of draining away the evening hours immersed in report after report, document after document. At his or her core, the value investor is one who understands that the asset, not the market, is the real prize.
Indeed, the insight that the underlying asset, rather than the frenetic swings of the market, is the real object of fascination is the fundamental insight of the value investors. Unlike the day traders and market watchers, the value investors have long understood that an asset’s value will always and inevitably be tied to the soundness of the underlying business and the ability of the people who run it, despite the state of the market or the swings it induces.
The value investor, then, plays the game with a very different set of rules. The value investor’s game is much a simpler albeit less glamorous one. Unless you are the type of prowl through the bowels of the internet, you won’t find the decisions of the typical value investor plastered across the front page news. Conversely, the snapshots that do capture the attention of the news — here think the wild dramas of everyone’s darling Gamestop or the see-sawing swings of the ever-salivating Tesla — don’t perk the interest of the value investor. As Klarman puts it,
“being a value investor means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking.”
True as that may be, however, there are and have been throughout the past century, a handful of investors, who do in fact prefer to walk the lonely road alongside Klarman. If you know your value investors, you, no doubt, already know their names. More than likely, you don’t need me to explain them to you ad nauseam.
I would be remiss, however, to write an article on value investing and refuse to name its progenitors. So, needing no explanation from me, I simply mention the likes of the shrewd and ever-relevant duo of Benjamin Graham and David Dodd, who in 1934 wrote the book Security Analysis that set the course for the practice of value investing thereafter. Suffice it to say; if there is something you’d like to learn about value investing, you should ask them, not me.
In this spirit, as I plow towards a deeper definition of value investing, I allow Graham and Dodd to speak for themselves. In their words,
“The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish either that the value is adequate — e.g., to protect a bond or justify a stock purchase — or else that the value is considerably higher or considerably lower than market price.”
In essence, the value investor judges the value in reference to the price. If a business is worth more than the current asking price for its shares, buy it. If it is worth less, don’t. Value investing is really that simple.
What’s The Point?
It would seem, then, that if finding success in investing was as simple as determining an asset’s value and buying it for less than that determined value, everyone should be a billionaire. In truth, there is a bit more to it than that. The guiding principle, however, is, in fact that simple. If you buy an asset for less than it is intrinsically worth, you stand to reap a hefty reward when that business improves and further increases in value. Likewise, if the business declines, you are protected from the fall in value by the margin between where the value of the business drops and the price you paid for it. If you paid 50 cents for a dollar, what do you care if the dollar drops to 75 cents? You’ve still made 25 cents. And, when the dollar, as it in all likelihood will, recovers and surges back up to a dollar and 10 cents, you reap nothing but reward.
So, although novels upon novels can be, and indeed have been, written upon the subject of value investing, I am writing simply to say that the lonely path to riches has already been trod for you. It isn’t a self-celebrating path, filled with the attention and adoration of supplicant trend-seeker. It involves difficult analysis and critical thinking. More likely, it involves losing out on more than a few speculative adventures. It, however, is a path that is well-worn and walked by investors much more successful than you or I.
You can certainly choose any investment strategy you’d like, and I’ll readily confess, this article does little to convince anyone with a brain. But, I, for one, as I wade into the deep waters of investment, am choosing to cling to an old life raft, built-in 1934, that continues to float safely along with the current of hidden value.
So, with little to say and less authority to say it, I simply leave you with a principle of Graham and Dodd: