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’