Patience.
Assuming you’ve decided to become a dedicated value investor, then patience is the first, last and most important word straight from the playbooks of happy retirees, wealthy market savants and numerous tycoons.
That’s right — deep breath — patience.
At a time where financial attention spans are too often measured via stopwatch, the notion of watching an investment grow over long years and longer decades seemingly runs counter to what many investors hold dear in their dreams.
Like: Flipping a stock to make a killing. Or: Timing the market. Or especially, given the slick high-tech sector, the delicious notion of finding the next Google and turning pizza money into enough dough to buy a chain of pizzerias.
“The goal is to focus on the long haul and to not try to outfox or time the markets,” says Bob Johnson, the president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.
That means staying with an investment through its dips or a market’s up-and-down cycles — in fact, using such opportunities to buy more shares while reinvesting the dividends.
This creates a compounding effect that multiplies the value of holdings — and so long as the company’s financials remain solid, the money making effect becomes exponential, as opposed to when a single investment is sold in the short term for a one-time profit.
[See: 10 Long-Term Investing Strategies That Work.]
Yet value investing isn’t just slow in a fast-paced world. It’s dull in a flashy one. Value investors might eschew buying up high-tech shares, for example, just because the sector itself is hot. That makes them easy targets for ridicule, even in decidedly button-down circles.
Johnson cites this example: “A Barron’s article with the headline ‘What’s Wrong, Warren?’ appeared right before the dot.com crash. The article’s premise was that the times had passed Warren Buffett by — and by staying away from investing in ‘new economy’ firms, Buffett would become irrelevant.”
That was until the likes of Pets.com went the way of the dodo. And in the years since, “Buffett has done quite well investing in candy, ice cream, soft drinks, running shoes — and staying away from new economy enterprises,” Johnson says.
Value investing has many nuances to it, but the underlying principle goes like this: If the share price is below its book value, that means it’s undervalued — and thus a good buy. If the price is above its book value, it’s overvalued.
“Value investing is old school insofar as it uses relevant facts about a business, particularly its past and estimated future profitability, to determine its true worth,” says Michael Van Biema, co-author of “Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors.” “Also, value investing focuses on making investments that have a margin of safety. When making an investment one should ask oneself, ‘Am I walking along the edge of a 10,000 foot precipice or a 3-foot ledge?'”
[See: 7 Notable Quotes From Warren Buffett.]
Returning to the notion of the playbook, there’s one volume that value investors consider required reading: Benjamin Graham’s 1949 tome “The Intelligent Investor.”
Compared to the motor-mouthed likes of Jim Cramer, Graham doesn’t generate nearly the adrenaline among Wall Street type-A traders. For some, Graham’s name barely rings a bell — on the New York Stock Exchange or otherwise. But to a certain billionaire or two, having Ben Graham as a guru might as well be the equivalent of taking songwriting lessons from Paul McCartney.
For starters, Buffett has made no secret of his affection for Graham’s groundbreaking work in value investing. He calls “The Intelligent Investor” nothing less than “the best book about investing ever written.” And that’s saying something, considering that Buffett is a guy countless market watchers love to mimic.
But if you follow Buffett, that makes you a Graham acolyte by default. After reading “Investor” for the first time, Buffett was so captivated by its ideas and theories that he went to study under Graham at Columbia Business School.
Having one billionaire on your side might seem like a track record enough. But another billionaire of lesser public profile, Charles Brandes, also studied under Graham — a schooling that prepared Brandes to teach value investing’s principles to an entire generation.
[See: 9 Ways to Buy Stocks That Everyone Needs.]
“Graham forged my value mindset more than 40 years ago and helped set the course for my journey to seek fundamentally sound, attractively priced companies,” Brandes says. “Despite the proliferation of investment products available to investors today, value investing — which is focused on seeking mispriced companies with the potential to appreciate in price over time — is fundamental.”
Of course, in the faceoff of fundamental versus fast, or doing your research versus rolling the dice, value investing will never be confused with the casino-style excitement some seek from investing.
But for those smart enough not to confuse Wall Street for the Las Vegas strip, value investing represents the road less traveled that ultimately leads to more money — a path not so much littered with buzzwords as marked by a simple watchword:
Patience.
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How to Become a Great Value Investor originally appeared on usnews.com
