Why Value Investing
"All Sensible Investing Is Value Investing".
Charlie Munger, Vice Chairman, Berkshire Hathaway
Value investors look to purchase investments at a significant discount to intrinsic value to account for the uncertainty inherent in any attempt to predict the future. Determining that a sufficient “margin of safety” exists between the price paid for an asset and a conservative projection of future value is the primary determinant for potential inclusion in the portfolio. Intrinsic value provides a framework around which value investors can act. Rather than being swayed by emotions, market sentiment, or short-term news, a thoughtful, deliberate value investor can assess if investments are priced below or above long-term intrinsic fair value and decide to buy or sell as appropriate.
"We are not against making money in the short term, we just have not found a (safe and repeatable) way to do so".
Tom Gaynor, Chief Investment Officer, Markel Insurance
When you purchase securities, you are not just buying pieces of paper meant to be traded, but a fractional ownership of a business or its obligations. The market price does not always accurately reflect the true intrinsic value of a company or an asset. The real intrinsic value is an estimate of the present value of all the cash flows which will accrue to the owner between now and the time of sale. Tanglible factors used in the estimate may include items such as the strength of the company’s balance sheet, hard assets, annual dividends rates, or a competitive advantage such as a wide distribution network or that is difficult to replicate.
“In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Ben Graham, Columbia Business School, Professor to Warren Buffett
Value investing often involves investing in companies that have fallen out of favor with the public, that are ignored, or that may be suffering from a poor business cycle or recession. Investing in these companies is often contrary to conventional thinking, which requires discipline and the ability to tune out noise from most media channels. As Warren Buffett likes to say: “You are neither right nor wrong because the market agrees with you in the short term. You’ll be right if you have your facts and your reasoning correct.”
Eventually the market revalues these companies when the economy or the industry’s prospects improve. This does not always happen overnight and it often can take years. Having the discipline to hold securities for the long term and possessing an adequate margin of safety can create a significant edge over many institutional investors who are focused on the next quarter’s earnings or a stock’s current “momentum”.