Sunday, 22 April 2012

Lessons for Value Investors

To be a value investor, you should have:

  • A long-time horizon: While the empirical evidence is strongly supportive of the long-term success of value investing, the key word is long term. If you have a time horizon that is less than two or three years, you might never see the promised rewards to value investing.  

  • Be willing to bear risk: Contrary to popular opinion, value investing strategies can entail a great deal of risk. Firms that look cheap on a price to earnings or price to book basis can be exposed to both earnings volatility and default risk.

In addition to these, to be a contrarian value investor, you need:

  • A tolerance for bad news: As a contrarian investor who buys stocks that are down and out, you should be ready for more bad news to come out about these stocks. In other words, things will often get worse before they get better.

In addition to all of the above, to be an activist investor, you have to:

  • Be willing to fight: Incumbent managers in companies that you are trying to change will seldom give in without a fight.

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