Wednesday, 14 August 2013

The divergent styles of value investing

1.  Some of the value investors invest only in superior businesses that they intend to own for decades, if not forever.

2.  Others, are looking for damaged goods that have been thrown on a rubbish heap, even though the assets or businesses are still worth something.

3.  Some investors run portfolios with six or eight stocks, others will own more than a hundred companies at any one time.

4.  Some of them buy bonds of  companies headed for or already in bankruptcy, thinking that either the bonds will be redeemed for more than their cost or that they will end up owning equity in a reorganized company as it emerges from bankruptcy.

5.  Some seek to avoid the crowd by concentrating on small and tiny companies; others prefer the stability and predictability of established firms with good businesses.

6.  Some try to buy shares in companies that they feel will command a premium from an industrial purchaser who wants to own the whole firm.

7.  Others play that role themselves and purchase the entire company.

There are many dimensions along which value investors differ from one another in how they select their companies: size, quality, growth prospects, asset backing, location (domestic only or more international), and so on.  They also differ on how they assemble their portfolios:  broadly diversified, industry-weighted to take advantage of a circle of  competence, moderately concentrated, or tightly focused.

All put the most emphasis on the "quality of company" dimension.  The quality dimension entails preferences concerning valuation approaches (assets, earnings, growth), the breadth of the portfolio (better companies generally mean more concentration), and the expected time for holding the shares (for the deeply discounted stock, until they recover; for the great companies, forever).

Direct and active investing is a dangerous game, not a trick one can do casually at home.  The easy availability of real-time security prices and inexpensive trading has convinced many otherwise sensible people that investing on their own will provide both enjoyment and profit.

When Mr. Market creates opportunities for value investors by overreacting to information or otherwise plunging to an extreme, most participants are part of that herd, not the few standing to the side.  To recall a piece of wisdom Warren Buffett frequently cites, if you have been in the poker game for thirty minutes and still don't know who the patsy is, you can be pretty certain the patsy is you.

Ref:  Bruce Greenwald

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