Value Investing Is Back In Style, Baby!

• Go for cash, not flash
• Develop your own investing style
• Never forget that you have the luxury of time

Monday, 25th March 2013

Dear Fellow Fools,

In the past two months, I’ve read articles in the Financial Times and The Economist that proclaimed value investing was staging a comeback after five years of trailing a more growth-oriented approach.

Coming from such august publications, it must be true, right? Does this mean investors should now switch from a growth approach to investing to a more value-oriented one?

Perhaps, or perhaps not. As investors with a decided value focus, my fellow Champion Shares PRO analyst Nathan Parmelee and I are obviously pleased to hear markets are coming around to our view. However, I would caution anyone thinking of scrapping their current portfolio for one that simply follows the latest trend.

Whose side are you on?

Success in investing is all about discipline, not chasing the next hot thing. Brokers and fund managers have incentives to keep you jumping from share to share, or fund to fund. But those incentives typically don’t align with your long-term goals.

In fact, studies have shown that fund investors materially hurt their returns by jumping from one fund to another, either in an attempt to get out of a loser, or to capitalise on something new and sparkly.

I’ve never been too concerned with the latest trends – be they red carpet or runway fashions, or the latest hot share tip.

When I invest my money, I’m not looking for flash. I’m looking for high-quality companies with a strong management team, solid competitive advantages and ample cash flow that I believe will grow my money over the course of several years. And I’m definitely not willing to overpay.

This long-term, disciplined approach to investing may not make me the hippest investor in the room, but it has served me well over the years – including some years nearly all investors would rather forget.

And it is this disciplined approach that Nathan and I bring to Champion Shares PRO – a service here at The Motley Fool where we are building and managing a £50,000 real-money portfolio of shares. We present our thoughts on the opportunities we see, and show our members how to follow along.

Comfortable in your own skin

While I am comfortable being labelled a value investor, I definitely don’t let that label define my investing style. I define that, and so should you.

When you are comfortable with a style of investing – whether it is income, growth, value or some combination – it makes it easier to ignore the screaming headlines, or the proverbial cocktail party conversations that can spark irrational – and unprofitable – reactionary trading.

Nathan and I have been developing our investing styles over the years, and while we think we work well together, we both have our own ways of looking at individual companies and our overall portfolio.

We may take different paths, but we share a view of value investing as more like bargain shopping. We’re less concerned about specific ratios or metrics, than whether we can buy a company for less than we think it is worth.

In order to get these types of bargains, however, you usually have to disagree with most other investors in the market, so it is important to have confidence in your decisions. Fitting in may work in some elements of society, but in investing, it is the outsiders that generally beat the market.

Time is on your side

And importantly, investors must be willing to be patient with their selections. It may take years for the true value of a company to be realised, but as long as there are no fundamental negative changes in the company’s operations or to your investment thesis, you should have the luxury of time.

Indeed, as an individual investor, your biggest advantage is patience. This is why The Motley Fool suggests you only invest money you don’t think you’ll need for at least three years, as there is always risk in investing. If you’ve got at least a three-year horizon, you should be able to wait out most market volatility, and not have to sell at an inopportune time.

At Champion Shares PRO, we can be patient because our Chief Financial Officer – whose money it is we’re investing – shares our long-term view and trusts our decision making. Of course, that trust only goes so far – he does like to check in, and ask us why we’re doing the things we do. Importantly, so can our members – Nathan and I are available to answer questions from them about the Champion Shares PRO portfolio.

If you think you may be interested in investing alongside us, watch your inbox tomorrow – Tuesday, 26th March – for a very special message.

To your investing,

Nate Weisshaar,
Senior Analyst — Champion Shares PRO