Value investors have
varying approaches to risk, some willing to accept greater risk for greater rewards.
However,
almost all value investors like a degree of consistency in
- returns,
- profitability,
- growth,
- asset value,
- management effectiveness,
- customer base,
- supply chain, and
- most other aspects of the business.
It's the same consistency you would strive for if you bought that espresso cart or hardware store yourself.
Before agreeing to buy that hardware store, you'd probably want to know that the
customer base is stable and that
income flows are
steady or
at least predictable. If that's not the case, you would need to have a certain amount of additional capital to absorb the variations. Perhaps, you would need more for more advertising or promotion to bolster the customer base.
In short, there would be an
uncetainty in the business, which, from the owner's point of view,
translates to risk.
- The presence of risk requires additional capital and causes greater doubt about the success of the investment for you or any other investors in the business.
- As a result, the potential return required to accept this risk, and make you, the investor, look the other way is greater.
The value investor looks for consistency in an attempt to minimise risk and provide a margin of safety for his or her investment. This is not to say the value investor won't invest in a risky enterprise; it's just to say that the
price paid for earnings potential must
correctly reflect the risk. Consistency need not be absolute, but predictable performance is important.
