In a piece written for Forbes.com’s “Gurus’ Guide to 2009“, John Heins and Whitney Tilson do a great job in examining just what makes an investor a value investor.
While value investors come in all shapes and sizes — large-cap, small-cap, activist, non-activist, U.S.-focused, foreign-focused — Heins and Tilson list 12 similarities they share. A sampling:
- They focus on intrinsic company value and buy only when there is a substantial margin of safety, rather than trying to guess where the herd will go next.
- They understand and profit from reversion to the mean rather than projecting the recent past indefinitely into the future.
- They understand that beating the market requires a portfolio that looks different from the market.
- They spend far more time reading things like business publications and financial reports, rather than watching the ticker or TV shows about the market.
- They focus more on analyzing and understanding micro factors, such as a company’s margins and future growth prospects, and less on trying to predict the direction of interest rates, commodity prices or the overall economy.
- They cast a wide net, seeking mispriced securities across industries and types and sizes of companies, rather than accepting artificial limitations on market capitalization or other criteria.
Heins and Tilson also list a number of quotes taken from Value Investor Insight that highlight what goes through the minds of successful value investors. Here’s a sampling of their compilation, which includes thoughts from some of the gurus we regularly cover on this blog:
- We focus first on good businesses, with high returns on capital, barriers to entry and significant free cash flow generation over a cycle. If you’re right about the business, time should be your friend, so catalysts are not important. — Charles de Vaulx, International Value Advisers, 11.26.08
- One of the first questions we ask about a possible investment is “Why is it mispriced?” If you don’t have a reason, there’s a good chance it isn’t really mispriced. — Jeffrey Tannenbaum, Fir Tree Partners, 7.31.07
- Human beings are subject to wild swings in their levels of fear, risk tolerance and greed. That won’t change. I base my whole approach on buying when others are fearful and selling when others are greedy. The reason Shakespeare is so relevant still today is that his plays were all about human nature, and human nature never changes. — Mark Sellers, Sellers Capital, 6.19.05
- The most important change in my 40 years of investing has probably been in investors’ time horizons. Today the majority of investors–Ben Graham would call them speculators–are focused so closely on this week, this month and this quarter. Stocks are bought and sold on penny deviations from short-term estimates, which is mind-boggling. Crazy as it is, we can’t complain–it just creates more opportunities for investors with longer time horizons. — William Nasgovitz, Hartford Advisors 9.30.08
- Traditional value investing strategies have worked for years, and everyone’s known about them. They continue to work because it’s hard for people to do, for two main reasons. First, the companies that show up on the screens can be scary and not doing so well, so people find them difficult to buy. Second, there can be one-, two- or three-year periods when a strategy like this doesn’t work. Most people aren’t capable of sticking it out through that. — Joel Greenblatt, Gotham Capital, 11.30.05
- A[n] argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear, [and] you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values. — Warren Buffett, Berkshire Hathaway, 4.30.07
- Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The low-risk, high-uncertainty [situation] gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much! — Mohnish Pabrai, Pabrai Investments, 6.29.07