Value Investing Works – Here’s Why
Reading that epic post on Buffett’s career timeline really opened my eyes.
Buffett bought his first stock at 11 years old.
When I was 11, I was busy re-enacting Power Rangers and Teenage Mutant Ninja Turtles.
I can only imagine how my life would be different had I known about investing at the age of 11. The mere discipline of saving up pocket money to put towards a stock would have been a life changing lesson.
I’m sure I would have chosen value investing had I started investing at 11 too. It just makes sense, but what about the strategy?
As an 11 year old, Buffett bought his first stock and held on. No leverage, no charts, no options, nothing complicated. He just employed the old school basic value of investing.
And it worked.
Value investing works.
It worked for the 11 year old Buffett, and for the most part, the same value investing as an 83 year old continues to work.
How to Beat the Market the Old School Way
It’s cool to hop on the hottest IPO and slap high fives with buddies making quick short term gains.
Good ol’ fashioned stock picking the old school way is becoming a lost art. Value investors incorrectly demand a catalyst when it shouldn’t be the deciding factor for an investment.
Warren Buffett, Benjamin Graham, Bill Miller and Walter Schloss.
Oh just a few names that you may have heard here and there.
These greats provided practical tips that you can apply to boost your portfolio. All within the realm of “value investing”.
I know it is easier said than done, but here are the Ben Graham steps to beat the market.
- Evaluate the stock and find its intrinsic value
- Find out what the market holds for it
- Invest your money with a margin of safety
- Patiently wait
That’s the basics and the framework for any successful investment. Sure there are lots of things you can do in between, but the core strategy always remains the same.
This strategy was effective for Graham and it is still effective today.
Geoff Gannon had some great thoughts in his article on Walter Schloss.
What can we learn from Walter Schloss?
The Ben Graham way works. Buying a hundred stocks at less than their value to a private owner is a recipe for success.
You don’t need to talk to management, listen to analysts, forecast the macro-economy, or even be especially selective in the stocks you choose.
All you need to do is buy stocks that are clearly selling for less than their conservatively estimated value to a private owner – and then hang on.
In Buffett’s 1984 letter to shareholders, he wrote this about Schloss:
…He knows how to identify securities that sell at considerably less than their value to a private owner… He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do – and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.
Then in 2006, Buffett wrote the following:
Walter did not go to business school, or for that matter, college. His office contained one file cabinet in 1956; the number mushroomed to four by 2002. Walter worked without a secretary, clerk or bookkeeper, his only associate being his son, Edwin…Walter and Edwin never came within a mile of inside information. Indeed, they used ‘outside’ information only sparingly, generally selecting securities by certain simple statistical methods Walter learned while working for Ben Graham.
Schloss wasn’t affected by what was going around him. He worked alone with his son and that was it. No one else worked for him. Yet he was able to cumulatively beat the market by 6 percentage points a year for 47 years.
Reminds me of a story that Graham told.
Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled—we haven’t got room for even one more.”
The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!”
Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.”
The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumor after all.”
Being a small investor works when having an individual mindset.
So it’s time to ignore the noise claiming that retail investors can’t beat the market or that pros get quicker access to info so individuals are at a disadvantage.
Value investing works.