28 May The Most Important Thing I learnt about Value Investing
I remembered when I was in secondary two. It was a long time ago.
I was an ok student, but Mathematics was a huge chore for me. You see, some people are better with words and some people are better with numbers (there are people good with both but don’t remind me, I hate them), and I was one of those better with prose than figures.
I remembered having to learn about differentiation and integration. That was quite a disaster. I hated it totally.
Well, it wasn’t a total wipeout. I could follow the examples given, pick out the similarities and apply the same procedure to questions I have been told to solve. And that was about it.
But it was a disaster for me psychologically because i absolutely could not understand the need to integrate and differentiate. To me they belong to a different universe entirely. I was extremely disturbed at having to slave away at irrelevant numbers when I could have been out having fun. Integrating and differentiating do not add value to my life, i remembered thinking. Not. One. Bit.
But there was this chap in class who was brilliant at it. (He went on to graduate with a degree in Maths. How geeky is that!). To him it was art. Doing Maths for him was like watching Leonardo painting the Sistine Chapel or having Beethoven compose right next to him. He would be in the zone.
He was brilliant at it because he could appreciate the elegance and beauty behind those equations. He understood what the numbers meant and why they behaved the way they did. His exam scores were exceptional because when you understood something at that highest level, you simply cannot lose.
As for me, I just don’t get it.
After we created the CNAV strategy we decided to consult with our Mentor. The strategy sounded like a radical idea, to value a company almost entirely via the assets it owns rather than its potential earnings.
I was expecting an in-depth discussion of the pros and cons of the strategy. Perhaps he could help to tweak the variables somewhat, or think of an angle which we have missed out. Maybe he could suggest ways to boost returns or reduce risk.
It was a great strategy, but we knew he could make it better. After all, he was The Master.
What happened next was entirely unexpected. We bought the strategy to him, and in true Master fashion, he gave us six words. Nothing more nothing less. Just six. These six.
All forms of Value Investing work.
Boy was I disappointed. It was like being dunked in a bucket of ice water. Hang on. It was like being dunked in a bucket of ice water just after they announced that you have won an Oscar. It was devastating.
It haunted me for a while. Why was the Master trying to brush us off like that? Does the strategy suck so much that nothing he said could ever make it better? Was The Master trying to be condescending? Or has he simply lost his mojo?
And then it hit me like a lightning bolt. Those six words are priceless. They mean a lot. In fact, they mean everything.
All forms of Value Investing work!
Value Investing has been in existence for the past century. There have been many successful Value Investors who have achieved better than market returns over extended periods of time. Lots of books have been written about these Super Investors. Some have even publicly come out to share their strategies.
Now take a moment to think about all the strategies and the value investors you know. Has anyone ever come out to say they have the best value investing strategy? Or has anyone ever claimed that they know of the best value investing strategy out there? Hang on, is the ‘best’ tag even applicable here?
The truth is, there is no best strategy. All forms of Value Investing work. The deciding factor behind a strategy’s success lies in the person executing it and not in the strategy itself.
Think of strategy as a golf club. It is extremely important that a golfer picks a set of clubs he or she is comfortable with, just as an investor must pick a strategy with his or her own circumstance in mind. A powerful but inappropriate club (strategy) would diminish performance rather than increase it.
A retail investor with a full time job with no background and no interest in finance cannot pick a strategy that requires him or her to spend time understanding companies and their businesses before investing. This Investor needs a strategy that is simple to understand, easy to learn and most importantly, a breeze to execute. Only then will the strategy work.
Value Investing is beyond strategies. It is not about looking outwards and searching for the best strategy. It is about looking inwards and searching within oneself for the most appropriate one.
This realisation is an extremely powerful one. Unlike my brush with differentiation and integration in secondary school, I am no longer rote learning or solving problems by association. Instead, I now understand the First Principles of Value Investing. I have gotten it!
What was your personal experience with Value Investing? Leave us a comment or drop us an email to tell us more.