(PHOTO: Source http://changzw.com/)
Part of being a value investor is understanding that your portfolio will underperform some of the time.
I recently read an article on this very topic where Mohnish Pabrai was asked a question regarding investors following his Dhandho Investor strategy:
Some investment strategies stop working as soon as they become sufficiently popular. Do you think this would happen if everyone who reads The Dhandho Investor starts following your strategy?
Pabrai give us his classic answer:
“As long as humans vacillate between fear and greed, there will be mispriced assets. Some will be priced too low and some will be priced too high. Mr. Buffett has been talking up the virtues of value investing for 50+ years and it has made very few folks adopt that approach.”
“So if the #2 guy on the Forbes 400 has openly shared his secret sauce of how he got there for all these decades and his approach is still the exception in the industry, I don’t believe I’ll have any effect whatsoever.”
The reason that investors continue to stay away from these types of successful investment strategies can be found in “The Superinvestors of Graham-and-Doddsville“. An article by Warren Buffett promoting value investing, published in the Fall, 1984 issue of Hermes, Columbia Business School magazine.
The article and speech challenged the idea that equity markets are efficient through the study of seven successful investment funds, all of which were managed by Benjamin Graham’s alumni, pursuing different investment tactics but following the same “Graham-and-Doddsville” value investing strategy.
Take a look at Table 2 below:
With the exception of Warren Buffett, all of the other superinvestors underperformed 28% – 42% of all years.
The problem is that most investors can’t withstand this level of underperformance before they revert back to chasing glamour stocks and the next share investing fad.
Good news for us deep value investors however, who are prepared to go through the pain needed to outperform.
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I love Buffett’s Quote; “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”. It goes directly along with this post