One of the best books ever written on value investing is, The Art of Value Investing, by John Heins and Whitney Tilson. Bill Ackman of Pershing Square Capital Management said the following about The Art of Value Investing:
“I learned the investment business largely from the work and thinking of other investors. The Art of Value Investing is a thoughtfully organized compilation of some of the best investment insights I have ever read. Read this book with care. It will be one of the highest-return investments you will ever make.”
One of my favorite parts of the book is in Chapter 1 – “All Sensible Investing Is Value Investing”, which provides the 13 commandments of what makes a successful value investor.
Here’s an excerpt from the book:
“All Sensible Investing Is Value Investing”
A walk down any supermarket aisle makes it clear we live in a world of increasing product specialization. To break into a new market or grab more of an existing one, companies launch a dizzying array of new products in ever-more-specific categories. Want your soda with more caffeine or less? You’ve got it. More sugar? Less sugar? Six ounces, 10 ounces, 20 ounces? Whatever you like.
This trend has not been lost on marketers of investment vehicles. Specialized mutual funds and exchange-traded funds exist for almost every imaginable combination of manager style, geographic reach, industry sector, and company market capitalization size. If you’re looking for a mid-cap growth fund focused on the commodity sector in so-called BRIC countries (Brazil, Russia, India and China), you’re likely to find it.
We understand the marketing reality of specialization, but we argue that the most important factor in judging an investor’s prospective gains or losses is his or her underlying philosophy. As you might guess from the fact that we co-founded a newsletter called Value Investor Insight, we agree 100 percent with Berkshire Hathaway’s Vice Chairman Charlie Munger, who says simply that “all sensible investing is value investing.”
But what exactly does it mean to be a value investor? At its most basic level it means seeking out stocks that you believe are worth considerably more than you have to pay for them. But all investors try to do that. Value investing to us is both a mindset as well as a rigorous discipline, the fundamental characteristics of which we’ve distilled down to a baker’s dozen.
Value investors typically:
1. Focus on intrinsic value—what a company is really worth—buying when convinced there is a substantial margin of safety between the company’s share price and its intrinsic value and selling when the margin of safety is gone. This means not trying to guess where the herd will send the stock price next.
2. Have a clearly defined sense of where they’ll prospect for ideas, based on their competence and the perceived opportunity set rather than artificial style-box limitations.
3. Pride themselves on conducting in-depth, proprietary, and fundamental research and analysis rather than relying on tips or paying attention to vacuous, minute-to-minute, cable-news-style analysis.
4. Spend far more time analyzing and understanding micro factors, such as a company’s competitive advantages and its growth prospects, instead of trying to make macro calls on things like interest rates, oil prices, and the economy.
5. Understand and profit from the concept that business cycles and company performance often revert to the mean, rather than assuming that the immediate past best informs the indefinite future.
6. Act only when able to draw conclusions at variance to conventional wisdom, resulting in buying stocks that are out-of-favor rather than popular.
7. Conduct their analysis and invest with a multiyear time horizon rather than focusing on the month or quarter ahead.
8. Consider truly great investment ideas to be rare, often resulting in portfolios with fewer, but larger, positions than is the norm.
9. Understand that beating the market requires assembling a portfolio that looks quite different from the market, not one that hides behind the safety of closet indexing.
10. Focus on avoiding permanent losses rather than minimizing the risk of stock-price volatility.
11. Focus on absolute returns, not on relative performance versus a benchmark.
12. Consider stock investing to be a marathon, with winners and losers among its practitioners best identified over periods of several years, not months.
13. Admit their mistakes and actively seek to learn from them, rather than taking credit only for successes and attributing failures to bad luck.
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