What is the essence of Value Investing?
Equity Intelligence 3rd January 2023
Value Investing has a rich tradition. Some of the most successful investors have relied on the philosophy and principles of the practice founded by Benjamin Graham and later nurtured by several investors across the World. From Graham to Warren Buffett globally and from Chandrakant Sampat to Parag Parekh and Rakesh Jhunjhunwala in India all have been schooled in this rich tradition..
Warren Buffet alluded to this fact brilliantly in his very popular and readable piece in 1984 - “The Superinvestors of Graham-and-Doddsville”. (Those interested can read here : https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors). Here he tracks the records of investors who stick to the “value approach” and have gotten rich going by the book.
“Super-Investors” may differ in day-to-day tactics and may end up owning different set of businesses but the core principles and tenets they adhered to have been same.
The enduring core tenets of Value Investing are three legged.
First, what was proposed by Benjamin Graham - the idea that - there is “Mr. Market” who is crazy but not crazy about everything and all the time. So, you need sensible search strategy. You need to identify pocket where Mr Market has gone crazy with greed or fear and sought to do contrary if possible.
Second, he insisted we look at owning stock as owning “factional ownership of the business”. You are not buying the ticker but the underlying business. Hence you must know what you are buying. So, you need to have superior valuation methodology and develop sound understanding of the business. Owner’s mindset also implies one is keeping in mind the perpetual nature of business and not overly focused on coming quarters or years.
And the third idea proposed by Graham is that of “Margin of Safety”. This is to have sound discipline in purchase and not buy at any price. Graham said “the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past in order for an investor to feel sufficiently protected against the vicissitudes of time.”
Practical Behavioural message of these tenets
If one think careful all three tenets are guiding us around “sensible behaviour”. It encourages “Equanimity” around greed and fear phases of the markets and not go overboard with the “herd”. It forces us to think like “owners” and hence think long term and spent most of our time thinking about the fundamentals of the business and not waste our time thinking about what other investors are thinking. It encourages to channelise our attention and energy to what truly matters in wealth creation. And most importantly it reminds us that we are dealing with future which no one claim to know. Despite all out efforts there are Unknown Unknowns and despite all our good intent we are likely to make errors in our assessment. Hence it is prudent to operate with margin of safety - that is building redundancy. It reminds us again and again that we could go wrong in many ways so be aware and build as many safety nets as possible. Investor who has internalised these behavioural guidelines have ended up being rich across geography, markets and time.
Happy Investing
Team EQ