Are you a Value Investor?

“Investing is most successful when it is most businesslike” – so said the father of value investing, Benjamin Graham, who is also the mentor of the world’s richest man Warren Buffett. Value investing requires a paradigm shift from the common perception of companies listed on the stock market as a bunch of ticking numbers to thinking of oneself as truly a part owner of a business. To express it succinctly, value investing is about ownership of an excellent business at a price that is a fraction of its worth.

Are you a Value Investor?

Characteristics of a non-Value Investor

Investors who have acquired the Holy Grail of Value Investing are few and far between. I would reckon that more than 95% of the investor population comprises of non-value investors. This group of people generally does not recognize that there will always be a disparity between price and value. Amongst them will be a lot of people who are emotionally correlated to the fluctuations of the economy and the stock market – when the stock market is bullish, their portfolio value rises and they are happy; when the stock market is bearish and their portfolio looks mediocre, they are unhappy. Their actions are driven by their emotions.

Amongst this group will also have people who profess to be technical analyst (TA) or computational clairvoyants who claim that they are able to predict future price movements by drawing charts based on historical prices and volume. Amongst them will be people who are opportunists and gamblers who hop on the bandwagon of certain news in the hope of obtaining a quick profit. There is also the group of Efficient Market Theory believers who firmly insist that information is perfect, and that all prices reflect the company’s underlying value; they firmly believe that all efforts to perform an investment analysis are futile and it is more worthwhile looking at global trends.

Characteristics of a Value Investor

At any point in time, value investors keep things simple and they only seek to obtain answers to one question: what is the company’s underlying worth? The fundamental difference between a value and non-value investor is that a value investor recognizes that there will always be a disparity between price and value of the business; there will always be room to capitalize on situations where the price grossly misrepresents the company’s value.

Value investors think independently and do not follow the herd’s behaviour. They are emotionally disengaged from daily stock market fluctuations; their decisions on buy/sell are strictly based on a sound and rational judgment of the business quality versus the price. Value investors are highly risk-averse; they only seek to invest in companies that fall into their circle of competence – they thoroughly understand the industry requirements and business model of the companies they hold stakes in. They sleep soundly all the time, even if the stock market closes for a prolonged period. As long as the company continues to operate profitably, value investors will remain inactive.

Value investors are very intelligent; they will awake from their inactivity or ‘slumber’ to swop in for bargains when everyone is fearful, and they will not hesitate to sell off their businesses at a significant profit when everyone else has a sense of unfounded optimism.

So, are you a value investor?