Fundamental Tenets of a Value Investor

There are four fundamental tenets in value investing:

1. Value investing is part ownership of excellent businesses.
2. There will always exist a disparity in the price of the business versus its underlying value.
3. The primary basis for buying into or selling out of businesses depends on a measure of underlying value versus the current market price.
4. The stock market only exists as a convenient means to buy into or sell out of businesses.

Requirements to be a Value Investor

It does not take much for one to be a value investor. There’s no requirement to be a financial expert, economist or have an accountancy degree – these are only ‘good-to-have’ as they accelerate the learning curve. What is more important is for the person to have (1) rational thinking, (2) an open mind with a willingness to adopt new perspectives and (3) to have emotional disengagement from the stock market, courage and patience.

A Rational Mind. The value investor must be one that has a desire to improve his knowledge through his own reading up or cross-sharing with others, and apply what he has learnt in school to perform his own independent analysis. He must be open to acceptance of new ideas that challenge how the general population will perceive things; only then will he be able to see what others cannot see, and achieve what the general crowd will not be able to achieve.

Emotional disengagement from stock market To become a value investor, one has to disengage from the emotions and mood swings of the stock market fluctuations. Only when this is achieved, will one be able to make sound and rational decisions, while capitalizing on the herd’s foolish behaviour.

Courage – The next most important virtue after intelligence. It requires immense courage to act against herd behaviour and run in the opposite direction. The next step after completing a thorough financial analysis is to wait for opportunity. When the opportunity comes, the investor must trust in his independent judgment and take action swiftly and decisively.

Patience – “Inactivity strikes us as intelligent behaviour”. The value investor has to be patient and recognize the fact that as long as value of the company has been correctly ascertained and acquired at a significant bargain, the price will take care of itself – in due time, the stock market will rise to match the underlying value. He will look away from the stock market, and direct his efforts to understand the business further, acquire new perspectives in valuing businesses. If the business’s underlying value strengthens over time, but the stock market does not price that in, the value investor will be even happier to acquire bigger stakes with a greater value-for-money proposition.