There seems to be an unspoken (but often implied) mantra in value investing that beginner investors start with asset investments and then once they learn the ropes and grow they graduate to real investment, buying great companies based on earnings or free cash flow.  A special few graduate to the highest honors of value investing, special situations, catalysts and bankruptcies.
I was attracted to the idea of value investing because it appeared so simple, purchase something for less than it's worth.  When I first encountered this it was so obvious, I couldn't believe that everyone in the market wasn't investing like this.  Purchasing something tangible for less than it's appraised value is something most of the population can grasp.  People will brag about the great deal they got on a pair of pants, or how they purchased a house out of foreclosure and saved a lot of money.  Buying an item at a discount to salable value is not a foreign concept to anyone, except participants in the public markets.  Market participants will bend over backwards to explain all the reasons a company should sell for less than book, or NCAV.  

Fortunes are made and lost in the market on a whim.  To make a fortune outside of the market you need to either marry the right person, be born in the right family, or most often work hard for sweat equity.  I've never heard of a young intelligent person starting a business, and within months turning the little local Carpet Barn into a billion dollar fortune through their raw intelligence, yet these sorts of stories percolate around Wall Street often.  A young fund manager can become famous from a single year of outperformance, or a single great trade.

For many it appears easy to make money in the market, do some reading, invest and profit.  The market's greatest spokesman, and one of the world's richest men doesn't help, Warren Buffett's folksy explanations of value investing are simple, but I feel miss the point.  I don't talk much about Buffett on this blog because I'm not sure if there's much to learn from him.  This might sound strange to say, but I put Buffett in a class of his own.  Buffett is a superstar investor, he is the Ussain Bolt, or Michael Jordan of investing.  Are Ussain Bolt's tips on running going to help me run any faster for my Thanksgiving race?  Probably not, no matter how simple they are, Ussain Bolt is naturally more gifted than I am.  I enjoyed reading The Snowball and Buffett's annual letters, but I don't believe he can be replicated, he's naturally a great investor, I don't have that same gift.

Given Buffett's success it's no surprise that there are legions of investors attempting to follow in his footsteps.  The problem is his footsteps are unclear, is it cheap stocks like he did in the 1950s, is it his concentration, is it his ability to discern great management teams, or his ability to take advantage of opportunity?  Everyone seems to have a slightly different take on what made him successful, and there is no consistent pattern to follow.

Buffett most recently has been preaching that investors should be buying great companies at good prices and let them compound.  Math is in his favor with a statement like this, it's impossible to argue against buying a company that continually compounds at 15-20% forever at a good or cheap price.  The issue is these companies don't sell at low prices often, and when they're priced low it's usually due to an issue or problem they're facing.  In my view claiming that the company will come out unscathed and continue on their unrelenting compounding journey is hubris that's often reinforced with hindsight bias.  No one knows the future, at best one is making an educated gamble that the future will resemble the past, with the twist that an investor is hoping any issue is resolved without incident.  We've lived in an unprecedented age of prosperity in America since the 1940s which has provided a nice tailwind for this style of investing, momentum is hard to change.

The mere fact that the world's most successful investor preaches a particular philosophy is reason enough for most investors follow after him prowling around for great businesses at good prices.  My view is that just because Buffett does something doesn't mean that everyone else can do the same as him no matter how easy he makes it seem.

What I don't understand is the general disdain for asset investing compared to Buffett's growth value investing.  The research bears out that simple value strategies like net-nets, or low P/B stocks outperform the market significantly.  In the book Quantitative Value the authors make note of a study that showed that if one were to take all stocks at less than 1x book value, short the ones with a low F_Score and purchase the ones with a high F_Score they would outperform the market by a whopping 20% a year.  The problem is doing something like this is too simple for most investors.  They want a challenge and buying and churning through cheap stocks isn't enough for them.

I like to think of value investors who follow in the footsteps of Graham are the antique collectors of the market.  We are digging through flea markets looking at old baseball cards hoping to luck on a mint condition Mickey Mantle rookie card.  We never quite find that Mickey Mantle card, but we do find a lot of Wade Boggs and Jose Canseco cards which if purchased cheap enough can be flipped for a nice profit.  The Buffett school of investing continually visits flea markets until the Mickey Mantle is found.  The problem is if one might not know exactly what mint condition constitutes, or how to tell the difference between an authentic and fraud card, and eventually overpay for their Mickey Mantle rookie card.

For me investing is a means to an end, it's a way to prudently manage extra savings and grow it at a rate above inflation.  When I need the money at some future date I hope to have more, I don't think I'll care much about how I got there, either by net-nets, low P/B stocks, or growing a business.

I'm not sure if this post has much of a point, maybe it's really a rant against an attitude I see a lot.  My question to you is: "Why so much disdain against a proven investment methodology, that while simple has historically consistently high results?"

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Comments (12)


You managed to insert the same paragraph into this post four times. Impressive.


Haha what a rookie

In reply to BusinessSense

blog form error on our part


I do appreciate your introspective ability..."I'm not sure if this post has much of a point"


Holy run on sentence, batman! Look at this:
"The problem is his footsteps are unclear, is it cheap stocks like he did in the 1950s, is it his concentration, is it his ability to discern great management teams, or his ability to take advantage of opportunity?"
That's four sentences!
"The problem is, his footsteps are unclear. Is it buying cheap stocks, like he did in the 1950s? Is it his concentration? Is it his ability to discern great management teams, or his ability to take advantage of opportunity?"
You clearly understand what you're talking about, but it was so hard to follow your train of thought that I didn't even make it halfway through. You'd be a much more effective writer if you turned a really critical eye to things like your use of commas.

Don't mean to be too harsh, especially on an early post - there's definitely something here to chew on.

Curiously strong.


Pretty high dickhead quotient in the comments thus far.


I don't understand the question. Are you asking why there's so much hatred for value investing? Hatred for Buffett? I don't think there's much hatred for either in general if that's your contention.


Dickhead comments? It's an unreadable post that people would like to be able to read because somewhere in that superfluous mess is a good argument.


Following in some one else's exact footsteps will never work.

p.s your post is horrendous.



the content of this post, quite interesting.. but wow.. I had a wild ride reading this whole thing...

I love my bananas!


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