Content provided by Kostya Etus, CLS Investment Research Analyst
I read a couple articles recently from The Wall Street Journal and CNBC about the basics of value investing. They described stories and research from some of the greatest value investors in history including Benjamin Graham, as well as Graham’s most prized pupil, Warren Buffett. I would like to share some of their key insights as they tend to be simple but, at the same time, priceless.
Graham grew up to favor companies so universally despised by investors that the stocks were, as he like to say, “worth more dead than alive.” He resoundingly beat the market over his multi-decade investing career.
In 1939, at age 27, Sir John Templeton told his broker to buy him $100 worth of every listed U.S. stock trading for $1 a share or less; he quadrupled his money in four years. “People are always asking me where the investing outlook is good, but that’s the wrong question,” Templeton once said. “The right question is: Where is the outlook most miserable?”
Warren Buffett purchased a Nebraska farm and a retail property near New York University. In both cases, he bought when prices were unusually low, after bubbles had burst, he had no particular expertise, and he invested because he thought the assets would be increasingly profitable, not because he expected to sell at a higher price. “With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.” “I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.” His bottom line fundamental advice: “Ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”
And now I’m going to throw out another great quote that I will coin as my own (although I heard it at a conference once, I cannot find it online): “Value investing is the art of buying sickly companies that are not terminally ill.”
Renowned value investor, Seth Klarman, discussed how research on fruit flies showed that most of them will swarm toward a light, but that a small minority appears to be genetically programmed to stay away from it. Klarman jokingly called these flies “tiny contrarians,” the insect equivalents of “deep value investors.” He went on to speculate that most people might possess “a dominant gene” for chasing hot performance and overhyped assets, while only a minority have “the recessive value gene” that confers a patient preference for whatever is battered and unpopular.
Another study has found that environmental influences also help explain the “tilt” toward value or growth investing. For example, if the economy was in a severe recession when an investor was between the ages of 18 and 25, or the investor’s parents were relatively poor, he is more likely to prefer investing in cheap stocks.
New findings suggest that you should ask financial advisers and investment managers: What adversity have you had to overcome in your life? And what does being poor mean to you? After all, a financial adviser or investment manager who has never overcome a serious obstacle might not have what it takes to hold on to cheap stocks when they get a lot cheaper in a hurry. A value investor who can’t withstand pain isn’t a value investor at all…
But whether you have value or growth genes in you, CLS Active Value and CLS Active Growth may be the perfect fit for your investment portfolio.