While I certainly believe there are core principles upon which sound investments are made, it’s equally clear that, like snowflakes, no two investing strategies are exactly alike. Equally talented and accomplished investors can view the landscape of investment opportunity in precisely the opposite way. The strategy that best fits my personality is value investing combined with some simple but essential technical analysis tools.
The differences in strategy and style among value investors are many: Some invest primarily in small-cap stocks while others stick to large-caps; some invest overseas while others stick to U.S. markets; some run concentrated portfolios, while others are more diversified; some are activists while others never are; some are long only, while others actively short. The list goes on. At the same time, several fundamental characteristics tend to unite value investors as well.
In this series of posts I offer this collection of wisdom classified in specific fundamental investing topics:
Finding an Edge
So if the entire country became securities analysts, memorized Benjamin Graham’s Intelligent Investor and regularly attended Warren Buffett’s annual shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads. People would still find it tempting to day-trade and perform technical analysis of stock charts. A country of security analysts would still overreact. In short, even the best-trained investors would make the same mistakes that investors have been making forever, and for the same immutable reason – that they cannot help it.
Seth Klarman, 3.23.05
Human beings are subject to wild swings in their levels of fear, risk tolerance and greed. That won’t change. I base my whole approach on buying when others are fearful and selling when others are greedy. The reason Shakespeare is so relevant still today is that his plays were all about human nature, and human nature never changes.
Mark Sellers, 6.19.05
“Humans have a strong desire to be part of a group,” says Legg Mason equity strategist Michael Mauboussin in a 2004 research paper that dissects how investors make decisions. “That desire makes us susceptible to fads, fashions and idea contagions.”
On the behavioral-finance side, one of many inefficiencies comes from people anchoring on the past. People assume something is cheap, say, just because it hasn’t traded at such a low valuation for five or ten years. But that doesn’t matter, what matters is what will be.
Ric Dillon, 6.29.07
We always ask whether we ourselves have any competitive advantage in analyzing a particular company. Can we know the business better because no one else seems to be paying attention? Is the market’s view being distorted by some behavioral or structural bias that we don’t have?
Brian Bares, 9.30.08
Investors overreact to the latest news, which has always been the case, but I think it’s especially true today with the Internet. Information spreads so quickly that decisions get made without particularly deep knowledge about the companies involved. People also overemphasize dramatic events, often without checking the facts. It’s the classic, “Are more people killed each year by sharks or by being trampled by pigs?” type of situation – the dramatic event can get more play than it deserves. These types of overreactions are what we’re trying to take advantage of.
John Dorfman, 10.31.08
One way of dealing with information being more available is to stop playing the game and seek out securities or asset classes where there’s less information or competition.
Seth Klarman, 9.30.08
Wall Street’s view is that if you don’t make your projections, you’re a bad person. That’s because they don’t want to do the hard work of making their own projections to see if the company’s projections make sense.
Richard Pzena, 2.22.05
Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The low-risk, high-uncertainty [situation] gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much!
Mohnish Pabrai, 6.29.07