Category Archives: Value Investing

Value Investing: Overcome Your Fear, Don’t Be Doomed to Mediocre Returns

Part of an occasional series on Value Investing

Fear. It’s the one word that summarizes the emotion that grips investors when times are bad, really bad. Fear is the emotion that takes rational, prudent decision-making out of the investing process. It’s the whipsaw to the euphoria and overconfidence that comes when times are good, portfolios are fat, and almost every investment opportunity looks like a good one.

Warren Buffett famously said that his investment strategy was founded on seeing fear in the marketplace as a tremendous buying opportunity.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” Buffett wrote in his 1986 Letter to Shareholders.

Berkshire Hathaway’s vice chairman, and noted investor, Charlie Munger, has long expounded that periodic steep market declines are inevitable, and that unwillingness to withstand them is the road to poor performance.

In a 2009 interview with the BBC, Munger said:

“This is the third time that Warren (Buffett) and I have seen our holdings of Berkshire go down, top tick to bottom tick, by 50%. I think it’s in the nature of long-term shareholding, of the normal vicissitudes in worldly outcomes and markets that the long-term holder has his quoted value of his stock go down by say 50%. In fact you could argue that if you are not willing to react with equanimity to a market price decline of 50% 2-3 times a century, you are not fit to be a common shareholder and you deserve the mediocre result that you are going to get, compared to the people who do have the temperament who can be more philosophical about these market fluctuations.”

Diversification: Your Tool For Overcoming Fear

So, how can you overcome fear? It’s wired into us. It’s not intellectual, it’s emotional. It’s the flight part of fight-or-flight response. Overcoming fear is easier said than done, but here is a suggestion.

Trust the power of diversification. If you are buying index funds, such as S&P 500 index funds, know that the entire U.S. economy is not going away. It’s already survived the Great Depression, Great Recession, and a host of lesser known financial crises that run all the way back to the Credit Crisis of 1772. As, Charlie Munger pointed out, you have to expect that steep price declines will happen a number of times during your lifetime.

Warren Buffett has always believed in the power and resilience of the U.S. economy. He points out that in his own lifetime it has survived World War II and a host of other challenges, including over a decade of inflation in the 1970s and early-1980s, when mortgage rates peaked at over 18%, and has come back stronger.

“Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater,” Buffett said in an interview on CNBC in February. He urged investors, even small investors to see price declines for the opportunity that they are.

Remember it’s buy low and sell high, not the other way around.

The resiliency and long term strength of the U.S. economy, in other words the power of businesses as a whole to meet needs and solve problems, enabled the Dow Jones Industrial Average to not only survive a loss of 90%, but to rise from its Great Depression doldrums of a low of 41.22 to the record high 29,551.42 set on Feb. 12, 2020.

As shocking as a DJIA number in the 40s seems to us today, it’s not the Dow’s all-time low, which was 28.48 on August 8, 1896. Thus, you don’t need a century of lifespan to prosper investing in the stock market. An investor that prudently bought at 28.48 in 1896 was still up roughly 45% when the DJIA hit its depression era low.

Given enough time, the strength of the economy has proven time and time again the value of investing in equities.

“Most people are savers, they should want the market to go down. They should want to buy at a lower price,” Buffet notes.

So, get a hold of your fear and turn it into the courage to see the opportunity that is right in front of you.

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Value Investing: Don’t Buy a Pig in a Poke

(BRK.A), (BRK.B)

Part of an occasional series on Value Investing

Don’t buy a pig in a poke. It’s an old expression that traces its usage to the Middle Ages when unscrupulous merchants would sell what was supposedly a suckling pig to unsuspecting victims only to have them later find that their bags contained a cat or a dog.

How does that apply to Value Investing? Simple. Know your investment.

If you are a Value Investor your goal is to understand what a business is, not just what it claims to be, or what others say it is.

Before you invest, have you closely studied the stock you are buying?

What are the past 10 years of earnings? Are they consistently growing?

What is the return on equity?

What does the company do with retained earnings?

Have you read the past 10 years of annual reports?

How strong is the management team? Do they align with shareholders’ interests?

What is the company’s intrinsic value?

What is the company’s price history? Can you provide a reason why you should buy now?

If this all sounds like too much work, there’s nothing wrong with building a balanced portfolio of index funds. However, if you are the kind of investor that likes to hunt for opportunities, likes to know about the individual companies you are buying, and doesn’t want to buy a pig in a poke, then answering these questions will be essential to using a Value Investing approach.

There’s a whole financial industry designed to take the thinking out of investing. Whether it is from talking heads on TV or the Internet, or investment company recommendations, and they can be a poor substitute for your own research and your own studious analysis.

In the end, it comes down to knowing your investment, so you don’t buy a pig in a poke.

Or as Warren Buffett once said: “Any time you combine ignorance and borrowed money you can get some pretty interesting consequences.”*

*1994 Berkshire Hathaway Annual Meeting

© 2019 David Mazor


Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Value Investing: Risk Is Not Your Path to Reward

(BRK.A), (BRK.B)

The first in an occasional series on Value Investing

How often have you heard that if you want greater returns you have to take more risk?

It’s one of those stock market investing truisms that not only gets repeated ad nauseam, but most anyone that has ever met with a financial advisor, or opened an online mutual fund or brokerage account, has probably been asked to declare their risk tolerance, as if the more risk you take the more reward you can hope to achieve.

The implication is that risk is tied to reward and you must be willing to take more risk if you want more reward.

However, nothing could be further from the truth.

This is not to say that there aren’t some investments that are safer than others. A Treasury bill is certainly far safer than a corporate bond, for example. However, there’s not a direct correlation between riskiness and return.

The very fact that there is risk means by definition that you have a greater chance of losing money the riskier an investment gets.

The father of Value Investing, Benjamin Graham, summed this seemingly pervasive but erroneous view when he wrote “there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run.”*

The goal of investing is making money, and it is not just taking greater risk that gets an investor closer to that result.

So, what gets an investor more return if it is not taking more risk?

It is doing the painstaking work that leads to recognizing value.

According to Graham, return is not related to the risk you take, but the preparation you have done (or lack of it) in selecting your investment before you invest.

For the Value Investor, the research you do and your adherence to Value Investing principles is what determines your rate of return.

First among those principles is that price is at the heart of any investment decision, because even a good business or piece of a business can bring a poor return if bought at too high a price.

Graham notes that it’s not the risk you take, but rather “The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to his task.”*

Value Investing lays out the fundamentals that followers of this school of investing are looking for. Those fundamentals lead the investor to the price worth paying for an investment, whether it’s a share of stock or the purchase of an entire business.

Warren Buffett went so far as to state that “The greater for potential for reward in the value portfolio, the less risk there is.”**

So, the next time you are making an investment, don’t let risk be an indicator of reward, it will only lead you astray.

*Graham, Benjamin, et al. The Intelligent Investor: a Book of Practical Counsel. Harper Collins, 2013.

**Buffett, W. (1984). The Superinvestors of Graham-and-Doddsville. Hermes, (Fall)

© 2019 David Mazor


Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.