The title sounds likes heresy to any value investor. How can you consider yourself a value investor if you do not even have a margin of safety? After all, did Buffett not say
“You leave yourself an enormous margin of safety? You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges.” Value Investing is determining the intrinsic value of a stock, and determine the difference between this value and the current share price to see if the stock provides a sufficient Margin of Safety.
I will argue that three of the best investors/firms do not invest with a margin of safety.
John Neff has one of the best long track records of any mutual fund manager. During Neff's 31 years managing the Windsor fund, the fund returned 13.7% annually versus 10.6% for the S&P 500. Neff’s investing style is described in his autobiography,John Neff on Investing
. Neff investment style can be described as looking for low p/e stocks of companies growing earnings in excess of 7% annually, and often paying a dividend. He then dissects what makes a low p/e stock better than a stock with a similar p/e. John Neff himself stated “I’ve never bought a stock unless, in my view, it was on sale.” I do not believe Neff mentioned the phrase margin of safety once in his book.
David Dreman is one of my investing heroes I got the opportunity to interview him
several months ago. He has a deep understanding of behavioral finance and is known as the original contrarian. He describes in his numerous books aboutnumerous books
how he looked for stocks with low p/e, p/b, pfcf, p/dividend. Dreman described his approach as "We invest in undervalued companies that exhibit strong fundamentals, above-market dividend yields and historic earnings growth, which our analysis indicates will persist. Our strategy is to own strong, fundamentally sound companies and to avoid speculative stocks or potential bankruptcies." Sounds like a value investor to me. I believe Dreman too never spoke about margin of safety. Dreman would buy stocks that had a low p/e without showing that the current low p/e might not be justified.
Some might say that Dreman and Neff are really contrarian investors. This could be described as buying out of favor stocks regardless of a margin of safety. One can argue that there is a difference between contrarian and value investing. Fair enough, but I have the ultimate question, two words: Tweedy Browne.
Tweedy Browne put together a marvelous (and free) 60 page pamphlet titled What Has Worked in Investing . I will summarize the essay/paper as follows: The fund provides data on five different types of stocks that have historically outperformed the market. The five approaches are: Low Price in Relation to Asset Value, Low Price in Relation to Earnings, A Significant Pattern of Purchases by One or More Insiders, A Significant Decline in a Stock’s Price, and a Small Market Capitalization. The pamphlet does not mention the phrase margin of safety. Now Tweedy Browne is classic value investors. Some consider Tweedy’s investment style to be most similar to Benjamin Graham, out of any firm today. Tweedy Browne states on their website: “We do not attempt to be all things to all people, but instead pursue a value-oriented approach to investment management first pioneered by Benjamin Graham.”
So the question is; does value investing not require a margin of safety, or are these people not really value investors/firms. I am not sure of the answer, and I open up the question to the audience.
To learn more about John Neff check out my resource page http://www.valuewalk.com/resource-page-2/legendary-value-investors/john-neff/, to see my David Dreman page use the following link- http://www.valuewalk.com/resource-page-2/current-value-investors/david-dreman-resource-page/
http://www.valuewalk.com/
“You leave yourself an enormous margin of safety? You build a bridge that 30,000-pound trucks can go across and then you drive 10,000-pound trucks across it. That is the way I like to go across bridges.” Value Investing is determining the intrinsic value of a stock, and determine the difference between this value and the current share price to see if the stock provides a sufficient Margin of Safety.
I will argue that three of the best investors/firms do not invest with a margin of safety.
John Neff has one of the best long track records of any mutual fund manager. During Neff's 31 years managing the Windsor fund, the fund returned 13.7% annually versus 10.6% for the S&P 500. Neff’s investing style is described in his autobiography,John Neff on Investing
. Neff investment style can be described as looking for low p/e stocks of companies growing earnings in excess of 7% annually, and often paying a dividend. He then dissects what makes a low p/e stock better than a stock with a similar p/e. John Neff himself stated “I’ve never bought a stock unless, in my view, it was on sale.” I do not believe Neff mentioned the phrase margin of safety once in his book. David Dreman is one of my investing heroes I got the opportunity to interview him
several months ago. He has a deep understanding of behavioral finance and is known as the original contrarian. He describes in his numerous books aboutnumerous books
how he looked for stocks with low p/e, p/b, pfcf, p/dividend. Dreman described his approach as "We invest in undervalued companies that exhibit strong fundamentals, above-market dividend yields and historic earnings growth, which our analysis indicates will persist. Our strategy is to own strong, fundamentally sound companies and to avoid speculative stocks or potential bankruptcies." Sounds like a value investor to me. I believe Dreman too never spoke about margin of safety. Dreman would buy stocks that had a low p/e without showing that the current low p/e might not be justified. Some might say that Dreman and Neff are really contrarian investors. This could be described as buying out of favor stocks regardless of a margin of safety. One can argue that there is a difference between contrarian and value investing. Fair enough, but I have the ultimate question, two words: Tweedy Browne.
Tweedy Browne put together a marvelous (and free) 60 page pamphlet titled What Has Worked in Investing . I will summarize the essay/paper as follows: The fund provides data on five different types of stocks that have historically outperformed the market. The five approaches are: Low Price in Relation to Asset Value, Low Price in Relation to Earnings, A Significant Pattern of Purchases by One or More Insiders, A Significant Decline in a Stock’s Price, and a Small Market Capitalization. The pamphlet does not mention the phrase margin of safety. Now Tweedy Browne is classic value investors. Some consider Tweedy’s investment style to be most similar to Benjamin Graham, out of any firm today. Tweedy Browne states on their website: “We do not attempt to be all things to all people, but instead pursue a value-oriented approach to investment management first pioneered by Benjamin Graham.”
So the question is; does value investing not require a margin of safety, or are these people not really value investors/firms. I am not sure of the answer, and I open up the question to the audience.
To learn more about John Neff check out my resource page http://www.valuewalk.com/resource-page-2/legendary-value-investors/john-neff/, to see my David Dreman page use the following link- http://www.valuewalk.com/resource-page-2/current-value-investors/david-dreman-resource-page/
http://www.valuewalk.com/
