Are you really a value investor?
Or, are you just a value pretender – a value groupie?
There’s a big difference between the two, even if you’ve never heard of value groupies before. Sure, a value investor is someone who buys “value stocks”, such as the ones I send out to those who request free net net stock ideas, but I think there’s a little more to it than that.
After all, both farmers and cattle chew on grass but one is definitely more human than the other.
So, what exactly is it that makes a value investor a value investor and the others…well… value groupies?
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Sherlock Holmes Would Have Made a Great Value Investor
Psychologists have long known that every decision you make is preceded by a specific feeling – a feeling that highlights the correctness of a specific choice in front of you. Ultimately, feelings come into play in all of your investment decisions.
- Warren Buffett Stock Picks
- Warren Buffett Current Portfolio
- This Powerful Chart Made Peter Lynch 29% A Year For 13 Years
But when it comes to value investors, facts (in the form of financial statements, company reports, independent analysis, etc) give rise to that feeling. On the other hand, a value groupie won’t necessarily even look at the facts before getting the urge to invest. At most, he’ll only give a superficial nod to them before plunking down a large wad of bills.
Value investors invest based on the facts while value groupies base their investment decisions on feelings.
Keep that in mind the next time you’re considering an investment.
Finding Excitement in Boredom
Do you like 10Ks?
But they’re critically important for the success of your portfolio.
Actually, I detest reading 10Ks… but I do it because I know how important proper due diligence is. Value investors automatically sort through these types of statements in order extract critical pieces of information and paint a detailed picture of the investment’s merits.
A value groupie, on the other hand, will typically skip these filings. A blog post or a quick scan of Google Finance is often enough.
As good as Google finance is, depending on it alone has serious limitations. You can only discover the off balance sheet assets or liabilities that could make or break your investment thesis by studying the 10Ks, 10Qs, or proxy statements.
Annual reports also give you a good idea of management’s attitude towards shareholders — management compensation anyone? – and if they have a record of doing what they say they’re going to do.
Let Science and Reason Be Your Guide
Do you like science?
I like rational thinking, as well.
But did you bother to take scientific studies into account when developing your investment strategy?
We apply academic studies as often as possible at Net Net Hunter when formulating investment tactics and strategies. Scientific studies have had a huge impact on Net Net Hunter’s NCAV Investment Scorecard… and ultimately lead to very solid returns.
It’s also helped us to avoid losing a lot of money on stocks investors should never have bought in the first place.
When it comes to investing, I’m a big fan of just doing what works – this is why I became a net net stock investor in the first place. Why would you want to settle on a strategy that will ultimately yield lower results and take more of your time and effort?
Developing a strategy based on evidence and reasoning also means knowing how the strategy performs long term and having the discipline to stick to it while it periodically under-performs. This is critically important and key to achieving great long term results.
Both evidence and reasoning are key. While you can find evidence to support all sorts of crazy theories, it’s you’re reasoning ability that will help you find the path to riches and avoid going broke in the stock market.
Value investors decide on an investment strategy based on what’s been shown to work well through scientific studies and industry practice. Value groupies jump on whichever strategy is currently performing well or in vogue.
Ever heard of John Templeton?
He was one of the best investors of all time. To him, investing was simple, but it never involved doing what everybody else was doing.
John famously bought a bag full of stocks trading below $1 at the onset of WW2, when most brokerages refused to even deal in them. He was also one of the first investors to look for stocks in what we now call the emerging markets.
According to John, being a maverick is critical to investment success.
Think dealing in value stocks makes you a maverick? Think again.
There are so many value investors these days that their mass creates a sort of gravitational pull. Value groupies feel comfortable with this pull, so tend to gravitate to the middle of the herd.
A real value investor is a real maverick. He doesn’t care what most other value investors are doing, and he might not even know.
A value groupie, by contrast, has probably been sucked deep into the Warren Buffett trap, since most value investors are writing about Buffettology.
Are You a Businessman?
All of the above points to one overwhelming characteristic of value investors: they treat their portfolio as a business, not a part time hobby. They’ve gone pro.
It’s easy to go the other way. It’s very easy to pick up a single stock that looks promising and forget about it for a while, mix and match different investment styles, or not think about how each investment fits into the larger whole.
That’s kind of like a management team that collects other businesses …just because.
Sure, some managers have done well building world class organizations through acquisitions (Berkshire and Leucadia National are two that come to mind), but you’re not Warren Buffett (Trades, Portfolio) or Ian Cumming (Trades, Portfolio)s. Many more conglomerates just waste shareholder money.
Compare that to a management team who has a laser-like focus on the well-chosen niche they’ve decided to exploit. That management team can develop a level of skill and expertise that can’t be matched by the management team of the conglomerate.
The focused team will always be recording their thoughts and predictions, then measuring their results. The focused team will always be looking to improve what they’re doing to exploit their niche to the greatest extent possible.
The value investor does the exact same thing with his chosen investment niche.
By contrast, the value groupie dabbles in a range of styles and strategies without mastering any one of them. He makes decisions on the fly, not bothering to jot his thoughts down in writing to test their accuracy later. He’s not concerned with constant refinement and improvement over time.
YOU Are the Bottleneck
Warren Buffett (Trades, Portfolio) says that he has the right temperament when it comes to investing. Charlie Munger (Trades, Portfolio) says that you have to look at things philosophically, stoically. Benjamin Graham made Mr. Market famous.
No matter how you choose to invest, your own psychology will play a tremendous role in your eventual returns.
This is something that value investors are well aware of and constantly focus on trying to improve. They reflect on their own psychology as much as they do the financial statements of undervalued companies themselves.
Ultimately, being acutely aware of which psychological traps you’re susceptible to and working to develop ever higher emotional intelligence will go a long way to achieving a great long term record.
Value groupies make big mistakes and then reason them away after the fact just in time for the next big investment opportunity. They deny, suppress, or blame other people, just so long as they don’t have to face their own psychological fallibility.
Working on yourself is difficult. Reading the Motley Fool and watching CNBC is easy.
A History Longer Than History
Money and investing is an ancient activity – far older than recorded history.
Thales was a Greek philosopher living in Ionia about 100 years before Socrates. The Ionians used to make fun of him quite a bit for thinking deep thoughts and asking questions nobody else cared about.
One day, through a series of observations, he came to the conclusion that the following year’s olive harvest would be much larger than usual. Rather than tell anybody else about it, he went around town buying up all of the olive presses.
His prediction proved accurate and, when it came time to harvest the city’s olive crop, he was the only game in town. While farmers were outraged, there was little they could do but take the price he dictated.
After collecting a massive bounty, he sold his presses and went back to practicing philosophy.
Thales existed over 2500 years ago, and there have been countless opportunities to make and lose money year to year since then.
With that in mind, why would you worry about the results of any one particular year?
Value investors keep a long term perspective when it comes to investing. They know that investing is a long term game and that they can do very well if they stick to a great strategy through good times and bad.
They know that a fantastic record builds wealth and that this fantastic record is the result of consistently making intelligent decisions.
Value groupies are always trying to knock the ball out of the park, or putting too much emphasis on a single year’s results, rather than seeing investing as the long term, often systematic, game that it is. Short term results are of paramount importance.
Value Investors Steal
Do you remember in university when your professor said that if you copy the work of another person you were likely to get kicked out of school?
Academics are all about image and name recognition. They want people to flock around them at the next library sciences convention in awe of their insights into 16th century library catalog systems.
Every area of interest has its social in-groups. By telling you not to plagiarize, professors are telling you to work for your own social status rather than sucking it away from another member of the in-group.
Even value investing has its own social clique, and one common distinction between value groupies and value investors is that value groupies try to rise to the top of it while real value investors just don’t give a damn.
As a result, real value investors are fine with taking ideas from other real value investors within their niche. They’ll double check the thesis, but they have no problem taking investment ideas from other people.
Value groupies want to be known for their original brilliant ideas. They want to be seen as great investors. Value investors are too busy making money to worry about what others in the community are thinking of them – isn’t that what value investing is all about?
So, Which Is It?
Are you a value investor or a value groupie? To be fair, you probably fall somewhere in the middle.
While I’m far closer to the value investor side of the spectrum I still have some things to improve. While I conduct serious research on anything I buy, I don’t record enough of my thought processes when making investment decisions, for example.
That’s something I’m working on.
Knowing which side of the spectrum you’re on will go a long way towards improving your investment returns and acquiring the wealth we’re all in it for.