One thing that links all of the world-famous value investors practicing today, and indeed in the past, is a desire for simplicity.
Investors like Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio), Mohnish Pabrai (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) are all looking for undervalued stocks, but they're also looking for low-hanging fruit.
Each investor is looking for stocks or assets that are clearly undervalued. They want to avoid assets that require large amounts of mathematical aptitude to understand. Buffett, in particular, has a desire to avoid situations that require a detailed spreadsheet to analyze.
In some respects, this is an edge in itself. Wall Street is full of highly intelligent people with some of the most advanced computers in the world. Trying to outperform this well-funded group of individuals with seemingly limitless resources is always going to be a fool's errand.
Focusing on simple situations that Wall Street is overlooking has certainly yielded better results for these investors over the long-term. While the rest of the financial world fights it out to see who has the most accurate earnings forecasts, successful value investors like Buffett, Munger, Pabrai and Klarman are content to stick with their straightforward value strategies and stay away from the limelight.
Improve your knowledge
According to Buffett's comments at the 1995 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders, rather than trying to fight with Wall Street on numbers, investors should instead focus on improving their knowledge. Here are his comments from the meeting:
"I don't think any great amount of mathematical aptitude is β not aptitude, but mathematical knowledge is a β advanced math is of no use in the investment process.
And understanding a mathematical relationship, sort of an ability to quantify β a numeracy, as they call it, I think that's generally helpful in investments because something that tells you when things make sense or don't make sense, or sort of how an item in one area relates to something someplace else. But that doesn't really require any great mathematical ability. It really requires sort of a mathematical awareness and a numeracy. And I think it is a help to be able to see that.
I mean, I think Charlie and I probably, when we read about one business, we're always thinking of it against a screen of dozens of businesses β it's just sort of automatic, and β But that's just like a scout in baseball thinking about one baseball player against an alternative. I mean, you only have a given number on the squad and thinking, you know, "One guy may be a little faster, one guy can hit a little better," all of that sort of thing. And it's always in your mind, you are prioritizing and selecting in some manner.
My own feeling about the best way to apply that is just to read everything in sight. You know, I mean, if you're reading a few hundred annual reports a year and you've read Graham, and Fisher, and a few things, you'll soon see whether it kind of falls into place or not."
Reading, not spreadsheets
A basic understanding of the figures is always going to be important for investors. However, understanding sectors and industries, and how they work, is likely far more important.
For example, a company's financial statements may show that its earnings are declining, but what can you do with this information if you do not know how the rest of the sector is performing as well? Research on competitors is the only way to find out if the company is suffering from cyclical, structural or individual problems. Further, the numbers will not tell you if the company has any hope of recovering from the downturn.
This information will only become clear if you have a broad understanding of the sector and its outlook in general.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett: Focus on a Company's Future Earnings Potential
- Seth Klarman's Core Investment Principles
- Charlie Munger: How to Keep a Cool Head in Bubbling Markets
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