In past articles, I’ve mostly focused more on the life lessons I’ve learned from Arnold Van Den Berg (Trades, Portfolio), with a few investing lessons sprinkled in. Being a renowned value investor with more than 45 years of experiences, Van Den Berg has accumulated a tremendous amount of advice and wisdoms.
In this article I’ll share some of the most important investing lessons Van Den Berg has taught me.
Reading
When I met Arnold Van Den Berg (Trades, Portfolio) for the first time in November 2012, we spent quite some time going through his Value Line studies. Century Management has built a data base of Value Line reports for a few decades. He uses the median price-earnings ratios of the companies covered by Value Line, combined with inflation and bond yield, to gauge whether the market is expensive, cheap or fair valued. Century Management also uses Value Line to screen for ideas regularly.
I also read Value Line reports on a regular basis when I worked for Van Den Berg, both the regular edition and the small and mid-cap edition. It was really helpful because it’s a great “financial encyclopedia” of different industries.
After going through every single report of thousands of companies, I started to get a good sense of what industries have attractive business models and what industries have lousy business models. Of course, you don't need Value Line to do this. The important point is to read - read about as many businesses as you can, and make sure to stay up to date on the ones that interest you from an investing standpoint.
Discipline
As I wrote in one of my previous articles, self-discipline has been a key factor contributing to Van Den Berg's success in life and in investing. He is the most self-disciplined human being I know. Once he decides to achieve something, he will be incredibly disciplined until he achieves his goals.
In investing, Van Den Berg also practices extreme self-discipline. To him, discipline in investing means always thinking about the worst case as well as disciplined buying and selling.
When working at Century Management, I actually had some arguments with him when it came to initiating a new position, especially for high quality companies. The most frequent reason why he wouldn’t buy a stock was that it was not cheap enough. He wouldn’t pay up for quality and growth.
As a young and inexperienced analyst, I was sometimes frustrated when he wouldn’t buy the company I recommended, but looking back, I realized that he was right almost all the time. Whether it was DaVita (DVA, Financial) or IBM (IBM, Financial) or Colfax (CFX, Financial), he was right in pointing out that the buy prices we recommended were too high. When the market value of these companies declined 20-30%, then he would say “now that’s a good price.”
Discipline also means always thinking about worst-case scenarios and margin of safety. When I met with Van Den Berg to discuss ideas, he always asked me to go through these two points. This absolute focus the downside seemed almost built in Van Den Berg’s DNA. He always reminded us that the worst-case scenario has a higher probability of happening than expected, and when it happens, it’s almost always worse than expected.
Leverage
One of the most amazing aspects of working for Van Den Berg as an investment analyst is that he can draw lessons from more than four decades of experiences, one of the longest in the current value investing community. During one conversation, he told us the No.1 lesson he has learned during his entire investing career. In fact, Century Management has learned this lesson many times in the past, as going against it has resulted in the most capital losses.
This lesson is related to leverage. Most value investors shun leveraged companies, Century Management included. However, there were many times that when Century Management first bought a company, the balance sheet was conservative. The management team of the company then proceeded to get aggressive in issuing debt and the balance sheet deteriorated, often due to a large acquisition. Not being sensitive enough to the deteriorating financial situation of those companies has caused Century Management to lose money. Quite a few of those companies eventually filed for bankruptcy. In other words, the margin of safety was there at the purchase date but evaporated after a major change in financial leverage.
During the years I worked for Century Management, I experienced the lesson of increasing leverage most prominently in the energy sector. Some energy companies did go bankrupt and wiped out the equity, but when Century Management bought them, they were financially strong. We should have taken notice.
I hope the above lessons are valuable to readers. If anyone has any questions or comments, please feel free to let me know.
Read more here:
- What I Learned From Ed Thorpe and Jim Simons - Part 3
- What I Learned From Ed Thorpe and Jim Simons - Part 2
- What I Learned From Ed Thorpe and Jim Simons - Part 1
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