Value investing strategies come in many styles. However, the two styles that stand out the most act like bookends to the value philosophy.

Ben Graham pioneered the search for statistically cheap stocks. He originally looked for stocks selling far below liquidation value. That strategy worked throughout the depths of the Great Depression and well into the 1940s and ’50s. It fell out of favor during the Go-Go ’60s, back into favor with the 1973-74 crash, and bounced in and out (mostly out) of favor ever since.

Some of Graham’s more ardent followers used his strategy outside the U.S. with much success. Others adapted as the market caught on and the classic Graham bargains disappeared. They looked for hidden assets, low price-to-book, etc. They redefined what a statistical bargain looked like.

Overall, Graham’s strategy was built around estimating asset values, which change significantly less than stock prices. An investor, willing to dig through balance sheets, estimate assets conservatively, and with a little bit of patience, could earn a good return without much risk if they bought a stock cheap enough.

At the other end of the spectrum was Phil Fisher. Fisher learned that he got better returns out of the stocks of growing companies that he bought and held for several years compared to those that he bought at a low price, sold at a high price, and repeated. Continue Reading…

Quote for the Week

In emphasizing the difference between the man who sometimes quits a winner and the man who beats the game, the reader will understand that the hardest thing in the world is for a winner in any game of hazard to quit while winning. “Beginner’s luck” is probably true in Wall Street as anywhere else. But the man who says, “I will quit when I have made a certain sum” is the only man who is trying to beat the game. And the game always beats him. — Edwin Lefevre, 1915 (source)

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Quote for the Week

Almost all of the information in the investment management business is oriented toward purchase decisions. The competition in making purchase decisions is too good. It’s too hard to outperform the other fellow in buying. Concentrate on selling instead. In a Winner’s Game, 90 percent of all research effort should be spent on making purchase decisions; in a Loser’s Game, most researchers should spend most of their time making sell decisions. Almost all of the really big trouble that you’re going to experience in the next year is in your portfolio right now; if you could reduce some of those really big problems, you might come out the winner in the Loser’s Game. — Charles Ellis

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Quote for the Week

In 1915, while just a beginner on Wall Street, I suggested that the firm recommend a low-price stock, the Computing-Tabulating-Recording Co. But my employer, a conservative fellow, pointed out that the company’s bonds weren’t covered by its assets. He said, ‘How can you touch such a speculative stock?’ And I returned to my desk a very chastised young man. Years later the public company changed its name to IBM.

He was wrong about the stock. But he was right in terms of an overall investment policy. Look at what could happen. A man could buy a stock like that at, say, $40 a share, and it goes to $100. Then people would say, ‘Don’t be a fool. Take the profit. Trees don’t grow to heaven, etc., etc.’ So he sells out, and then spends the rest of his life watching IBM go up and up, while looking vainly for another IBM. To make a fortune in one stock you almost have to be an insider. For mere traders, there are very, very few IBMs. That’s the vital point. — Benjamin Graham (source)

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