If you are a value investor, every now and then you lag, or experience what consultants call tracking error. It can be very painful. To be a value investor, you have to be willing to suffer pain.
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Value investors tend to look for what they perceive to be stable businesses and technology is fast changing almost by definition.
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Markets are all about expectations, and the critical question for investors is always, what is discounted? Are the expectations reflected in market prices too high, or too low?
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It is almost a tautology in capital markets that the best investments are those with the worst previous returns, where expectations are low, demand is down, and prospects appear at best highly uncertain.
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Bargain prices do not occur when consensus is cheery, the news is good, and investors are optimistic.
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As is often the case in financial markets, when the opinions are all on one side, the opportunities are usually on the other.
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The key question in markets is always what is discounted. Excess returns are earned when expectations — what is discounted — are different from what occurs.
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Two things seem pretty clear to me: first, no one can consistently buy at the low or sell at the high (except liars, as Bernard Baruch said), and second, lowest average cost wins.
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The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation?
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In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years.
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The most important question in markets is always, what is discounted? What does the market expect, as reflected in prices, and how do my expectations differ?
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When growth becomes scarcer and the discount rate becomes lower, growth becomes more valuable.
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Price and value are not only different, it is precisely that they can differ widely that creates the opportunities for value investors to earn excess returns. The greater the difference, the greater the potential return.
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For value investors, price is one thing, and value is another. When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.
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One of the markers, in my opinion, of a high future return is where the worst rate of return has been during the preceding five or six years.
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We’re bottom-up investors. We always have to operate on negative macro assumptions.
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As a value investor, what you are interested in is whether the company is creating wealth.
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My clients say the way to get rich is to buy what I’m buying — but to wait two years to do it.
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I look at situations and act when I think the problems are temporary. I believed if you could buy assets with sufficient ability to carry them then over time you could not lose.
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When it is all said and done I am a professional opportunist. What has always intrigued and attracted me are scenarios where I believe there is significant inherent value beyond the price I am paying.
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You can’t be a good value investor without being an independent thinker – you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.
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The thing about buying depressed stocks is that you really have three strings to your bow: 1) earnings will improve and the stocks will go up; 2) someone will come in and buy control of the company; or 3) the company will start buying its own stock and ask for tenders.
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If a stock goes up 30 or 40 times in ten years, it has to have been grossly underpriced to begin with.
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Almost every value trap is the result of people extrapolating past returns on capital and past valuations onto a different situation today.
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Some might see buying and creating value from others’ mistakes as a form of exploitation, but I see it as giving neglected or devalued assets, in any industry, new life.
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Opportunity arises when the gap between reality and perception becomes significant.
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Maybe it makes me old-fashioned, but investing to me is about owning great companies for many, many years.
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Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios which frequently appear downright imprudent in the eyes of conventional wisdom.
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I believe it is highly possible to improve your long-term results by adjusting your investment position at the extremes of the cycle. Not that often. But at the extremes.
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Smart investing doesn’t consist of buying good assets, but of buying assets well.
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The man who is sure improvement is coming can buy on the basis of current less favorable conditions, and thus derive the full benefit of the betterment — if it materializes.
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It is important to make sure that one is not lured by rash enthusiasm into commitments at levels greatly above those soundly warranted by the financial set-up and the earnings record.
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Whether you’re investing in art or in securities, no one should confuse value and price.
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Value investing does not appeal to the masses. If it did, you would never be able to buy a bargain.
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Most of the people who have accumulated the greatest wealth in this business have done so not by predicting the future, but by buying companies at such attractive prices, thereby discounting the majority of the problems people fear.
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Value investing is a way of life. I apply it to everything I do. It’s not just stock markets.
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For most investors in general, selling the expensive asset, and buying the cheap asset, seems like a logical strategy — except when you actually try to do it. Because most people are actually not wired to be selling what’s expensive and going up, and buying what’s cheap and going down.
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If you have a valuation discipline, then you know that stock prices change more rapidly than business value. You also know that rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return.
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It’s not what you buy, it’s what you pay. And success in investing doesn’t come from buying good things, but from buying things well. And if you don’t know the difference, you’re in the wrong business.
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Growth stock investing may be more a philosophy of buying what is popular. Value investing is more a philosophy of buying what is out of favor.
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Historically, many companies that have had terrible times have come back, or many of them do. A decline doesn’t mean it’s the end.
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If you talk to a businessman, a businessman is going to feed the winners and kill the losers. But in the investment world, when you’ve got a winner you should be suspicious about what’s next. And if you’ve got a loser, you should be hopeful — although not naively hopeful.
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We think diversification is only a surrogate, and usually a poor surrogate, for knowledge, control, and price consciousness.
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We get protection by being price-conscious and by being extremely knowledgeable about our holdings.
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We don’t pay attention to quarterly earnings or consensus forecasts. That’s performance investing, not value investing.
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I learned how to work on what’s cheap. I became a total believer. To this day I think that is the only way to invest.
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I have learned that the great opportunities are the places that have been neglected, where other people are not looking.
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All successful investment involves trying to get into something where it’s worth more than you’re paying.
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There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling.
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Even the world’s greatest business is not a good investment if the price is too high.
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I think all good investing is value investing, and it’s just that some people look for values in strong companies and some look for values in weak companies, but every value investor tries to get more value than he pays for.
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I didn’t get rich by buying stocks at a high price-earnings multiple in the midst of crazy speculative booms, and I’m not going to change.
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It is easy, of course, to pick out good companies, companies that are better than other companies. But that is not the same thing as picking out good stocks to buy at their current prices.
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In investing, nothing beats the discovery of an undervalued stock, no matter what the nature of its business or the past trend of its earnings.
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I make no attempt to forecast the general market — my efforts are devoted to finding undervalued securities.
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I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a “New Era” philosophy where trees really do grow to the sky.
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Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.
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The availability of a quotation for your business interest (stock) should always be an asset to be utilized if desired. If it gets silly enough in either direction, you take advantage of it. Its availability should never be turned into a liability whereby its periodic aberrations, in turn, formulate your judgments.
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I am willing to trade the pains (forget about the pleasures) of substantial short term variance in exchange for maximization of long term performance. However, I am not willing to incur risk of substantial permanent capital loss in seeking to better long term performance.
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I will not abandon a previous approach whose logic I understand even though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.
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Market prices for stocks fluctuate at great amplitudes around intrinsic value but, over the long term, intrinsic value is virtually always reflected at some point in market price.
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Suppose you bought a stock cheap when it was a relatively obscure situation, and then a half-dozen Wall Street firms started cheering for the stock at the same time. I’d get concerned and think about selling. I don’t like bandwagons. I’d rather do my own thing.
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We don’t invest for income. If you invest soundly for growth, the income follows.
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I have a very simple strategy. I buy good companies at attractive prices. Then I sit on them.
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The greater the potential reward in a value portfolio, the less risk there is.
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It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or doesn’t take at all.
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You’re not buying a stock, you’re buying part ownership in a business. You will do well if the business does well. And if you didn’t pay a totally silly price.
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Beating the market averages, after paying substantial costs and fees, is an against-the-odds game; yet a few people can do it, particularly those who view it as a game full of craziness with an occasional mispriced something or other.
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I think there’s a tendency in the modern world of people wanting their money to be working hard, and I joke that our money is like a couch potato by comparison.
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In my opinion, the market tells you when to buy things. And when things are really cheap, on a Graham and Dodd valuation basis, you should like them more. And when they’re really expensive, you should like them less.
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Discrepancies — and hence opportunities — in securities originate most often when events move faster than quotations.
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If you think of the stock market as a cauldron of minestrone soup that occasionally somebody sticks a ladle in and stirs up, it takes a while before all the vegetables float back to the level that they were at before.
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I am much more inclined to buy a stock that has been kicked out of an index because then it may have value characteristics — it has underperformed.
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The question we ask ourselves is, ”What would we be willing to pay to own a security forever?” Then we determine whether we can buy it at a discount from that figure.
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We try to buy dollars for 50 cents, and to realize the dollar before too much time passes.
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It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.
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My experience is that when people want to give something away at a ridiculous price because they have to, not because they want to, that’s a good time to buy.
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Value investing is, at its core, the marriage of a contrarian streak and a calculator.
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Risk is not inherent in an investment; it is always relative to the price paid.
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Investors must never mistake an investment that is down in price for one that is bargain-priced; undervaluation is determined only by a security’s price compared to its underlying value.
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We consider for each of our investments not only whether a security is undervalued but why it is undervalued. If the reason is that there are uninformed or emotional sellers, we become more comfortable.
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It is only in a bear market that the value investing discipline becomes especially important because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk.
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The main underlying principle of value investing is that you should invest in undervalued securities because they alone offer a margin of safety.
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Value investors thrive not by incurring high risk (as financial theory would suggest), but by deliberately avoiding or hedging the risks they identify.
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Value to some extent is in the eye of the beholder. It is very hard to pin down what the value of a future set of cash flows from a business, be it cable TV or biotechnology, is going to be.
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If the market’s going wild and you want to be in it, you either have to lower your standards to stay in the game or you buy stuff which may not participate because it’s not part of the game at that time.
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Just because we think a stock is undervalued doesn’t mean we’re right. We may be wrong in our judgment.
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The general state of business thus does not forecast the course of stock prices except in the apparently paradoxical fashion that great prosperity affords an advantageous time for selling stocks, extreme business depression an opportunity for purchase.
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Don’t buy “cheap” stocks just because they’re cheap. Buy them because the fundamentals are improving.
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A correction is a wonderful opportunity to buy your favorite companies at a bargain price.
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As soon as you realize you can afford to wait out any correction, the calamity also becomes an opportunity to pick up bargains.
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The first task of the bargain hunter is to narrow the field and separate the solid prospects from the ones that are counting on hopes, prayers, and miracles.
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I’ve found that when the market’s going down and you buy funds wisely, at some point in the future you will be happy.
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