Sunday, August 18, 2013

value investing is not for everyone

The simple truth is that value investing, especially asset based deep value investing, is not for everyone. For obvious reasons, I am grateful that so few people actually invest this way.

Deep value investing is simply not enough of an action sport for many people. I do not trade every day, or even every week or every month. I hold positions until they work. Sometimes this happens in a few months usually because of a takeover offer or restructuring proposal. Most of the time I end up holding the shares of an undervalued company for several years. I have held positions for over a decade during my career.

Deep value investors do not feel the need to play just because the casino is open. The ringing of the bell at the NYSE does not hold the same significance for me that it does for my more trading oriented friends. Daily market movements are more a curiosity than a matter of life, death, and profit and loss. Quarterly earnings reports are just a checkpoint and not the end all and are all of trading existence. I buy when I identify a solid value that passes my screens and checks. I sell when a holding becomes fairly or overvalued depending on the quality of the underlying business. The rest is just noise.

You will not own exciting stocks. While others chatter at the water cooler or cocktail party about Apples newest phone, surgical robots and other exciting products you will not garner the same attention with your stocks. Asphalt plants, safety garments, and staffing companies are just not going to be as sexy. Although in all probability they will end up making you big money without the risk of permanent loss of capital, no one else will care. You will own stocks no one has ever heard of and for the most part do not want to know about. Deep value investors need to become well versed in literature and sports so as to not be totally ostracized at public gathering.

You have to be able to be a buyer when others around you are selling in a panic. Bargains are not created in a vacuum so you will be buying stuff no one else wants. Your busiest buying binges will come after market meltdowns. John Templeton called this buying at the moment of maximum pessimism. It takes some courage and conviction to be a buyer of bank stocks in a credit crisis or tech stocks after a crash but it works. A deep value investor will often be buying stocks that others are puking up as a result of margin call. Seth Klarman refers to this as being the buyer of last resort and once again it is not easy but it does work. Value types look at corrections and crashes as inventory creation events and not catastrophes

The other side of this is that you will be selling when others are starting to get excited about stocks. It can be frustrating to hold cash balances when others are bragging about huge day trading profits and new paradigms. As market rally to the frothy point and everyone is excited your stocks will become overvalued and you will be selling. It is not market timing so much as a natural part of the value cycle. Cash balances will rise as you are unable to find suitable new bargains to replace stocks you have sold. It will be frustrating until it is rewarded by the inevitable decline and birth of a new value cycle.

Value investing is not for everyone. You will not trade all the time. Your stocks are almost never on TV. You will be selling when friends and neighbors are excited about the market and buying when they are depressed. There is lots of reading involved. It is more like an extra innings pitcher’s duel than a sudden death overtime football game. It has been proven to be wildly profitable over time but many people just do not have the discipline and patience. Fortunately I do.

-- by Tim Melvin

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