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.
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