What is a value investor?
A value investor, many believe, is the definition for the ‘classic’ investor – somebody who is in it for the long-term. If you’re using the value investment methodology, you will look for companies that have ‘strong fundamentals’. By this we mean making sure that the balance sheets are healthy, that plans for the future are in place, that the management team has a history of competency, that capital is managed responsibly – in short, all the factors that tell you if a company can weather the storms of the fickle markets.
The key word here is ‘value’ – the share price of the company being lower than it’s actually worth. The investor will try to find value by looking for companies that everybody else is missing. There are any number of reasons for a company being undervalued by investors - perhaps because the company or sector isn’t glamorous, or the company has had some bad press recently, or the stock didn’t reach expectations in the previous quarter. The value investor makes it their mission to find these bargains – and then hold on to them as the rest of the world catches up.
The most famous value investor alive today has to be Warren Buffett, who was taught by Benjamin Graham, forming a dynamic duo not dissimilar to that of Alexander the Great and Aristotle. Both of these investors would trade through a company called Tweedy, Brown, Company, headed by Christopher H. Browne, another famous value investor.
Benjamin Graham produced what is seen as the definitive guide to value investing with his 1934 release ‘The Intelligent Investor’ which Moneywise summarises here.
Wannabe value investors can also learn from Warren Buffett’s shareholder letters, available as a collection called ‘The Essays of Warren Buffet: Lessons for Corporate America.’
The wisdom these two men have given to investors is immense, but just for a taster, here are a few of their quotes.
- “Invest only if you would be comfortable owning a stock even if you had no way of knowing its daily share price.”
- “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
- “If the reason people invest is to make money, then in seeking advice they are asking others to tell them how to make money. That idea has some element of naïveté.”
- “Price is what you pay. Value is what you get.”
- “Our favourite holding period is forever.”
- “Chains of habit are too light to be felt until they are too heavy to be broken.”
- “Wide diversification is only required when investors do not understand what they are doing.”
John Neff, the ‘professional’s professional’, and now retired, was a famous American value fund manager in his time. From 1964 to 1995 his Vanguard Windsor Fund returned an average of 13.7% annually. This compared to 10.6% a year from the S&P 500 index of America’s biggest stocks over the same period.
- “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.”
- “I’ve never bought a stock unless, in my view, it was on sale.”
Fund managers who follow value strategies today include Nick Kirrage, who runs Schroder Recovery, Alistair Mundy, who manages Investec’s Cautious Managed fund and Alex Wright, who heads up Fidelity Special Values.
Particular aficionados of Warren Buffett’s methodologies include:
Out of all the main styles of investing, value sounds like the easiest and most fool-proof, but it’s a lot harder than it looks. It sounds boring, cerebral, old-fashioned, even, but to invest money like this takes courage.
The most obvious example is tobacco. 10 years ago everybody was terrified of holding stock in companies like British American Tobacco. Tobacco companies faced advertising bands and headline court cases with damage figures thrown around in the billions of dollars… yet they have since performed well for investors.
This isn’t to encourage people to invest in so-called ‘sin stocks’, but to demonstrate what successful value investing looks like when you’re equipped with hindsight. You need to know how to assess companies, what questions to ask and what conclusions to draw from the answers. And, to make things even harder, you have to go against the common grain and put your money where your mouth is when doing so.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.