Value investing at its core is really a simple methodology of finding cheap “undervalued” stocks at bargain prices.
Q3 hedge fund letters, conference, scoops etc
Its founder, Benjamin Graham lived through the great depression where times were truly tough. That experience has also fed into the psychology and thinking of the framework in The Intelligent Investor – his most famous and well known book.
Many of his disciples are fond of talking about frugality and thrift despite amassing staggering wealth. Warren Buffett for example is famous for still staying in his original house and driving his own car.
That begs the question – is shunning material pleasures part and parcel of being a successful investors?
A dollar spent today is an opportunity cost
Part of the reason that drives value investors to be so thrifty is that money spent today represents money that could have been compounded over five, ten or fifteen years. It seems sightly absurd to think of life that way – especially in this day and age where the pace of light seems frantically fast.
Still, value investors gravitate towards investing for the long term and this in part explains why they are used to thinking about investing in terms of years not months.
Einstein once called compounding the eight wonder of the world, and compound interest is astounding for those who are unfamiliar with it.
You can use the rule of 72 as a shorthand method of figuring out what kind of return you need annually and the number of years needed to double your money.
The magic of compounding is that every time your money doubles, $1 becomes $2, $2 becomes $4, $4 becomes $8 and so on and so forth. This applies to large numbers as well, and as you can see from the graph below, a large majority of Buffett’s wealth was actually made in the last two decades.
Still, be careful not to take this too far
From articles extolling millennials to forsake “smashed avocado toast” or expensive coffee treats, it’s easy to assume that the way to lead life is to lead a deeply frugal life.
Such advice is not very different from the articles arguing that Donald Trump should have simply invested his inheritance in the S & P 500 as opposed to running his business.
Still, think this thinking is deeply flawed:
Life is about embracing this world, not living on the mountain and avoiding all contact
None of us knows how long we have in this world. Choosing to spend on nothing and becoming a miser and stingy is not a fulfilling way to lead life.
This doesn’t mean that we should go crazy and spend wantonly. Rather, it is a call to realize that we shouldn’t necessarily assume that we are going to live to 70 or 80 and postpone all material enjoyments till then.
Jim Rogers, partner of George Soros often tells the story of his regret and postponing the having of kids till a much later age because he thought they would be a financial draining and in conducive to his desire to making money.
What is value investing really?
Something I feel quite strongly about is that value investing is often mistaken for simply being cheap.
I completely disagree.
Value investing is really about understanding the value of things, and figuring out what price is worth paying for.
It may make perfect sense on one occasion to pay for that cup of Starbucks, or that avocado toast if you are looking to celebrate a special occasion.
On the other hand, it can be a complete waste of money if you are doing it for the sake of keeping up with the jones.
The point here is that context matters. Value investing as a framework is really just about figuring out what the intrinsic value of something is, and that can differ greatly for each person and even change depending on the situation.
Article by Jun Hao, The Asia Report
