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The business of value investing – Six essential elements to buying companies like Warren Buffett- Charlie Tian 2009
https://bbs.pinggu.org/thread-695143-1-1.html (Page 207-213)
Remain Flexible in the Approach
Myth: Value Investors Only Invest in Bear Markets and Only Low P/E Stocks Qualify as Bargains
阅读到的有价值的内容段落摘录
As renowned investor Shelby Davis astutely observed: “A down market lets you buy more shares in great companies at favourable prices. If you know what you’re doing, you’ll make most of your money from these periods, you just won’t realize it until much later.” Bear markets are characterized by widespread disdain toward equities, causing many buyers to exit the markets at the first sign of trouble. This disdain is fuelled by endless negative newspaper headlines and television programs that further fuel investors’ disregard for equities. Forgetting that media outlets are talking about the current state of affairs while the markets focus on the future state of affairs, investors abandon equities at the height of bad news, thereby selling low and buying high. As the saying goes, what has risen shall fall, and what has fallen shall soon rise again. Surely not every stock that deteriorates will again rise — it’s up to you to provide the thorough analysis and determine whether a superior investment opportunity exists. It’s not easy going at it alone and buying securities when everyone is selling and companies are experiencing setbacks. Investing during times when the market mood is at its worst requires investors to be comfortable with the fact that prices could go lower still. Many investors have a misguided fascination with trying to buy at the bottom and sell at the top. That idea rests on the belief that investors can time markets perfectly, suggesting that the quoted price of the stock is the central object of focus. Value-oriented investors, however, rely on the stock price only in as much as it serves to determine whether the business is undervalued. And as is often the case, value investors usually buy before the bottom is reached and sell before the absolute top. But what counts is what happens in between: buying low even though the price may go lower and then selling high even though the price may go higher. In the end, the result is a gain on investment. Also, armed with the knowledge that the security is undervalued, investors have the added benefit of buying more as the price declines and thus getting an even greater bargain. The result of the value approach is ultimately a win - win for value investors. They buy cheap regardless of whether the purchase is being made at the bottom. Should the price decline further still, value investors see this as an even better opportunity to buy more for less. The late Benjamin Graham and David Dodd summed up their investment philosophy brilliantly in a passage from their seminal work Security Analysis. During Graham’s day, the concept of value investing was oxymoronic in the sense that if you weren’t investing with the goal of buying assets for less than they are worth, then you were speculating. The term “value investing” was not even used 60 years ago during Graham’s time, but what Graham and Dodd defined as the key to successful investing applies to any self-described investment approach: It is our view that stock-market timing cannot be done, with general success, unless the time to buy is related to an attractive price level, as measured by analytical standards. Similarly, the investor must take his cue to sell primarily not from so-called technical market signals but from an advance in the price level beyond a point justified by objective standards of value. It may be that within these paramount limits there are refinements of stock-market technique that can make for better timing and more satisfactory over- all results. Yet we cannot avoid the conclusion that the most generally accepted principle of timing- that purchases should be made only after an upswing has definitely announced itself- is basically opposed to the essential nature of investment. Traditionally the investor has been the man with patience and the courage of his convictions who would buy when the harried or disheartened speculator was selling. If the investor is now to hold back until the market itself encourages him, there will be nothing to distinguish himself from the speculator, and wherein will he deserve any better than the ordinary speculator’s fate. Value can be found in various different ways in various businesses. One business might be undervalued in relation to the free cash flow it generates. Another business might be undervalued because its future growth potential suggests that the intrinsic value will continue to increase over time (Johnson & Johnson). Yet another business might be undervalued because it would be worth a lot more to a strategic buyer. It is very easy for investors to take the lessons and philosophies of value investors and conclude that the approach is rigid in its nature. Four common myths include:
1. Value investors only invest in bear markets.
2. Only low price to earnings (P/E) ratio stocks qualify as bargain investments.
3. High - growth businesses cannot be value investments.
4. Value investors never sell stocks short.
阅读到的有价值信息的自我思考点评感想
Value investors love bear markets only inasmuch as they provide more fertile hunting for bargain securities. Value investors invest in any type of market as long as the ability to buy an asset for less than its intrinsic worth exists with a comfortable margin of safety. Bear markets offer greater opportunity to find such investments, but not the only opportunity. Value investing is, by its very nature, a very flexible approach. That’s not to say that the four aforementioned “myths” don’t appeal to value investors because in fact they do. Many value investors love to search for low P/E stocks, but while a business trading at three times earnings merits a very close look, it certainly doesn’t mean the business is a screaming bargain. If the business is able to continue increasing profitability, then the opportunity becomes very intriguing. Otherwise, the P/E of this year can easily become a P/E of next year. What matters most in investing is the future performance of the company over a reasonable period of time. In fact, many bargain investments arise from opportunities in which the business has suffered a temporary net loss, thus leaving it with no P/E multiple. The Business of Value Investing The market often punishes the stock prices of these businesses to the point that they may qualify as the best bargain opportunities. When discussing P/E ratio in the context of whether the figure is too high, fair, or too low, the discussion becomes very arbitrary. While many investors might agree on the fact that paying 75 times earnings for any business is grossly high, what qualifies as an appropriate P/E multiple for the value investor is far from specific. The P/E multiple is important but not so much on its own and more so with regard to the overall fundamental strength of the business. A company like Berkshire Hathaway that trades for 17 times earnings in 2009 cannot be considered expensive on a P/E basis, once the quality and operating performance of the company over the past 40 years are taken into account. Similarly, electronics giant Best Buy cannot automatically be assumed to be cheap trading at a P/E of 10 in 2009 in relation to a P/E of 14 for the S&P’s 500 Index. The goal of the value investor is to determine whether low valuations are a temporary or a permanent issue. If temporary, then the work begins in determining if the current price justifies making the investment.
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