Value investing is a long-term investment approach that focuses on buying undervalued securities in the stock market. It is based on the idea that by purchasing stocks that are trading at a lower price than their intrinsic value, investors can achieve superior returns over the long run.
One of the most well-known proponents of value investing is Seth Klarman, a well-known value investor and the founder of the Baupost Group, a Boston-based investment firm. Known as the "Oracle of Boston," his fund has returned around 20% since 1982.
He is also the author of the widely regarded value investing book, "Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor." In this book, Klarman outlines his principles for successful value investing and discusses the importance of finding a "margin of safety" in investments, which refers to the amount by which the intrinsic value of a security exceeds its market price. The concept of a margin of safety is central to Klarman's investment approach and is one of the key tenets of value investing.
Klarman has outlined several principles that he believes are essential for successful value investing. These principles include:
- Focus on the long term: Value investors should be willing to take a long-term perspective and be patient in holding their investments. Short-term fluctuations in the market should not deter them from their long-term investment strategy.
- Look for undervalued securities: Value investors should seek out securities that are trading at a discount to their intrinsic value. This requires thorough research and analysis of the company's financial statements and other relevant information.
- Diversify your portfolio: Value investors should diversify their portfolio by investing in a range of different securities, rather than concentrating their investments in a single stock or sector.
- Be disciplined: Value investors should be disciplined in their investment approach and stick to their investment strategy, rather than getting caught up in the hype or emotion of the market.
- Be willing to go against the crowd: Value investors should be willing to go against the prevailing market sentiment and make investments that may not be popular at the time.
- Be patient: Value investing requires patience, as it can take time for the market to recognize the true value of an undervalued security.
- Avoid overpaying: Value investors should be careful not to overpay for securities, even if they are confident in the company's long-term prospects.
- Be cautious of leverage: Value investors should be cautious of using leverage, or borrowing money to invest, as it can increase the risk of losses.
- Be aware of risk: Value investors should be aware of the risks associated with their investments and be prepared for the possibility of losses.
- Keep an open mind: Value investors should keep an open mind and be willing to consider new ideas and viewpoints in their investment approach.
Klarman's quote below sums it all up perfectly...
“Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgment, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and it’s price fluctuations is a key factor in his or her ultimate investment success or failure."
- Seth Klarman