value investing paradigm
- The essence of value investing is buying something for less than its true value, with the “margin of safety” being the discount to the market price.
- The value investing approach was first taught by Benjamin Graham and David Dodd at Columbia University in 1928 and was subsequently adopted by many successful investors, including Berkshire Hathaway chairman Warren Buffett, Irving Kahn and Joel Greenblatt.
- Numerous studies, including a study by Fama & French, 1992, have shown that value stocks outperform growth stocks and main market indices over a longer time horizon.
IN ORDER TO BE A VALUE INVESTOR, ONE NEEDS TO HAVE..
- Contrarian mind-set - buy when everyone else hates the stock, typically the best times to invest are when the current performance of the business is weak and the outlook appears bleak
- Patience - market prices can be irrational for extended periods of time and a value investor needs to be patient for the value to be realised
- Long-term horizon – this strategy requires the investor to have a long-term horizon and wait for the true value in the business to be reflected
- Belief in mean reversion – value investing works in the case of industries that follow typical business cycles in which a downturn will eventually correct and result in a recovery – usually this is reflected in industries which are fairly mature with limited secular shifts