I follow the simple principles of value investing principles – buying something for far less than it’s worth. I do this because it is the logical way to higher than average returns.
Value investing is a simple idea, yet for many, it’s hard to implement. It’s not hard because investors don’t work hard or because they don’t have all the information. It’s hard because many investors lack the discipline and patience required.
As a value investor, I believe it’s my greatest competitive advantage – a long time horizon. As a result I can stand volatility and venture into out-of-favour businesses because I understand value will triumph over the long run.
I don’t discriminate among investments. Borrowing from Peter Lynch, I will buy anything at the right price. This could be a business trading for less than the assets on its balance sheet. Or it could be a wonderful business that is in a temporary slump. The only thing all investments have to have is value far exceeding its current price.
With this mindset I’m also not limited to a sub sect of value investing. For example, I don’t throw out potential investments just because they don’t have a moat or some other characteristic. This is not to say I don’t acknowledge and categorise investments differently. If I’m looking at a spin-off or some other special consideration, I will analyse accordingly.
But as long as I understand the investment and can identify value, then it’s an investment I look to make.
The reason why I stress cheapness is because I’m risk averse and demand a high margin of safe. This is an idea Benjamin Graham define so well in his many writings over the years. It is the different between value and price.
Therefore, I want to find investments with a high margin of safety to avoid permanent capital loss. I find it helpful to always keep Warren Buffett’s two rules of investing in mind:
- Rule #1. Don’t Lose Money
- Rule #2. Don’t Forget Rule #1