The Biggest “Value’ in Value Investing…

By far, the biggest value that “value” investing has is that it’s principles can be applied – successfully – to a broad range of asset classes. It’s a mental and emotional framework that provides a recipe for success.

To some this may be a “duh” moment.

However, the reason I bring this up is that many investors pigeon-hole themselves into only publicly traded common stocks with value investing and ignore potentially fantastic returns in other assets. If you were to look at the portfolio of Baupost Group manager Seth Klarman, you would probably see a broad array of assets, some of which would probably leave you scratching your head a bit. But the mental framework is being applied.

Benjamin Graham, the father of value investing, was known to hold common stocks, preferred stocks, convertible preferred stocks, mortgage bonds, subordinated debt and convertible bonds.

An famous story about Warren Buffett’s beginnings in professional money management (while working for the Graham partnership) in the book Snowball by Alice Shroeder talks about how the investment firm got into an arbitrage deal for a Cocoa bean warehouse receipts/stock swap transaction. Very interesting.

Yes, Buffett has been oft-quoted as saying “invest in things you understand very well.”

Sage advice, of course. But you can work to rapidly expand your circle of competence.

I think the common concern voiced by many is: “I should only invest in what I understand. If I can only spend time on common stock 10k’s, I don’t have the competency to compete with professionals in the bond business or other areas.”


“It’s fine for Warren Buffett or Seth Klarman to look at convertible bonds or derivatives because they have 30 years of experience already.”

This may be a valid reason.

But I think it’s limiting if you want to be a successful professional investor.

You should look for undervalued asset opportunities everywhere. Once you gain a competency in one area, you can begin to push yourself a little further. The first time I read a bond prospectus, I thought I was going to die. After a while, I learned how to better read them. Similarly, I bet the first time you laid your eyes on some 10k footnotes or FASB’s you wanted to grab a gallon of coffee to keep your eyes open.

I think a lot of individual investors spend countless hours on public equity stock screens, trying to find a mis-priced company that many professional money managers globally have missed. Unless their are market extremes (a la 2008-2009, 2002, 1987, etc.) it’s mostly an intellectual exercise.

Man is fool-prone. Folly will happen a lot. Folly creates mis-priced opportunities. Mis-priced opportunities creates profit potential.

I don’t think you should always only look at one asset class for identifying an undervalued opportunity.

The core tenet of value investing is: “acquire an asset for an appreciable discount to it’s intrinsic value.”

I have applied value investing principles – without having even 1% of the widsom of a Buffett, Graham or Klarman – in asset classes such as: residential real estate, publicly traded equities, publicly traded bonds, private loans and commercial real estate.

Will I post the annualized returns of the great “hall of fame” money managers?Doubtful.

Will I generally beat the pants off of most of my competition and make handsome profits? Probable.

And that’s all I need.

I sometimes think of investing as playing basketball (a sport I’ve loved all my life). If I ran out today and said I’d be the next Michael Jordan and pinned my hopes on that, I would probably want to shoot myself the first time I did not dunk after taking off from the free-throw line.

On the other hand, if I focused on fundamentals and being the best within my ability every day, I’d wind up to be a darn good basketball player – better than most.

And, in business, if you are better than most you will do OK. You can’t look at investing exactly like sports, however. I just use this as analogy to keep my raging competitive streak in check. Trying to duplicate Graham, Templeton, Lynch, Buffett, Munger and the rest is a fools errand.

Use value investing as a framework with which to evaluate a multitude of profit opportunities.

Taking a Graham phrase on investment to heart: “investing is most successful when it is most business like.”

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