“Value Investing” is a Concept, Not an Investment Strategy
AUTHOR: NOAH MURAD
A good strategy to be successful in anything is to 1) recognize something that is undervalued and 2) show that value to others.
This is what Ben Graham taught as the father of Value Investing and how this concept could be applied to stocks. Recognize stocks that were selling for less than working capital, invest and then sell when the broader market recognizes the value, which would push the price up.
The paradox is that the more people learned how to do that, the less financial return was available. Over time, thousands of funds have popped up claiming to be “Value Investment” funds, but they all did something different than what Graham taught. This includes Warren Buffett (whose managers now make venture capital investments) and Joel Greenblatt whose fund successfully buys hundreds of stocks in a long/short strategy.
What these successful investors do is look for undervalued concepts and ideas first. They don’t pick the school of thought they want to follow and then find ideas within it.
If you ask someone how to do something, like how to succeed as an investor, in business or in your company, you marry yourself to the “how.” During my first 5 years in business, all I wanted to be was a “Value Investor,” so I passed on any opportunity to get involved in technology companies or venture capital investments. I missed out on one of the most lucrative areas of investing over the past decade because I was more concerned with the “how” instead of the results. You and your family will care far more about the results. (Picture yourself telling your significant other, “I know we could have made 3x our money, but it wouldn’t have been a Value Investment.”)
What I missed most of all was the main principle: look for undervalued concepts and show that value to the world.
Here are some of the qualities we can generalize about undervalued opportunities:
They’re unpopular. No one will understand what you’re talking about when you explain it to them. If many people are talking about them, they’re not undervalued.
When you have realized on something undervalued, you get rewarded really easily. It doesn’t feel like hard work.
The value goes away once other people can emulate it.
It seems like a very obvious strategy or opportunity to use in hindsight
You should also know that the “thing” that’s undervalued doesn’t have to be an investment. It can also be a tactic or a skill you have that’s under-appreciated by others.