Value Investing Background

Value investing, is a strategy based on acting on the observation of a clear difference between current price and current value of an investment.  Ben Graham and David Dodd made this strategy famous in their 1934 book “Security Analysis.”  Ben Graham like many was wiped out in the great depression in the late 20’s.  He realized that predicting the future is a guessing game, and that investing should be based on the current intrinsic value of a businesses assets rather than a guessed future value.  Hence, value investors choose to find businesses where the businesses current tangible assets are greater in value than the current purchase price of that business, therefore creating value and providing a margin of safety upon purchase.  Warren Buffett, considered one of the worlds most successful investors, was an A+ student of Ben Graham at Columbia University, and eventually worked for Graham later. In Warren Buffett’s early years he used Grahams style in its purest form with success and challenges.  Warren Buffett refers to Graham’s original concept of value investing as the “cigar-butt” strategy where the idea is the business essentially has one last puff left. The challenge with this cigar-butt value investing concept is that a world class business usually sells at a large premium to its net worth, so most of the opportunities fitting this strategy were not world class type businesses, but rather smaller businesses tettering on trouble, and this was a risk.  Buffett experienced this first hand, so Buffett, with his partner Charlie Munger, figured out it is was better to modify Grahams concept, and preferred companies and industries that were world class leaders with strong past track records, but were misunderstood, faced uncertainty, or the businesses value was unjustly being taken down with the market, so it could be invested in at a discount to actual current value.

The greatest characteristic of the value investing model is that it is backed up by investors with documented successes with the most visible being Buffet and Munger.  The modern list includes people such as Howard Marks, Dan Loeb, Monish Pabrai, Joel Greenblatt, Bruce Greenwald, Seth Klarman, Guy Spier, and Bill Ackman who are some examples that use value methods.  In Warren Buffett’s speech in 1984 titled “The Super Investors of Graham-and-Doddsville,” Buffett indentifies investors that have emulated Ben Graham’s method.  Most of the super investors were either students of Graham or worked for Graham as he had.  These super investors, as Buffett refers to them, don’t always get it right, but their performance is quite impressive.  They include Walter Schloss, Tom Knapp & Ed Anderson (Tweedy, Browne), Bill Ruane (Sequoia Fund), Rick Guerin (Pacific Partners), Stan Perlmeter, Charlie Munger, and the Buffett Partnership.  See one of the many tables from this speech and article.

In 1992 Tweedy, Browne published a report that was updated and revised in 2009 titled “What Has Worked in Investing,” In this report Tweedy Browne studies over fifty investment models spanning nearly fifity years back to 1958.  The following is an exerpt from the introduction, “While this conclusion is no surprise to us, it does provide empirical evidence that Benjamin Graham’s principles of investing, first described in 1934 in his book, Security Analysis, has served investors well.”  The report provides a lot of good information.

Value investing is not glamorous and can be quite boring, and in times of new hot cycles or ideas can come across outdated.  Value investing takes time to play out, so it requires patience. An investment in a world class business made at a price that is less than it’s worth should rise in price, but the timetable for that to occur is unknown.  It’s one of the reasons the strategy is so under represented.
As Kenneth Marshall states in his 2017 book, Good Stocks Cheap, “Value investing outperforms other strategies over time.  Studies show this. Not some of the studies. All of the studies.”