Or otherwise on the other side
of
the existing finance industry mania.
If it’s on the recommended list of one of the big
retail brokerages my advice to you is watch out!
Value investing consists of
a basic approach
to the process of investing.
The first thing you have to do
is identify potential investments that you’re going to look at.
What you are looking for
is stocks that are obscure.
It’s stocks that are small capitalization
because
big institutions aren’t going to be able to afford the time
to concentrate on analyzing those stocks in detail.
When you have identified a security that you’re interested in
you still have to figure out what is that security worth.
Not all value is measurable.
If we were sitting here at the height of the internet boom,
I don’t think anybody knew what those internet stocks,
not even God knew, what —
not even any of the many Gods around the world
knew what those internet stocks were ultimately going to be worth.
There is a value approach to valuation
and this is really what distinguishes it more than anything else,
starting to look at the balance sheet,
which most people don’t look at.
Most people project earnings.
What Buffett has added to this is a systematic way
that’s much more intelligent than the standard valuation approaches
for looking at growth stocks.
A good valuation approach will also clearly identify
the critical information
that you are uncertain about
and that is going to focus your research effort.
When you add bad information to good information what do you get?
The bad information!
It’s not a good way to go about trying to pin down a value.
So it’s in the area of how you look for stocks,
how you value stocks,
how you focus your research and collect all the relevant information.
And ultimately how you analyze and manage risk and construct a portfolio
that value investing is very different from
almost all other current practices.
And the evidence that it’s successful is
that if you look
in every dimension.
What investment strategies are successful
statistically
overwhelmingly,
they’re the value strategies.
Modern financial academics have established that
beyond a reasonable doubt.
You want to go to the part of the market where other investors are crazy.
Either crazy on the optimistic side if you’re a short seller
or crazy on the pessimistic side if you’re gonna just be buying stocks.
So you’ve got to look
intelligently for those opportunities.
You’ve got to ask, where is the craziness today?
What creates opportunities
is the fact that most investors
and most human beings
are constitutionally oriented to buying lottery tickets.
They love to buy the dream
and when money is going into the dream
it’s leaving other areas
and it is that tendency of human beings to pursue
those kinds of get-rich-quick opportunities
that creates the value opportunities for the plotting careful investors.
It’s painstaking.
It’s careful.
You don’t buy your stocks all at once.
You buy them over time because you recognize
the market fluctuates.
You start with a good price and to
your shock and surprise the stock actually falls
and you got to be ready to buy more in a slow steady confident way.
My job,
given that I’ve decided to concentrate in the area of investment management,
is to improve the way people deploy their wealth.
And this is the best mechanism for doing it
and I think if they’re doing it for their clients
they’re going to do a much better job for their clients.
If they’re doing it for themselves they’re gonna do a much better job
picking good managers or deciding where to allocate their money,
and if they’re professional managers managing for people’s retirement
that’s a huge gain to society at large.
You wanna look for opportunities that most investors
are turned off by non-glamour stocks
that may not be growing that rapidly.
When a stock is ugly and bad people are sure it’s going to lose money