Whenever I hear “value investing”, I visualize Benjamin Graham working through balance sheets, income statements, cash flow statements and writing down important points in his notebook with his sharp pencil. He has said many a times that he was lucky to have entered the market at the time that he entered. The pendulum had just swung from unsustainable optimism to unjustifiable pessimism. There were a lot of depressed companies. Many of those were trading at values far below their intrinsic value. All he had to do was to look for those. One-by-one.
Today, I feel that we have lost that opportunity. If only we could have arrived to this world in the pre-computer era. Large players wouldn’t have much advantage over little players (like me). With ever so advanced computing power, large players are able to find out companies with potential and invest capital in them. Also, the rise in the number of money managers and institutions would only further add fuel to the fire. I believed there were high barriers to entry to value investing and maybe I should look for something else. Enter Seth Klarman’s Preface to 6th Edition of Security Analysis.
“With today’s many amply capitalized and skilled investors, what are the prospects for a value practitioner? Better than you might expect, for several reasons. First, even with a growing value community, there are far more market participants with little or no value orientation. Second, nearly all money managers today, including some hapless value managers, are forced by the (real or imagined) performance pressures of the investment business to have an absurdly short investment horizon, sometimes as brief as a calendar quarter, month, or less. A value strategy is of little use to the impatient investor since it usually takes time to pay off. Finally, human nature never changes.”
Seth Klarman is right to a great extent. The number of publicly traded companies has increased and so has the number of investors. But, the rise in the number of ‘value investors’ is lesser than that in the number of ‘non-value investors’ — those that deal with derivatives, venture capital and other speculative instruments. Also, as size of investment fund increases, it becomes difficult for the fund to move the needle. Berkshire Hathaway is an apt example. Finally, people who invest in these investment funds are humans. Humans like quick rewards. Thus, investment funds are always in pressure to deliver high short term results. It makes little sense for such funds to operate on value investing principles. They take a long time to give substantial results.
Thus, the barriers to value investing hasn’t increased. The barriers are almost the same as it was during Graham’s time. The biggest barrier being temperament. Value investors need right set of skills — emotional and analytical — to succeed.
In the words of Seth Klarman –
“That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low-risk approach to successful long-term investing.”
