Value investing is simple to understand but difficult to implement. It requires a great deal of hard work, unusually strict discipline, and a lot of patience. Very few have the proper mindset to succeed.
Since being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds, it can be a very lonely undertaking. A value investor may experience poor, even horrendous, performance compared with that of other investors or the market as a whole during prolonged periods of market overvaluation.
When securities prices are steadily increasing, a value approach is usually a handicap; out-of-favour securities tend to rise less than the public's favourites.
The most beneficial time to be a value investor is when the market is falling. This is when downside risk matters and when investors who worried only about what could go right suffer the consequences of undue optimism.
Emotional investors and speculators inevitably lose money; but investors who take advantage of the market’s periodic irrationality have a good chance of enjoying long-term success.
Benjamin Graham's margin-of-safety concept is to invest at a sufficient discount so that even bad luck or the vicissitudes of the business cycle won't derail an investment.
Very simply put, his investing style is “mispricing due to overreaction”. He picks up securities that trade at a wide discount to their underlying value, what he calls “the element of a bargain”. In other words, it’s key to establish a margin of safety that not only enables you to make a sufficient profit, but also gives a wide enough discount from the underlying value. This way, you are able to profit even if your estimate of the underlying value is incorrect. Value investors invest with a margin of safety that protects them from large losses in declining markets.
Herein lies the secret. Make an investment if it is extremely confident that it won't lose much value, even if the initial investment thesis proves to be wrong.
But , note that investors can be pressured into investing prematurely; the cheapest security in an overvalued market may still be overvalued. This is where the discipline of a value investor comes in which will enable him to wait for an opportunity to buy, offering a better return for money.
There are some key lessons in investing philosophy . (To be continued .....)