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Investors come in different styles. There are speculators, there are traders, there are growth investors, stock-pickers, index-trackers. And then there are value investors.
If you've been investing long you'll have heard of Warren Buffett. You may have heard of Ben Graham, who pretty much coined the term 'value investor'. You may have an idea that the value investor is:
• only interested in boring industries,
• technologically illiterate,
• not making much money.
Not true. When you come to that last point, well maybe value investors didn't make much money last year, during the 'dash for trash', but over the long term they generally do pretty well.
Value investors are often older investors simply because we tend to acquire patience with age. And sometimes they are interested in industries that look boring, because that's where the value is. If tech stocks are overvalued, as they were in early 2001, value investors steer clear. (Contrarily, in 2003 value investors bought bags of tech stocks - computer services companies, all on low PERs after the tech bust and mostly paying dividends. Value investors made huge amounts of money out of tech that year, which didn't always make us popular with our growth investor colleagues and friends.) They are often contrarian, because they're looking for value the market has overlooked - but they are only contrarian because they've found that value, not because they think the market is always wrong. The only factor that really defines the value investor is the search for value.
Value investing is about paying the right price. If you pay too high a price for the best company in the world, you'll be lucky to make money out of it. Acquire a good company for half what it's really worth, and you have given yourself a massive advantage for the long term.
Of course, what that right price is can be a bone of contention. I won't go into every way of calculating it here; some value investors use NPVs, others say the right price is a 25% discount to the market, others put a number on it or look at historical average PERs.
Value investors are also fundamentalists. They invest in companies on the basis of the business, and tend to look at long term earnings trends, and long term trends in return on capital. ROCE is a key figure for value investors - they are looking for companies which generate better returns than they can get elsewhere, at a price lower than they have to pay for other assets.
It is a very logical, very rational, and very disciplined approach to investing. I try to be a value investor, but I don't always live up to it - and it's when I'm not rational, when I get too excited by a good story, that I tend to make investment mistakes.
Now you'll probably think that value investors usually invest for the long term. True, they can be incredibly patient with a stock when they believe the market has undervalued it, waiting years and years till its value is finally recognised, whether by the market or by a trade bidder. But don't confuse value investing with 'buy and hold'. Buy and hold is a prejudice, not a rational investing style. Value investors simply do not care how long they hold the stock. Time is not important. They care only about the value. So suppose a true value investor buys a stock today with great assets, good balance sheet, good income stream, though currently down from what it was, good dividends though also trimmed since last year; at say 9x earnings, that's a value price. Suppose tomorrow, there's a rumour that one of the major players is going to bid for it, and the share prices goes up 50%. In case you have any kind of queries about exactly where along with the way to work with
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, you possibly can call us from our own web site. This stock is no longer value. It is valued at a growth rating. It's time to sell. Yes, I only held it for one day - so what? It's expensive, and it would be expensive whether I'd held it for a day or for ten years.
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