Ronald Chan on what it means, and what it takes, to be a value investor. These observations were based on the 12 successful investors featured in his book, The Value Investors: Lessons from the World’s Top Fund Managers, which is an interesting read.
A Humble Portfolio Construction
Humility allows investor to remain down to earth and be aware that they can be wrong at times. It not only encourages investors to look for a margin of safety, but it also equips them with an open mind. Knowing that the world is uncertain, value investors tend to look towards diversification for protection.
The Art of Valuation
As Spanish value investor Francisco Parames puts it, “it is not how sophisticated you are in your valuation model, but how well you know the business and how well you assess its competitive advantage.”
Reading for Ideas
Successful value investors read a great deal. For that matter, the desire to learn new subjects and the willingness to keep an open mind are critical. The good news is that the Internet has made finding good investments ideas much easier as compared to the past.
More Than Just Fundamentals
While many value investors tend to be bottom-up in nature, those who invest in emerging markets tend to keep an eye on macro factors. A change in political wind can lead to a drastic change in the economic direction of a region.
Timing for An Exit
Value investors in the book tend to focus more heavily on investment valuation than on the investment’s holding period. Anthony Nutt, Irving and Thomas Kahn said that investors must avoid shortsightedness when holding value stocks because patience and discipline are paramount. On value traps, Jean-Marie Eveillard believes that you cannot say that a stock is a trap just because your holding period is mismatched with the time it takes for the stock to recover. If you have patience, and if your analysis is right, then the market will acknowledge the stock eventually.
Having the Right Temperament
Being a value investor is highly dependent on character. Value investing attracts conservative people who look for the downside risk of an investment first. While investors are naturally emotional and affected by the news, value investors can still maintain their calm in face of opinions and comments from the media.