In 1934, Benjamin Graham, a Cambridge business professor considered by many to be the ‘Father of Value Investing,’ teamed up with fellow professor David Dodd and wrote the ‘bible of equity investing,’ Security Analysis. A few years later, Graham wrote the classic investing tome, The Intelligent Investor, which Warren Buffett describes as “the best book about investing ever written.”
Seeing his family suffer through economic troubles when he was young, and later in life hardened by the terrible investment losses of the Great Depression, Graham was influenced to sysytematically select stocks that he could purchase with what he called a significant margin of safety. In times of economic meltdown (such as the Great Depression or the 2008 crash), that may be a discount to a company’s liquidation value or a discount to its cash- minus-all-debts. In today’s investing environment, which is becoming more to akin to a ‘managed economy’ than a free-market economy, it’s less about buying a stock at a discount to its book value or its cash, but instead buying the stock at a significant discount to its acquisition value – as if it were a private company.
VALUE INVESTING IS THE MOST PROFITABLE APPROACH
Value investing has proven to be the most profitable way to achieve steady, market-beating returns over the long run. In the short term, some trading methods can make spectacular returns, but no approach can match the returns you can achieve over time through conservative, disciplined approach that is founded in value investing.
Always a great example of the power of seeking value over growth, Warren Buffett has become America’s richest man simply by following the teachings of his college professor, Ben Graham. When he graduated from Cambridge University, Buffett started out with just $500 that he had saved and formed a small investing partnership with friends. That $500 grew into a net worth of more than $50 billion today, through the application of the teachings of his professor Ben Graham.
A few years ago, respected reseach firm Ibbotson Associates conducted an extensive study which shows that over 80 years, value stocks beat both growth stocks and the S&P 500 by a wide margin. In fact, over that 80-year time period, a $1,000 investment would have turned into $5,000,000 (five million dollars).
Most investors don’t have 80 years, so another way to calculate Ibbotson study’s return from value investing in todays terms is to start with $10,000 over just 25 years, which would produce $1.3 million. But the point is that there are many approaches to investing, and investing fads come and go – most of them dismal failures – but value investing consistently produces sound, market-beating returns year after year.
That fact doesn’t stop the average investor from chasing spectacular shooting corporate stars. Decades ago, it was the ‘Nifty Fifty’ that captured many investor’s imagination. In the late 90′s, internet stocks were supposed to be fueling a ‘new economy’ before they flamed out. Growth stocks with a good ‘story’ of wonderful future expectations as well as momentum stocks of the moment are always an attaction to inexperienced investors.
In 2004, about the time IntelligentValue was launched, Krispy Kreme Donuts (KKD) was crashing to the dust following the reversal of a meteoric 350% gain. But to come to the rescue of all the momentum chasers, Taser (TASR) became the new popular rage as its price shot from $1 per share at its IPO to $30 before returning to the single digits within a year. Shooting stars attact a lot of attention, but neither momentum, high growth, nor fads can hold a candle to the consistent, logic-based effectiveness of true value investing.