Whitney Tilson discusses what it means to be a Value Investor:
"I have encountered thousands of value investors over the years and am constantly struck by their differences – and their similarities. Allow me to explain. Some value investors invest primarily in small-cap stocks while others stick to large-caps; some invest mostly overseas while others stick to U.S. markets; some run concentrated portfolios, while others are more diversified; some are activists while others never are; some invest only on the long side, others are long-short, and some only short stocks. But while styles may vary, the fundamental characteristics that unite value investors are many."
What are the fundamental characteristics that unite value investors? According to Tilson:
-We tend to buy what is out of favour rather than what is popular.
-We focus on intrinsic company value and buy only when we are convinced we have a substantial margin of safety, rather than trying to guess where the herd will go next.
-We understand and profit from reversion to the mean rather than projecting the immediate past indefinitely into the future.
-We understand beating the market requires a portfolio that looks different from the market and we recognise that truly great investment ideas are rare. Thus, we invest heavily in our handful of best ideas and don’t hide behind the "safety" of closet indexing.
-We are focused on avoiding permanent losses and on absolute returns, rather than outperforming a benchmark.
-We typically invest with a multi-year time horizon rather than focusing on the month or quarter ahead.
-We pride ourselves on in-depth and proprietary analysis in search of what Michael Steinhardt calls "variant perceptions", rather than acting on tips or relying on Wall Street analysts.
-We spend much of our time reading – business publications, annual reports, and so on – rather than watching the ticker or the television.
-We focus on analysing and understanding micro factors, such as a company’s margins and future growth prospects, and not trying to predict the direction of interest rates, oil prices, the overall economy, and so forth.
-We cast a wide net, seeking mispriced securities across industries and types and sizes of companies rather than accepting artificial limitations on market capitalisation or other criteria.
-We make our own decisions and are willing to be held accountable for them and do not just seek safety in whatever everyone else is buying or decision making-by-committee.
-We admit our mistakes and seek to learn from them.
In the rest of the column, Tilson goes on to argue that Berkshire Hathaway is a strong value stock, estimating its value at $125,000 per A share (or $4,167 per B share) versus current quotes of 91,750 for the A shares, and 3,056 for the B shares. In other words, Berkshire is about a third under valued.
As to Tilson’s rules — I would argue that many of these are applicable to other investing disciplines beyond value investing also. Long term time horizons, variant perspectives, avoiding crowds, being patient and disciplined, having a well rounded understanding of business and economics — how can anyone argue against these approaches?
Most are not easy; As Tilson points out, "if it were easy, everyone would be doing it – which would make investing a lot less interesting and profitable."
Good stuf Whitney. Thanks!
Celebrate value investing . . . with a good investment
By Whitney Tilson
Financial Times, May 4, 2006
Today’s NFP number stunk the joint up: 75,000. That’s half of the monthly population growth, meaning the percentage of people working (relative to pop) actually went down, if we are to believe this data.
Astonishingly, some people STILL do not understand the data or the context of the weak job growth within this recovery. To wit, my friend Cody Willard – a telecom strategist – writes:
"Surely, Barry, you’re not seriously trying to rekindle your argument about "job creation is not what it is typically at this phase of a recovery."
That statement has been a cornerstone of your bearish rants for the last couple years. Yes, I know you’ve been a "trading bull" and what not, and rightly so, but this economic argument of yours has been, in my view at least, wrong for the last few years and now that job creation is finally starting to slow — years after your repeated flagging of how this "recovery" (You still call this a "recovery" btw?)"
Ahhh, poor Cody. He is lost in a sea of data, unable to see the truth. He believes the spin.
Rekindle? Just because you close your eyes, the boogie man doesn’t disappear.
Hey Cody, please cite me some data revealing this to be an above-average private sector jobs creation recovery. Hell, I’ll take average.
You won’t, because you cannot.
Cody is engaging in several analytical foibles, but the best way to describe it is "ignore reality." But his subjective error does not change the objective reality for the rest of us: By any honest measure – e.g., NY Federal Reserve or Cleveland Federal Reserve research — this has been the worst modern jobs recovery on record.
This is not a meme I am pushing or a Bear story I fabricated.
It just “is.”
This doesn’t mean you run out and short everything; as I wrote last December, one should Never Confuse Economic Analysis With Trading.
But comprehending the reality of the economic situation is important. Why does this matter? What Cody fails to consider is the importance of understanding the specifics of how a recovery comes about, and how it compares to prior recoveries. What it means as the massive government stimulus that goosed the economy begins to fade. What happens when the Pig is finally thought the Python?
I expect that as we begin to slow, there ain’t a whole lot of fat to get sliced. As unemployment starts ticking up, it will not be pretty. It suggests the next recession will be more severe than the last one.
UPDATE: June 2, 2006: 12: 47pm
Cody and I finish the debate below