Learning from Value Investors

• Posted by derek
• on November 18th, 2010

Much time is spent here discussing analysis of markets…let’s give company analysis its due.  Just as trend following offers an edge because it’s so psychologically difficult to stay with a stock that seems “too high”, value investing offers an edge because the companies bought are perceived as terminal or, at best, non-growing.  Only the most thorough and patient of researchers can operate successfully against this backdrop.

I love the following take from David Merkel in his new series called “On Investment Modeling”:

“The only positive thing about Modern Portfolio Theory is that it sidelines a bunch of bright guys who would otherwise be competitors in the markets.  Sun Tzu would admire this tactic — getting a large portion of the opposition to become peaceniks because the expected value of the war is zero or negative.  It’s as if an economic Tokyo Rose is broadcasting that competition in financial markets is futile — in aggregate, everyone will get average performance, so why fight to get better performance?  It’s futile; give up; go home.

An awesome analogy, which he follows with 8 questions he asks himself as part of “looking through the windshield, not the rear view mirror”.  His rigor in analyzing companies is a standard to which fundamental investors should aspire, and he’s provided a ton of insight over the years into his methods.

Another glimpse into the detail demanded by a value investor comes from Todd Sullivan.  With this discipline comes fewer opportunities than a trader may desire, but when they come it makes sense to pay attention.  He spent the time on his weekly TV show discussing the details behind opposing positions in $JOE, short by David Einhorn and long by Bruce Berkowitz.  He followed this up with his interpretation of a Barron’s piece on $GGP, and demonstration of his analysis approach.  Remember, this is a guy who publicly shared his purchases of the stock below $1 and has remained steadfast in support throughout its rally.

Different tools, different psychology, different time frame than trend followers.  What is similar is the use of a defined edge to enter a low risk/high reward opportunity, and giving it the space required for full exploitation of the idea.  No matter one’s style, it makes sense to study the thought process behind successful market operators of all stripes.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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