Value Investing, Warren Buffett, Benjamin Graham and so on!

Dear Reader,


Warren Buffett has been famous for beating the stock market indices year in, year out.

Other followers of value investing strategy like Benjamin Graham, Seth Klarman, Joel Greenblatt have been able to beat US stock market indices by stock picking as well.

What is value investing actually? It is a strategy of investing in mature, profit making, dividend distributing companies in mature businesses that have low Price to Book and Price to Earnings ratios.
In the book 'The Intelligent Investor'  it is quoted that Price to Earnings ratios above 40 would make Benjamin Graham cringe. Benjamin Graham, after all, is the 'father' of value investing.

Why does value investing generally beat the market over long periods of time. As far as I am concerned, the answer is as follows. The mature, large, lowly valued, dividend distributing companies value investing favors, actually tend to fall less in bear markets or financial crises or they have the proverbial 'margin of safety' popularized by Benjamin Graham in his book the 'The Intelligent Investor'. Why does this happen? Basically, it seems that valuation in some peculiar way seems to matter. Investors seem to think high flying technology and growth stocks that rise exponentially during stock market boom periods are more likely to fail and their stock prices fall more in bear markets than the stock prices of established companies from established industries.

Why then doesn't everybody follow the value investing strategy and become exponentially rich.
Well there are two problems with value investing. First, the out performance of value investing with regards to the main stock market indices is minor - usually 2-3 percent a year so high fee structures like the typical hedge fund fees of 2% of assets and 20% of profits are not feasible. Why do large established companies' stocks not move more? Size effect. They are too large and if they continue growing very fast they will subsume the global economy in their respective industry. One way to circumvent this is to break into other industries. Many research analysts seem to push this explanation for Amazon's crazy high valuation.

Another problem with value investing is that the value companies seem to change. Once they are growth companies like banks before the Great Recession in 2008 and now banks are value stocks. Energy companies were growth stocks when before the Great Recession oil was trading at 140 USD. Now energy companies are value stocks. A typical example is when Warren Buffett said he would not touch airline stocks and recently he bought quite large quantities of them. Growth stocks also have spanned different industries during the years.

Now growth stocks are the global IT leaders like Apple, Amazon, Microsoft, Google and Facebook.
Facebook is down 25% from its recent peak. Basically, Facebook's growth stopped and Facebook's stock exhibited the large fall typical for growth stocks.

Warren Buffett's Berkshire Hathaway invested circa 23% of its stock portfolio value in Apple's stock. I read some explanations that Apple is now an industrial company and it should not fall hard as a technology stock. I do not think this is true. When Apple's current 13% revenue growth falls t let's say 1-2%, Apple's stock will fall hard, similar to Facebook and if Berkshire Hathaway's is still heavily invested Warren Buffett will lose a huge sum of money.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Conflicts of interest: I may possess some of the securities,currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!


Kind regards,
Petar Posledovich