The very essence of value investing is contrarian. It’s buy low, sell high. It involves buying companies out of favor with the market. It means getting great deals on stocks. And it will always work.
The reason why value investing works is because of its essence. The reason why there are profit opportunities in the market is because there is an obvious herd mentality. If this mentality exists, then do you think you’d profit more by following it or opposing it?
I hope it’s obvious to you that profits are made by going against the herd. You don’t make money if you are late to a trend. By then, all the money has been made. You must invest before the trend, if you want to profit from the trend.
But it’s not even about the trend. Or about profits. It’s about buying great companies at great prices. It’s looking at the company like you own it. It’s always more than just the stock ticker.
Success means knowing what a good price looks like. It’s understanding what you’re willing to pay. It’s understanding when the market is overcome by optimism. Or by pessimism.
Fear and greed determine short term market results. The news is absolutely fixated on short term market results. So is the media. Your broker. The analysts. Executives. Employees.
All of Wall Street is caught up in this frenzy. Today Telsa (TSLA) is hot. Tomorrow it’s not. Momentum guys, growth guys, technology guys, trend following guys. They’re all names for the same herd.
You know what you don’t hear about on Wall Street? The value guys. The contrarians. The investors who buy a stock and don’t make a profit until 3 years from now.
Value Investing: Contrarian
There’s nothing sexy about being a value investor. No one wants to take a carefully disciplined approach. The herd doesn’t want to invest intelligently with time tested principles.
And this is why value investing continues to work. And will always work.
Even when value investing is more popular– it goes in and out of phase like anything else– the true contrarians will continue to profit. You see, value investing is all about avoiding the herd.
During times of value investing popularity, the opportunities are found outside the herd. The so-called value investors will all bid up the same stocks. But in doing this, they turn value opportunities into non-value opportunities. The herd won’t know when this happens. So they will keep piling in. And then there will be opportunities elsewhere.
Even in the most explosive of bull markets, not every industry flourishes. Business cycles happen everywhere and to every company and industry. In the past year for example, we’ve seen the general stock market rise while gold stocks have been left behind. I bet that in a year or two you will have seen a big rebound in gold stocks. It’s just the nature of industry rebounds.
There’s always undervalued stocks to buy. Some time periods have more than others, but you can always find one if you look hard enough. You can look to other industries, other countries, and even other asset classes. Value investing doesn’t necessarily have to be tied to stocks.
Value Investing: Consistent
My whole point is that value investing is so different than the rest of Wall Street. Another of its biggest reasons for success is that its methods are consistent. With a lot of mainstream analysts, they will invent different metrics for different companies.
For example, they’ll say that for Apple you have to look at margins. For Tesla look at top line growth. For Chevron look at cost per barrel, and for Netflix look at subscriber count.
This is ridiculous, and yet it’s the madness that rules our markets! How can you possibly hope to succeed when you are inventing new strategies for every stock? It’s like trying to find a needle in a haystack.
This kind of thinking reminds me of the dot com bubble.
During that time, mainstream analysts were inventing all sorts of vain metrics to rationalize overvaluation. Even though the soaring internet stocks were clearly overvalued in fundamental ratios, people kept buying them.
They would “analyze” an internet company by looking at their traffic, click through rates, and other obscene metrics. The truth was too obvious to heed, and so most investors ignored it. All the while the internet stocks were insanely overvalued in the most basic of fundamentals.
But people will always find an excuse to dismiss the truth.
It’s different this time, they said. It’s a new economy this time, they said. Ah, you fools. So they said during the technology booms in 2007, 1999, 1950s, 1929, 1900s, and beyond.
Yes technology changed our world each time. But each time, the thesis for value investing held true. That, my friends, is quite an accomplishment.
Value investing works because people are irrational. They are emotional, impulsive, and unpredictable. Just as you can be sure that they will create massive bubbles of excess optimism, they will create opportunities with their excess pessimism.
It’s a problem. But it’s also the solution.
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**Why Value Investing Will Always Thrive – WW#35**
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