October 11th, 2005 by Kaushal Majmudar
Warren Buffett has said in multiple settings that Value Investing is a concept that is either immediately attractive upon initial exposure or else is never grasped. His comment implies that there may be little ground to acquire the mindset of value investing if you don’t already have a strong affinity to think this way. Of course, there are bound to be counter examples of people who once or twice burned by other techniques finally migrate to a philosophy (namely value investing) which has proven to work over many different environments and most importantly offers the likely promise of being able to preserve your capital in case of unexpected circumstances that arise after investing. At The Ridgewood Group, we were definitely in the category of people - who when exposed to the basic ideas of value investing were immediately drawn to this focus on being price conscious before making investment commitments. But enough about why we like and following value investing.
Our title is THE TROUBLE with value investing. Whenever the market is down (but even in sunnier environments), we are reminded that value investing in not a panacea, especially over the near term. More specifically, we have noticed a pattern in over a decade of investing in that most of the investments that we consider attractive (from a value perspective) continue to decline in price. Though we usually buy well below the 52 week high prices of the securities we purchase, and then only when fundamental value provides an underpinning, we invariably find that the momentum and near term earnings outlook are poor enough for selling pressure and even fundamental developments to continue to drive down prices after we have made purchase commitments.
This brings us to the punchline: The Trouble With Value Investing, is that it requires the patience of Job in the face of declining prices and quotational losses. Value Investing rarely offers immediate gratification, and at times gratification can be delayed for as much as four or five years. Perhaps there are ways to time purchases so that this issue can be largely or partially mitigated (we doubt it, but remain open minded). To date, the best we can often do is leave some powder dry to average down. As humans, we are wired to desire quick results and patience is usually painful to muster. Fortunately, despite its troubles, Value Investing works better than almost any other form of investing if you care about winning in the long-term. Long-term gain versus Short-term gratification is a core tradeoff we face countless times per day. Unfortunately, value investing is no different.
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August 16th, 2005 by Kaushal Majmudar
Speaking of headline risk (one of the reasons cited for Berkshire’s current valuation discount), we think that “headline risk” along with other investment-speak terms like “profit taking” or “value trap” either don’t exist or aren’t helpful. Saying it differently using Henry Miller’s words, “Confusion is a word we have invented for an order which is not understood.”
In each of the above cases, nobody (especially the experts) wants to admit that they are confused. This is probably a sincere consequence of self denial - as human beings we have an even greater capacity to delude ourselves than we do others. Consequently, plausible-sounding but meaningless terms like “headline risk” have been resourcefully created to avoid admitting that “I am confused and have little time or inclination to uncover the deeper patterns that may be at work.”
As we have said before, the risk that matters is the risk of losing money in the long-term. The real question that should be asked and answered is not whether surprise headlines may occur, but what impact foreseeable or unforeseeable developments and headlines will have on the long-term health and viability of the underlying business. Indeed, if headlines blow matters out of proportion and scare away other investors, the more proper characterization from a long-term investment perspective is not “headline risk”, but rather “headline opportunity”.
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July 8th, 2005 by Kaushal Majmudar
There is no doubt that web logging (blogging for short) is increasingly pervasive. It represents a true revolution in publishing since nearly everyone with access to a PC or terminal can now publish (share) their thoughts with the world wide web in a simple and easy fashion.
We have been thinking about starting a blog for some time, and a few of our current clients and others have suggested that starting our own web log would be a powerful way to stay in touch with our clients and educate prospective clients and others about value investing, intelligent investing, wealth management, how we think, and related topics.
So after some thought and deliberation, The Ridgewood Group is launching our very own Blog. Our purpose in doing so may evolve. However, initially, we hope to share with our clients and other readers insight on:
- Intelligent money management
- The activities of other intelligent investors
- Topics in and around value investing
- Activities of The Ridgewood Group
- Musings on a variety of topics
For now, we will make entries on a semi-regular basis and hope that some of you will provide feedback and dialogue on these thoughts.
We look forward to our discourse and give and take with each of you out in Cyberspace regarding various topics related to inteligent investing and value investing.
Warm Regards,
The Ridgewood Group
P.S. The Ridgewood Group is a value oriented money management firm in Short Hills NJ. We serve individual and institutional clients around the country. For more information and resources on value investing, visit our website at www.ridgewoodgrp.com
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