The Ridgewood Group Value Investing Blog

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.