Value Investing
Too good to be true
Want to get in on the ground floor of an exciting opportunity, and rocket to dizzying heights of fabulous wealth with unimaginable prestige and influence, practically overnight? Want to turn a tiny investment into a vast fortune with nearly no skill, knowledge or hard work required? Would you believe that seven out of the world’s 10 richest people were just last week working in Subway sandwich shops for minimum wage until they learned this one weird trick that investment companies don’t want you to know about?
No? Good. Because all of that is ridiculous.
Building wealth takes time. It involves risk. And skill. And knowledge. It’s not a game of chance. It’s not a game at all.
If you would like to step in on the ground floor of a REAL exciting opportunity, go to your local library and check out every book you can find about value investing!
Value investing: the ugly duckling
You know that old story about the ugly duckling that turned into a swan? As we see it, that’s value investing. It is the tortoise to the day-trader’s hare. The hard-working ant who scoffs at the lollygagging grasshoppers. The paid-for Volvo next to the leased Corvette.
It’s also the philosophy that made Warren Buffett a millionaire by 30, a billionaire in his fifties, and the third richest man in the world in his eighties (timeline).
Like many things in the world of finance, value investing is a simple concept that’s not so simple to execute well.
Method to the madness
Value investing puts some common-sense methodology behind the madness of attempting to beat the market. Its basic premise is to buy up solid companies that are, for whatever reason, priced below their worth, and hang on to them. In theory, the market will eventually correct itself—meaning that stock price will rise to its actual value, and the investor who bought at the low point has a built-in profit. (Yeah, it seems obvious. But in 1929, it got Benjamin Graham a book deal.)
In today’s technology-driven market, however, these opportunities are generally harder to come by. The sheer volume of transactions means that a good deal often gets snapped up and traded away almost immediately. In effect, the markets adjust to “true” value so quickly that it’s quite difficult to get in on it. Without resorting to insider trading (which is illegal, of course), finding those values is basically a matter of luck (Joel Greenblatt).
Unless… you have knowledge that the rest of the market doesn’t.
What kind of knowledge might that be, you ask? Maybe you know a lot about a particular industry and you can tell the difference between good practice and flawed. Maybe you’ve worked in pharmaceuticals, or chemicals. Maybe you’re an MBA management consultant to Big Agriculture. Maybe you’ve got a future in pork bellies.
Or, maybe you use environmental, social and corporate governance (ESG) data to brush up your bona fides in any given industry.
Conventional investment wisdom looks for a good value based on past financial performance. It’s a matter of numbers-only financial analysis. But, if you bring in ESG data, you suddenly have a lot more information to help gauge a company’s worth, and its level of risk.
One hypothesis is that companies with strong ESG performance are good investments, and value investors can capitalize on the common perception that sustainability mumbo jumbo is detrimental to profits. (Incidentally, it isn’t.)
Value investing helped Warren Buffett get that whole richest-man-in-the-world thing going, so maybe it could work for you too.
You, too, can be a value—and values—investor
The volume of company information that’s available to analyze can make your head spin. But, we have technology at our disposal today that Buffet and all those other 20th-century financial whiz kids didn’t have.
Technology that allows you to peer deep into the soul of a publicly traded company also presents a unique opportunity for the mindful investor: crafting a value-investing strategy around your personal values.
See, these so-called “extra-financial” data aren’t just good for mitigating risk or finding overperforming, underpriced stocks. They can also be a great way for ethically inclined investors to make sure that you’re investing in companies whose behavior and principles mesh with your own values.
The real deal
So this is the real opportunity for mindful investors: Use your personal values to find old-fashioned value in the financial markets.
Ask yourself, what do I want to invest in? What kinds of companies, and what kinds of corporate behavior, do I want to support? What issues are priorities to me? What do I think makes a company a good investment or a risky proposition?
Once you’ve defined your values, put them to work. You can use ESG data to filter for companies that meet your standards. Stocks that you believe are solid investments. And then, apply the principles of value investing: watch and wait for those stock prices to fall into a range that you think is a good deal. Buy what you can, and hold onto it for the long term.
That’s one way to find value from your values. May they lead you to a good deal. :)