What is a Value Investor?

by Wes Bridel on March 18, 2011

in Stewardship

A value investor is different.  We looked at how a macroeconomic thinker positions his portfolio, but how does the value investor do it?

Pure value investors never buy funds.  The value investor prides himself on combing through the financials of companies and uncovering the truly undervalued company.  You can’t do this with a fund.  Diversification works both ways.  It protects you from the bad companies imploding, but it also means that the really great companies in that industry won’t help you too much as they are discovered by the general market.

Because of this, a value investor worth his salt would never have invested in Enron.  If he were a top notch investor he would have noticed that there were things happening on the books of Enron that were impossible to explain.  If a value investor can’t understand how profits are being earned, he’s not going to invest precious capital.  No one knew (until famous Short Seller investor Jim Chanos hypothesized) that Enron was cooking the books.  And Enron was a Wall Street darling.

But I’m sure there were wise value investors that passed on investing both because the price ran too high and because they didn’t understand the company.  Jim Chanos came out smelling like roses because he dug deep enough to see that something was clearly not right in this company and was bold enough to sell shares short.

Another great thing about being a value investor is that if you are good at uncovering true and lasting value, the market will eventually reward you for it.  This is why value investors typically do not set stop losses or worry about market swings.  They buy when they know they see value (and they stay out of the market when they do not!) and then they hold on through thick and thin until that value is realized in the marketplace.  Because they are investing into value and not hype, they have the confidence to ride out waves.  They focus more on things like the P/E ratio than the share price.  They only care about share price when they are buying or selling, otherwise it’s just noise obfuscating the true value.  This philosophy of investing is difficult in that it requires discipline, patience, and understanding of corporate financials, but it is also perhaps the only way to ensure that you are a successful investor.

Otherwise, you are probably more a speculator.  The macroeconomic thinker we described above is a speculator.  Don’t confuse speculation with gambling.  A speculator who doesn’t have sound fundamental reasons for speculating is not really a speculator, but more of a gambler.  Never be a gambler.  If you do not have very thorough understanding of why and how you are speculating or investing, you would be better served to go spend your money or give it away rather than throwing it at the market and hoping you make money.

Let’s shift back to another form of speculation that is very different than the macroeconomic thinker philosophy mentioned above.

This is Part 3 in a short series on the different types of investors.  At the following link you can find:  Pt 1 & Pt 2.   If you’d like to check out the series on asset allocation and diversification, you can follow the links to read Pt 1, Pt 2, Pt 3, Pt 4, or Pt 5.

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