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My Biggest Discovery about “Value Investing”

Credit: Simon Cunningham

I can’t recall the exact date, but it was around nine years ago when I first decided to venture into investing in shares.

One of my initial reasons for doing so was the better long term returns the share market had delivered compared to other options such as bonds or gold.

For instance, the S&P 500 (an index for the US share market) has achieved an annualized return of more than 9% since 1871. In the Singapore front, the SPDR STI ETF (SGX: ES3) has delivered a long-term annualized return of 8.65% for more than 12 years since April 2002. The STI ETF is a proxy for Singapore’s market barometer, the Straits Times Index (SGX:^STI).

Scouring for knowledge

Going into my new venture, one of the first things I learnt was the term “value investing”. Back then, it seemed to me that the go-to person for “value investing” was a billionaire investor named Warren Buffett. So, I picked up the first book on Buffett which looked good and read it from page to page. I was delighted because the book contained detailed step-by-step instructions on how to look for companies and how to value a company.

Convinced that this “value investing” thing wasn’t all that hard, I then decided to wade into the share market to test my new found ideas. Unfortunately, what I found was a mess of companies which did not fit nicely into the steps which I had learnt.

In short, I quickly got confused. Why wasn’t this “value investing” steps working like what the book said? Isn’t this the model answer?

Re-learning “value investing”

It wasn’t until I picked up a book called “Value Investing with the Masters” by Kirk Kazanjian when I realized that I have been going about it the wrong way.

In his book, Kazanjian interviewed 20 different mutual fund (the equivalent to unit trusts in Singapore) managers. They were not ordinary funds managers – Kazanjian had chosen them because of their outstanding performance over the market and the rest of their peers. In other words, the 20 investing masters were, to quote Kazanjian, “head of their class”.

As I read through the interviews, I started to notice contradictions between each investing master. In some cases, two investing masters would be doing things in a completely opposite manner. So, I decided to tabulate each of their investing styles based on different important elements of investing. This was done to aid my valiant search for the “ultimate value investing” steps. Below is a summary table with four of the 20 investing masters.

Source: Kirk Kazanjian's "Value Investing with the Masters"

Source: Kirk Kazanjian’s “Value Investing with the Masters”

My biggest discovery

Eventually, it dawned upon me that I should stop looking for the model answer to “value investing”. Because, the model answer did not exist.

You see, my biggest discovery about “value investing” was that it was not a set of rules or steps which were written in stone. Although anyone could refer to the term “value investing”, in reality, each investor had their own interpretation of what it meant. In the case of the investing masters, each made a compelling argument on why their own approach works. And each had their own excellent track record to back it up.

In one instance, Bill Miller would spend a lot of time on both valuation and understanding all facets of a company because he holds a concentrated portfolio. Jean-Marie Eveillard, on the other hand, would mostly shun the management team of a company but at the same time, hold a more diversified portfolio of around 150 names.

Foolish takeaway

In the end, my main takeaway was that it is more important that the investing approach had to come together as a whole to match the character of the individual investor. The interviews revealed how each investing master had developed over time and had a different set of strengths. Hence, it followed that their own “value investing” approach made the most sense to themselves alone.

This became my first big lesson as a new investor: I had to find a “value investing” approach which can become my own.

For the curious minds, Kazanjian’s book “Value Investing with the Masters” is one of the 25 recommended books by The Motley Fool’s Co-Founder and Chief Executive Officer, Tom Gardner. I have managed to go through many more books and conversations with other Foolish investors since I first discovered Kazanjian’s gem.

All these reading, conversing, and learning are all part of my quest to become a better investor. This time round however, the search for the “value investing” approach would be on my own terms and would be based on my own interpretation. For those interested, I’ve previously shared one of my interpretations of an approach to investing I’ve found very useful – check it out here.

As it is in long-term investing where I expect to hold an investment for years and decades, I too expect to be learning and refining my investing approach in the decades to come.