Can You Handle The Truth?

Col. Nathan R. Jessup with Lt. Daniel Kafee, from the 90’s hit movie A Few Good Men

Col. Nathan R. Jessup cross-examined by Lt. Daniel Kaffee, from the 90’s hit movie A Few Good Men

Col. Jessup:  I ordered his assets be transferred off the base as I believe his investing life is in danger.

Lt. Kaffee:  You mean his investing is not value investing?

Col. Jessup:  Is there another kind?

Lt. Kaffee: What about growth investing, dividend investing, momentum investing and investing in distressed assets?

Col. Jessup:  Son, I eat breakfast every day 300 yards from Cubans waiting to kill me, so don’t you dare teach me the meaning of investing.  Is that clear?

Lt. Kafee:   Yes.  

Col. Jessup (with anger):  Is that CLEAR? 

Lt. Kafee:  Crystal.

Value investing is one of the overused phrases in the investing parlance.   This has even come to be seen as a sub-set of the investing world.   However, I believe all investing is value investing (or should be).  

We all know Warren Buffett (too bad that he doesn’t know us!).   One of the lesser known figures of value investing is the hugely successful Seth Klarman.  He published a book that is now out-of-print called ‘Margin of Safety’, considered a real practitioner’s guide to value investing.   Margin of Safety is a wonderful concept in investing.   It’s the basic idea of buying a dollar of value for substantially less than it is worth, say, 60 cents.  Any investor wanting to profit from the capital markets is, at one level or another, dependent on capturing the value offered at a discount.   This concept is at the core of all value investing.  

Though I consider myself a dividend investor, I am a closet value investor as well.  After all, I am also looking to purchase a dividend-generating asset at a value, that is, at a discount to its intrinsic worth.   Sometimes I am hardly offered any discount, sometime a modest one (<10%), and sometimes a sizable (10-20%) to substantial (>20%) discount.   As intrinsic value is not easy to calculate with accuracy, I can try to estimate it at best with +/-20% variance.   Due to inherent variability in the estimation of a stock’s true value, many value investors want a sizable margin of safety in their purchase, say 25% or higher, so that any error in estimating intrinsic value is covered.  It’s another way of saying they will buy a $1 asset only if it is offered in the market for $0.75 or less.  This doesn’t happen very often, so the value investors master a remarkable skill, which is actually what makes them successful.  That skill is patience.   The ability to be patient for long periods doing nothing, and then jumping without hesitation when the right opportunity presents itself differentiates the value investors from the rest.  It helps them realize total returns well in excess of an index investor or a dividend investor.   In his own inimitable style, Charlie Munger defines this aspect as ‘assiduity’ – the ability to sit on your ass and do nothing after you have bought into a great business at fair value, though the dictionary definition of the word is somewhat differentBerkshire Hathaway’s record of the past 40 years proves that this works…really well.

In my own investing journey, it is the patience part that I find the most challenging.   It takes enormous self-control not to pull the trigger to purchase a good company you wanted to buy until it enters your strike zone.   In the rare cases where I have been able to do it, the rewards have been worth it.  In other cases, the reward or disappointment depends on whether there is a raging bull market or a flat/declining market going on. 

Lt. Kaffee:  I want the truth!

Col. Jessup: You can’t handle the truth!

Patience – the truth holding us back from becoming true value investors.   How do you handle it?

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2 comments on “Can You Handle The Truth?”

  1. By ZJ Thorne

    I love the idea of waiting until the good business is discounted at least 25%. The rewards feel bigger that way.

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