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Bitcoin, Dogecoin, Tesla, Gamestop, and numerous other assets have easily beaten the returns of any long-term value fund in the last few months or years.
Which has made some people on wall street think that value investing is dead and people sticking to it are ‘stupid’. All you need to do in order to make a bunch of money is be on a watch out for the next big thing consistently.
It is normal right now for people to think that value investing is dead because in such a euphoric market, money is made in the short-term, and value is nowhere to be found in hyped-up stock prices.
But what do real value investors who are sitting on their million-dollar portfolios while chilling in Switzerland and not carrying about social media comments have to say? Is value investing really dead? If not, what is the best way to go about it in such a market?
To answer all these questions, we have the renowned value investor Guy Spier with us. Though he needs no introduction, still, Guy is a Zurich-based value investor and the author of the well-known book The Education of a Value Investor.
So, let’s learn from Guy!
What is Value Investing?
First of all, what is value investing? I know most of you who are reading this article might already know what value investing is, however it’s worth knowing how Guy Spier describes it.
In the words of Guy, “Value investing is buying something whose value you can understand. It is investing intelligently”. Guy describes Intelligent investing as looking into the asset to deliver a return.
So for example, if you buy a farm, you can think about what crops you can grow on it and what you might be able to sell those crops for. These types of assets have an intrinsic value, and they generate cash flow.
And then there are assets like Bitcoin, where you’re not really looking at what you can get out of the asset, but what somebody else might pay you for it down the road. This is what you can call momentum investing or growth investing.
Is Value Investing Dead?
Guy says that no matter how the market is, there will always be a space for investing intelligently in companies that are consistently growing and justifying their prices. So value investing can never be dead.
However, what happens is that market works in cycles. There will be times when the market will go through a cycle, which it is in right now, where people who think about the world in that slow-careful way will look increasingly stupid. Investors who follow the philosophy of intelligent investing will feel humiliated and doubt their decisions.
But the thing is, this cycle will also end like every other one in the market. But until that doesn’t happen, people like Guy will be made to look like they don’t know what they’re doing.
And the interesting thing about such euphoric markets is that whenever it occurs, people seem to think that it will last forever, but it never does. The cycle always comes to an end, and when that happens, people who said value investing is dead themselves move towards it.
How Do You Select Value Assets in a Euphoric Market
How do you find value in a market where almost all good companies are trading at a premium? Would you sit out of the market until the bull run ends, but that can take years, or do you buy into overvalued assets because you just can’t stand the fact that everybody else seems to be making money?
What Guy does in such a market is divide the portfolio into other assets and long-term compounders, companies that you will be willing to hold through any market cycle because you feel convinced enough that they will continue to become more and more valuable with time.
For example, one of Guy’s favorite companies, Nestle, is an excellent example of long-term compounders. It’s a Swiss company that has half of its sales in the United States and owns famous brands like Nescafe, Nespresso, and a whole bunch of others.
They are basic to human needs and will be always in demand until there are humans on the planet. Guy keeps only such companies at the core of his portfolio, which he is not worried about what their valuation is at any given time.
You can invest in such companies in any type of market because even if their price drops tomorrow, they will only become a more attractive investment.
When you’re investing in such a market, the best thing to do is keep an assumption that if you don’t buy today, it will go up 100% by tomorrow, and if you do buy it, then it will drop 50% the very next day. If you’re comfortable holding it even after a 50% drop, then that is probably a good investment in any market cycle.
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How to Value Invest Properly
Here are some points that Guy talks about to become a better value investor.
1. Invest in Businesses You Can See, Touch & Feel
You might have heard a lot of times that you should only invest in businesses that you understand. Another thing that Guy talks about is businesses that you can see, touch & feel.
So for example, one of Guy’s major investments was McDonald’s. But when he first bought MCD shares, they begin to fall and quickly became a losing position. So what Guy did was he started going to McDonald’s a lot more to see if people are still happily eating at McDonald’s.
Now that was a story to explain that the key to value investing is to have conviction in your long-term picks so that you don’t cut them off after some losses. And the ability to go and see if a business is doing well or not helps immensely keeping your conviction.
So say you buy into a satellite technology company and the stock dips 50%, would you still be able to hold with the same conviction as compared to a stock like Nestle or McDonald’s, where you can see, touch & feel how the company is doing.
2. Avoid FOMO When Investing
The fear of missing out is one of the most common emotions that causes a person to make stupid decisions. And it gets severe while investing because every other day, some asset or some investor is beating your returns and boasting about it on the internet.
If you’re trying to patiently build wealth over a long period of time, you need to expect that every now and then, somebody will be blasting past you.
Every year there will be a new big thing. Some year, it’ll be tech stocks, then next year, it’ll be Bitcoin, and then something else for the following year. But as a value investor, it shouldn’t impact you because it is part of the game.
The best way to overcome FOMO is by not focusing on it and keeping your focus on building other parts of your life.
What’s not known about Warren Buffett is that he has an enormous amount of joy in the relationships he builds with people inside his family, group of friends, and the businesses that Berkshire Hathaway owns.
So the solution is to not keep focusing on the fact that you didn’t buy Amazon or sold Amazon early but to build a rich life.
3. Think Like an Owner Not a Shareholder
Once you buy a stock, start thinking like the owner of the company rather than an investor. The minute you start thinking like an owner and not an investor, you stop worrying about what the share price is doing.
You think about what you like and dislike in the business, and where do you see the company in the next 10 or 20 years.
As a value investor, once you buy into a stock, then it shouldn’t matter to you what its price is doing or what kind of bullish or bearish chart patterns it is forming. The only thing that should matter is how the company is doing fundamentally. Are the customers still happy with its products, and will they continue to demand them more in the future.