Sven Carlin - Modern Value Investing

The single greatest edge an investor can have is a long-term orientation. Seth Klarman

The thing that is mostly overlooked when discussing investment strategies is personal goals. Investing is extremely personal as we all work hard for our money and we are not investing just for the sake of investing. At the end of our investment process, there are some personal goals that are supposed to improve the quality of our lives; be it having enough money to retire, achieving financial freedom, paying for your childrens college tuition, traveling the world and who knows what might be your heart's desire. Therefore, before deciding on any kind of investing activity, it is extremely important to first know yourself, your investing goals and how you will react to anything that might happen in the stock market, good or bad. Before applying a value investment strategy, you should understand the following:

It is not possible to make rational investment decisions when your current lifestyle depends on your investments

In the short term, all investments can be extremely volatile. Ray Dalio, famous for his historical approach to investing always reminds us that each asset class will probably decline 70% or more at least once during our investing career. Therefore, a value investing strategy should be applied only with a long-term mindset where your current lifestyle doesnt depend on what is going on in the stock market. If your lifestyle depends on the market, you will not be able to make rational investing decisions and take advantage of market irrationalities, which is the main factor behind value investing. When an asset class like stocks are dropping, a value investor has to start buying when the discount offered by the price drop is justified by the value of the stocks even if the stocks might temporarily drop more. It is impossible to catch the eventual bottom in a stock market crash. If your current lifestyle depends on your investments, there is no way you will have the courage to buy the extreme bargains the market often offers because of fear that those might go even lower.

To illustrate how things can go wrong when investing it is good to know that even Warren Buffetts Berkshire Hathaway portfolio was down more than 50% twice in the last 50 years (1974 & 2008/2009 ) . Therefore, if your lifestyle doesnt allow the kind of downturns in your invested portfolio, that affect even Buffett, you should really avoid investing in the stock market. On top of that, the best returns come from heavily investing in periods when all others are selling in panic as only then, value can be bought on the cheap.

You will probably underperform in extreme bull markets

Value investing is not correlated to what is going on in the stock market. Therefore, there will be occasions where a value investing strategy underperforms the general market, especially when there are irrational forces driving the market. This has been the case in the 1990s when value investing was proclaimed dead and Warren Buffett was derided because of his unwillingness to invest in internet companies. In 1999 Berkshire lost 19% of its market value while the S&P 500 grew 21%. After the dot-com bubble burst, most of the crowd lost their money while Buffett came out unscathed with market-beating long term returns. In 2000, 2001 and 2002 Berkshires stock returned 26.6%, 6.5% and -3.8% respectively, while the S&P 500 returned -9.1% in 2000, -11.1% in 2001 and -22.1% in 2002. I wont even mention the declines in the technological NASDAQ index which make the declines in the S&P 500 look like a treat. From 1999 to 2002, a period which includes one of the worst bear markets in history, $100 invested in Berkshire in 1999 would have returned $104 in 2002 while the same amount invested in the S&P 500 would be at only $75. Therefore, sticking to value investing wont make you win every year but it will sure make you finish your investing life marathon with a satisfying return in comparison to the risk taken with a guarantee that you will reach your financial goals.

A situation where value investing isnt outperforming is happening as I am writing this (2018). The stock market has been in a bull market for more than 9 years now, driven by the extreme liquidity global central banks have put into financial markets. There hasnt been much benefit in being a value investor in the last years as a rising tide lifts all boats, while the point of value investing is not to leave you naked when the tide shifts. However, being a value investor now can provide the necessary protection to minimize your losses and increase your returns when the next bear market comes. And, a bear market always comes.

You have to be a contrarian; fearful in frothy markets and convinced in panicky ones

In order to take advantage of value investing opportunities you have to be able to think for yourself and not get under the crowds influence. Most investors are easily influenced by short term events and news, they panic in a recession while they quickly become exuberant in periods of economic growth and stability where most follow a few strong trends. The inevitable recession panic makes them sell stocks at whatever price and creates huge bargains while the euphoria creates bubbles. A value investor takes advantage of such opportunities by doing the opposite of what the herd does. This allows for lower risk and higher returns the ultimate goal for any investor.

Is this overwhelming? Dont worry, this book is all about how to take advantage of the above described market situations and will provide you with many investment strategies that lead to low risk and high returns over the long term and food for thought to develop your investing mindset .

Value investing is mostly boring

Value investing consists of doing lots of research, saying no to thousands of investments opportunities, buying only when something meets all the criteria, and then waiting for the market to recognize the value of the undervalued investment you found. Eventually the market always recognizes value but it can take years for that to happen and we will also discuss strategies on how to shorten the recognition of value but nevertheless, excluding a bit of portfolio rebalancing, there isnt much short-term excitement in being a value investor. However, over the long-term, value investing provides the highest returns with the lowest risk, something to be very excited about. To put it in the words of Nobel Prize economist Paul Samuelson: