What is value investing?
Value investing is a particular investment strategy in which investors seek out undervalued stocks with the intention of holding them for a long period of time. This is in contrast to active trading, which involves buying and selling stocks quickly attempting to gain a fast return on investment.
Value investing requires investors to complete fundamental analysis to determine which stocks might be intrinsically valued higher than their stock price (i.e. undervalued). How exactly is that analysis done? By researching the company’s financials, completing financial ratio analysis (such as the price to earnings and price to book ratio) and assessing other fundamental business metrics.
Value investing is a focused and patient approach to buying low and selling, high which requires investors to truly dig into and attempt to understand where the company is and where it will likely end up.
For example, in doing some financial analysis of a company, you may find that their stock price is only $47, but their financial performance is more indicative of a stock price worth $100. In that case, a value investor would be inclined to purchase the stock at $47 with the expectation that the market would eventually correct itself bringing the stock price up to $100. At that point, if they choose to sell, they would profit $53 per share. Or, they could continue to hold on to the shares if they anticipate the stock price to continue to rise.
Without further ado, here are 7 famous value investors and their advice to you.
1. Warren Buffett
Perhaps one of the most well-known names out there, Warren Buffet has built his reputation on value investing. He is the CEO of Berkshire Hathaway and has an estimated net worth of 84.6 billion dollars. He is consistently listed as one of the wealthiest people on the planet. Buffett is well known for investing in companies such as Apple, Coca-Cola, and Bank of America.
True to his value investing beliefs, one of his most quintessential pieces of advice to investors is to, “Never invest in a business you cannot understand.”
2. Charlie Munger
Munger is one of the closest and most trusted partners to Warren Buffet at Berkshire Hathaway holding the position of vice chairman. His estimated net worth is $2 billion dollars. A well-known philanthropist, Munger makes a point to both invest in and donate to organizations that he believes in and understands. Some of his largest investments are with Berkshire Hathaway and Costco.
One of his greatest pieces of advice to investors is that, “An idiot can diversify a portfolio, or a computer. But the whole trick of the game is to have a few times when you know something is better than average, and invest only where you have that extra knowledge. If that gets you a few opportunities, that’s enough.”
3. Bill Ackman
Ackman differs from Warren Buffett and Charlie Munger in the sense that he tends to take an active role in the companies he invests in, often by attempting to redirect management strategies. While Ackman has been highlighted in the news for some tremendous short plays (betting that a stock price will drop), 83% of his investment portfolio is made up of only 7 companies. He is the founder and manager of Pershing Square Capital Management and has a net worth of 2.4 billion dollars.
One of Ackman’s best pieces of advice to investors is, “Understand how the company makes money: Again, do not invest because the crowd thinks it is a good product.”
4. Michael Lee-Chin
Lee-Chin is another avid value investor who made much of his wealth by investing in financial companies including National Commercial Bank Jamaica and AIC Limited. In fact, he has a 65% in National Commercial Bank of Jamaica which has contributed to a majority of his wealth. He is the chairman and CEO of Portland Holdings Inc and has an estimated net worth of 1.5 billion dollars. He is a strong proponent of understanding the companies he invests in, believes it’s more important to understand what you don’t know than what you do know, and to be purposeful.
His advice to investors is that, “You can’t look at the intrinsic value of gold as you can a business. Gold doesn’t give you cash flow, and, at the end of the day, cash flow is what is important. Gold doesn’t give you dividends.”
5. Mohnish Pabrai
Pabria is a student of the Warren Buffett philosophy on investing. Where he differs is primarily through the geography of his investments. Pabrai tends to focus his investing in India and other emerging markets where he finds there to be greater potential for undervalued stocks. He is the founder of Pabrai Investment Funds and has an estimated net worth of over $100 million dollars.
His advice to investors is, “The only way one should buy stocks is if you understand the underlying business. You stay within the circle of competence. You buy businesses you understand.”
6. Allan Mecham
Allan Mecham is a value investor to the core. He typically holds no more than 12 stocks in his portfolio and holds them for the long haul. He founded Value Capital Management which oversees more than $2 billion dollars in assets. Mecham is often cited as the 400% man for the cumulative mind boggling returns he was able to attain over a 15 year investment period towards the beginning of his career.
Some of his greatest advice to investors is, “My view on selling is akin to the old sports adage, ‘the best defense is a good offense’; the best sell discipline is a stingy buy discipline — which couples proper analysis with a bargain price.”
7. Peter Lynch
Lynch was the manager of the Magellan Fund at Fidelity Investments from 1977 to 1990 over which he was able to provide investors with an average return of 29.2% annually. If that’s not impressive enough, he has an estimated personal net worth of $450 million dollars. Along with the other investors on this list, he attributes his success to value investing. His philosophy is that knowledge is power.
One of his greatest pieces of advice to investors is, “If you can’t understand the balance sheet, you probably shouldn’t own it.”
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