Value investing is one of the simplest and easiest forms of investing possible. All that is to it is to buy things when they’re cheap, and sell them when they’re expensive. It’s the fundamental business model of any and every company on Earth, and value investors contend that it doesn’t matter if you own 100% or .00001% of a company; in any case, the same simple principle of “buy low, sell high” holds. All else is unsustainable.
The biggest and most successful champion of this type of investing strategy is Warren Buffett, whose Berkshire Hathaway (BRK.A, BRK.B) has experienced a compound annual gain of 19.8% since 1965–an unprecedented performance both in the rate of return and the length of that return. Buffett has maintained a high profile presence in popular media, and he has been the subject of several books, documentaries, and webpages devoted to praising the man and trying to understand his investment principles. But there’s not really much to understand. It’s just a matter of buying things when they’re on sale, and selling them when you can get more for them than they are really worth.
Warren Buffett’s business partner and longtime friend Charlie Munger has maintained a lower profile, although he has been instrumental in the growth of Berkshire Hathaway and maintains the same investment philosophy as his more famous coworker. One of the important attitudes that Munger has stated in his few interviews is that vicissitudes in the marketplace–even a loss of NAV of 50% during a downturn–is part and parcel of investing. Part of your job as an investor is to hold your shares and deal with the loss. Munger has seen his company’s value decline in periods of extreme financial stress, like the period of late September 2008 to February 2009 when shares of his company declined by over 50%. One share of BRK.A lost over $73,000 in value over that 7 month period.
Munger shrugged. In a great interview with the BBC, Munger says that investors need to shrug at such losses and wait out the tide of market noise. Investors who lack that temperament, Munger says, cannot be philosophical about such fluctuations and will panic and sell. They deserve their mediocre returns, Munger says.
While value investing is not always synonymous with a buy-and-hold strategy, companies of great value tend to remain great value for a long time. Coca-Cola (KO), Johnson & Johnson (JNJ), Procter & Gamble (PG), Exxon (XOM), and–of course–Berkshire Hathaway tend to remain good values for a long time, so it’s rare that a bubble will encourage a large sell-off of these valuable stocks. Hence Buffett’s favorite holding time is forever.
One of the problems, as Munger discusses, is systematic risk. Markets are irrational, and markets panic, causing great valued companies to go down as a result of a calamitous event. What causes that event? The answer could be market panic, improper regulation, or mismanagement at one level or another. Munger puts it more bluntly, “sometimes the idiots get in control.” In 2008, the “idiot boom” and “idiot expansion of consumer credit” caused the problem, which Munger identifies as an unsustainable and immoral trend where hype superseded reason.The boom and bust of a capitalist economy is unavoidable, Munger contends. So a wise investor would be wise to endure the ups and downs and keep buying ownership of valuable companies.
An investor who applied Munger’s wisdom to Munger’s company would probably have bought shares in Berkshire Hathaway at the beginning of 2009 when fear brought the Dow Jones Index to record lows and BRK.A lost that $73k. An investment in the company at that time would be up over 59% today, 3 and a half years later, for an annualized return of about 13%. Not bad.