THE ULTIMATE QUEST OF VALUE INVESTORS

THE ULTIMATE QUEST OF VALUE INVESTORS

Author: contemplator   |   Publish date: Thu, 13 Aug 2015, 12:33 PM

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This article is dedicated for value investors.




In October of 2009, Charlie Munger was interviewed on the BBC.


Here's what he had to say about Berkshire Hathaway's (BRKa) stock (it was down quite a bit at the time) and, more generally, the decline in common stocks.

So how much does Charlie worry when Berkshire's common stock declines?

"Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it's in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact, you can argue that if you're not willing to react with equanimity to a market price decline of 50% two or three times a century you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations."

In this BBC interview with Warren Buffett, also from back in 2009, here's what he had to say about the nature of stock markets.

"The very liquidity of stock markets causes people to focus on price action. If you buy an apartment house, if you buy a farm, if you buy a McDonald's franchise you don't think about what it's going sell for tomorrow or next week, or next month, you think about how is this business going to do. But stocks with this huge liquidity suck people in and they turn what should be an advantage into a disadvantage."

Then, later in the interview, Buffett said this about investment: 

"...you compare the net return to how much money you are laying out, that's investment." 

Finally, he added this:

"...you can still get in trouble if you pay too much, but you are focusing on the right thing if you look at the stream of income that the asset is going to produce over time."

Source of reference: http://theinvestmentsblog.blogspot.com/2013/02/charlie-munger-warren-buffett-market.html

Soooooo... what is the ultimate quest for an value investor?

1. Determine the intrinsic value of a business that has durable competitive advantages.

2. Buy at discount to its intrisic value. Price is what you pay value is what you get. (Shouldn't you be happy when the stock crashed by 50%? ringgit is definetely on big sales now yet the stock market on a tiny sales)
- the calculation of intrinsic value is an art rather than science. I believe the use of DCF, reverse DCF, evaluation of business indicators, scuttlebutt method should be applied and evaluated based on different situations.

3. Control your psychological misjudgements. If you can not tolerate the stock prices fall by 50%, you should buy very low cost index fund like Vanguard's. Sadly as i know, the ETFs in Bursa charges heavenly. Who knows how to buy the Vanguard's in US from Malaysia or Singapore please kindly enlighten me here. :)
- Charlie has a wonderful work on Human Psychological Misjudgement. Visit his Poor Charlie's Almanac will pay you handsomely.
- Price of stock has not relation to its value. Volatility is an intrinsic characteristic of stock. Measurement of beta is a foolish game. You just need to make sure you doen't overpay.
- Focus on absolute return but relative return.
- Microeconomics is what you should really focus rather than the macroeconomics. (You didn't play FOREX right?)


4. Value investment is simple but not easy.

Nooo stock  recommended by me to buy. Why?
-there is no free lunch in this world.
-many others already recommended stocks to be bought. Yet the decision for purchase will depends on your own answer to ULTIMATE QUEST (did this sounds like an examination?)
If you found my writing sounds logic, you can visit my previous blog:
http://klse.i3investor.com/blogs/contemplator_bursamalaysia/76177.jsp



LASTLY, I urge all of us to help others that need our help. Do donate those who need our help (2.6 billion ringgit is not a donation).




INVESTMENT IS MOST INTELLIGENT WHEN IT IS MOST BUSINESS LIKE-- Benjamin Graham


Contemplator
13/8/2015