Value Investing Explained in 7 Quotes

Value investing, done well, can make you wealthy.

Jul 29, 2014 at 10:31AM


Source: Flickr user PRodriguez.

Value investing involves searching for undervalued stocks that offer some margin of safety and then holding them while they approach or exceed their true value. Below are a few quotations related to value investing that can deepen your understanding of it.

"We don't have to be smarter than the rest. We have to be more disciplined than the rest." -- Warren Buffett
Value investing requires conviction. Buffett has also said that it's best to be fearful when others are greedy and greedy when others are fearful. That's far easier said than done, though. With value investing, you have to keep your strategy in mind and then stick with it through ups and downs. If you believe in the power of getting wealthy by investing in undervalued stocks for the long haul, then you need to be brave and disciplined enough to take advantage of market downturns, buying bargains in panicked environments when others are selling.

"Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by over-enthusiasm or artificial stimulants." -- Ben Graham 
Ben Graham was Warren Buffett's mentor. His quotation here reminds us that value investing takes patience. When the market has been booming for quite a while, a downturn might be in order, but it could take another year or two to arrive. Don't get impatient and buy mediocre stocks because you're tired of waiting. Similarly, if you've bought a seemingly undervalued stock, it can take a long time for the rest of the market to wake up and get interested in it. As the company keeps executing well and growing, it will seem like more and more of a bargain over time, eventually attracting more investors to start driving the price up.

"The stock market is filled with individuals who know the price of everything but the value of nothing." -- Phil Fisher
Value investing means not getting too hung up on a stock's price, which doesn't mean much by itself. A $3 stock can be wildly overvalued and due to fall, while a $200 stock can be undervalued. The respected insurance company Markel, for example, was trading near $330 per share five years ago, and it recently topped $655, having roughly doubled. With value investing, you need to find compelling companies trading at compelling values. You can get a sense of a stock's value by comparing the stock price to other measures, such as sales, earnings, cash flow, book value, etc.

"Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty -- such as in the fall of 2008 -- drives securities prices to especially low levels, they often become less risky investments." -- Seth Klarman
This underlines how value investing never looks at prices in a vacuum. Imagine a seemingly risky biotech company. You might be nervous to buy it now if the drugs in its pipeline have not yet earned FDA approvals. But if the stock falls, at a certain price point it will seem like a risk worth taking. The idea that great uncertainty leads to reduced risk echoes the "be greedy when others are fearful" maxim.

"A great business at a fair price is superior to a fair business at a great price." -- Charlie Munger 
Warren Buffett, based on Ben Graham's teachings, used to be a stricter value investor, demanding big margins of safety via ultra-low prices. But his partner Charlie Munger was instrumental in getting him to realize that great companies are worth a fair price and that you don't always need to wait for a price dip to buy. After all, a great company can keep growing, as it probably has some sustainable competitive advantages.

"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing." -- Charlie Munger
This is a good reminder that value investing requires knowledge and skill. The best value investors are always reading and learning. They know how to assess a company's value and are very familiar with certain industries. Thus they're able to spot bargains when they come along.

"If you want to shoot rare, fast-moving elephants, you should always carry a loaded gun." -- Warren Buffett
Finally, know that value investing requires you to be prepared and ready to act. It's hard to take advantage of a great opportunity, for example, if you have no cash on hand to invest in it. (You might sell a less undervalued holding, though, if need be.) It's also smart to maintain a watch list of companies that you've run across in your reading and research -- ones you'd love to own for the right price. Check your watch list regularly, and you'll likely spot some nice bargains now and then.

Value investing isn't easy, but it has made a lot of disciplined, patient, insightful people wealthy. Learn more about it.

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