It seems that the investing world is often divided into growth and value camps, even though it has been argued that growth is a component of value. Whichever camp you identify with, learning how successful investors go about their business can do nothing but improve your own investing performance.
In Value Investing With the Masters, Kirk Kazanjian gives us a glimpse into the minds of 20 value investors. In their own words, they describe their investing philosophies, how they got to be where they are today (at least as of 2002, when the book was published), how they go about finding stocks to buy, and when and why they sell those stocks.
Kazanjian calls these gentlemen "masters," because they each run a publicly available mutual fund that has consistently outperformed its peers and, in many cases, the overall market. Bill Miller, for instance, manages the Legg Mason (NYSE:LM) Value Trust fund and is a well-respected investor here at The Motley Fool. His fund had a 15-year streak of beating the S&P 500 index, a streak that ended just this past year.
Each master who's been interviewed adds his own unique viewpoint to the idea of value investing. Some of them, such as Christopher Browne, David Dreman, and Charles Royce, more closely follow the tenets of Benjamin Graham and Warren Buffett. Others, such as Miller, Bill Fries, and Marty Whitman, are "rewriting" the rules of value investing to fit their own personalities and styles. There are even some younger investors added to the mix, such as Bill Nygren, Jim Gilligan, and Kevin O'Boyle, who will carry value investing into the future and put their own unique stamps upon it. Several of the masters' funds have been highlighted in our very own Motley Fool Champion Funds service, including one managed by Robert Muhlenkamp.
Why they buy
One question every investor wants answered is, "When is a good time to buy?" When Miller was asked a variation of this question, he answered:
If you think about it, the only way you can earn an excess return by owning a particular company is if the market hasn't valued it properly. ... When growth investors do really well, they do so because the companies grew faster and longer than the market believed. To most value investors, a company is undervalued because the market has overly discounted some negative event or is too pessimistic about something that's weighing on the stock price.
Many of the other 19 masters express the same sentiment about companies being out of favor and thus being attractive to value investors. When it was his turn, Robert Olstein said:
Investors are always voting. They have a perception about a company. The price of a company's stock is based on that perception at any point in time. A value guy like me tries to predict when these perceptions are wrong and will eventually change.
What they buy
Not only do they describe the philosophy of when to buy stocks, but Kazanjian also has them discuss particular examples. For instance, we read why, in 2001, John Goode of Smith Barney Asset Management was buying Carnival (NYSE:CCL), which he called a "rubber ball," and avoiding most Internet stocks as "broken eggs." David Williams of U.S. Trust describes how he mixes growth investing with value investing; for example, he bought into companies such as Qualcomm (NASDAQ:QCOM) and Nokia (NYSE:NOK) when they were value stocks and held on as they became growth stocks.
James Gipson describes why he bought more of Merrill Lynch (NYSE:MER) when it was out of favor in 1995: "If you're a value investor and you thought it was cheap at $70, it's even cheaper at $60. The rational thing is to buy more." By the way, Merrill Lynch's stock is up more than 600% since mid-1995, a 17% return per year.
The best part
My favorite part of the book is the summary Kazanjian gives at the end. He has two brief sections, one highlighting several traits that many of the masters have in common and another listing 10 keys to successful value investing. One of those keys, which we've highlighted above and which almost all of the masters mentioned in one way or another, is "buy what's out of favor."
Another key, which follows naturally from the first, is "have patience." It can take a while for Mr. Market to recognize the value in the company you just bought. Wallace Weitz said it best: "You need to have patience and a willingness to look dumb for a while."
Nicely put.
The book is not a quick read; I found 20 interviews a bit overwhelming for one weekend. Besides, the interview format is not easy to read in general, at least for me. After I finished, though, I found myself going back to the book several times to see what those successful investors have in common, to reread short sections on how one or another makes his buy decision, and for reinforcement of the value-investing philosophy in general.
Even if you do not agree with this philosophy, reading the book will be an educational experience. And that is Foolish indeed.
For a newsletter service that uses many of the ideals illustrated in this book, take a free 30-day trial of Motley Fool Inside Value, where Legg Mason is a recommendation.
Fool contributor Jim Mueller does not own any company mentioned. Fool rules are here.
