The Many Faces Of Value

by: Novel Investor

Warren Buffett commemorated the 50th anniversary of Security Analysis by writing about a few lucky investors. The accepted theory at the time was that beating an efficient market boiled down to luck.

Buffett, of course, didn’t agree with the efficient or the luck part and the “Superinvestors” was born. The efficient part has since been disproven but his article unearthed the skill of seven value investors who were adept at beating the market.

Their performance results posted in the article can be found in the table below.

The Superinvestors of Graham and Doddsville (Annual Returns)
Name Years P’ship Returns Ltd P’ship Returns Dow/S&P Returns
Walter Schloss 28 21.3% 16.1% 8.4%
Tweedy, Browne (Tom Knapp) 16 20.0% 16.0% 7.0%
Warren Buffett P’ship 13 29.5% 23.8% 7.4%
Sequoia Fund (Bill Ruane) 14 17.2% 10.0%
Charlie Munger 14 19.8% 13.7% 5.0%
Pacific Partners (Rick Guerin) 19 32.9% 23.6% 7.8%
Stan Perlmeter 18 23.0% 19.0% 7.0%

Their performance is astounding, really. Several actually continued that pace after 1984 and Buffett could probably add a few more names to the list since then.

Now, some people will see these numbers and think I can do that too. I’ll just invest like Guerin or Buffett. Seems easy enough.

Except, the numbers don’t tell you about their process, or what the market was doing at the time, and what they had to endure. Some people won’t bother to learn about it either. Instead, they’ll buy “cheap,” maybe buy “quality” and trudge forward.

Most won’t last more than a few years, though. Here’s why. In a reply to Buffett’s article, Eugene Shahan offered this:

What conclusion can one draw?

  1. With only one exception (Buffett), a superior long-term record can occur despite miserable three or even six-year segments.
  2. If an effort is made to look at shorter intervals of performance, the effect may be to reduce the longer term performance. This is only an intuitive conclusion, but it may strike at the heart of why there are so few practitioners of a systematic approach that generates superior long-term results.

I assume that none of these managers panicked in the face of adversity and changed their style after three dissappointing years of using a value approach. But how many investors have the strength of character to continue an approach that can be unrewarding for three or even five years? Isn’t it easier, after a msierable one or two years, to grab at the things that are moving, that other managers who are doing well are holding, that you feel foolish for having missed?

The true impediment to superior investment results, then, seems to lie only partially in the realm of financial risk attached to the security purchased (however that is measured). Of perhaps equal importance is the pressure of client or investor impatience. Most human being have limited attention spans.

It may be another of life’s ironies that investors principally concerned with short-term performance may very well achieve it, but at the expense of long-term results. The outstanding records of the “Superinvestors of Graham-and-Doddsville” were compiled with apparent indifference to short-term performance.

Shahan’s response is a recipe for success. Behavior matters. Skill (and a little luck?) certainly plays a part, but it only goes so far.

Not many people will stick with a strategy that loses money, much less falls short of the market, for a few years. Yet, almost all of the “Superinvestors” suffered through multiple losing years and/or underperforming the market.

Shahan chalks it up to self-discipline:

This may be a classic example of self-discipline. If you cannont play the game using the rules with which you are comfortable, then stop.

The common thread between the “Superinvestors” is fitting their styles to their strengths and weaknesses. They tilted the rules of value investing in their favor. Then they let the value process, not the outcome, drive their decisions.

What really stands out about the investors above is their differences. They come from a wide range of backgrounds: a lawyer, a chemistry major, an advertising exec, an IBM salesman, and one never went to college.

Their styles are equally different. Some are widely diversified. Others hold concentrated bets. Some stick to well-known companies. Others focus on the obscure. Some want to understand the business. One could care less. But it’s all value investing.

There are so many ways to be a value investor but the only style that works is the one you can stick to.

The Superinvestors of Graham-and-Doddsville (Buffett)
Are Short-Term Performance and Value Investing Mutually Exclusive? (Shahan)