The View from Burgundy: A Quarter-century of Investing
has some interesting insights. Brought out by Burgundy Asset Management, it would help every equity investor pay heed to these points.
True value investors diligently search out companies of quality that can be bought for significantly less than their intrinsic value, with a large margin of safety. And sell when the market price is too expensive compared to the true intrinsic value of the company.
Being a value investor is often an uncomfortable position to be in. It requires the willingness to do what is unpopular and the discipline to stick with your decision while the majority of investors are going in a different direction. The most difficult aspect of investing is to have the confidence and courage to do what is usually quite unpopular. This is because investing in shares of companies that are significantly undervalued often means investing in stocks that the investing public is currently avoiding.
A stock should be sold when it becomes fully priced. Sometimes, however, a particular stock (for any number of reasons) will become the darling of the street and gain momentum, or an industry will capture the imaginations (and the pens) of brokerage analysts. At such times, even though our targeted price might have been reached, we might hold onto the entire position, or sell only a part of it, in order to let the market carry the stock higher. This is not our usual practice, since it presumes that this overpriced security will become even more overpriced. One must recognize that holding an overpriced stock implies a greater price risk than the potential reward.
The world of investing can be a very lonely place at times. Successful investors develop their own philosophy that guides their investment approach and their actions through that sea of market sentiment. At times, the most important decision is not the individual buy or sell order, but the decision to stick with the investment philosophy you feel is right.
No investment philosophy, like other philosophies of life, is static. Occasionally, you must revisit your beliefs to reinforce currently held assumptions and glean new perspectives.
There is no doubt that the capability of the senior management is perhaps the most important variable in the success of a business enterprise. As a result, management is ultimately critical in how the shares of a company perform over the long run. Yet assessing management is extremely difficult for someone who isn’t really on the inside of an enterprise. Unfortunately, this is the position of most investors or investment analysts. In our own case at Burgundy, we view any attempt to assess management of companies in which we invest to be one of the most important, yet most difficult, things that we do. It is certainly the least scientific part of the investment research process!
There is no doubt that the capability of the senior management is perhaps the most important variable in the success of a business enterprise. As a result, management is ultimately critical in how the shares of a company perform over the long run. Yet assessing management is extremely difficult for someone who isn’t really on the inside of an enterprise. We view any attempt to assess management of companies in which we invest to be one of the most important, yet most difficult, things that we do. It is certainly the least scientific part of the investment research process!
Traditional economics teaches us that when prices for goods are low, demand is stimulated, but that as prices rise, demand declines. Oddly, it seems that in the investment world the opposite is true. High prices attract more investors.
Benjamin Graham, the father of value investing, wrote a classic article for Ladies Home Journal in the 1940s in which he addressed the following brilliant exhortation to America’s women: “Ladies, buy stocks the way you buy your groceries, not the way you buy your perfume.” There exists no better quick summation of the value investor’s approach. Hard-headed calculation and a focus on price and that elusive thing called value is the basis of this method.
But, just as high prices seem to attract investors, so too do low prices seem to scare them off. We believe that the best way to make money is to own outstanding companies run by capable management, which can be trusted to act in the interests of shareholders. But everything in the market has its price, and the long-term returns from even the best investments are heavily influenced by the price you pay for them.
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Opportunism and market timing
Some people confuse opportunism with market timing, but they are entirely different things. Opportunism is focused on individual businesses and stocks, while market timing is based on general sentiments about “the market.” Opportunism is based on optimism – it looks for a break in a company’s stock price but maintains a belief in the attractive nature of the company’s business. Market timing is based on a pessimistic assessment of market valuations, economic forecasts or political risks. Not surprisingly, specific optimism beats generalized pessimism most of the time. After all, if someone doesn’t want to invest in good markets, what are the chances they will act in bad ones?
