Friday, September 21, 2007

Why is Value Investing so unpopular ?

It has always made me wonder about the popularity and usage of value investing techniques among the general public. While technical analysis enjoys a widespread following and has a whole legion of supporters and theorists (who incidentally also write hundreds of books on various aspects of TA), it came somewhat as a surprise to me to find out that there are only a handful (yes, just a handful) of really good books written on value investing and value investment techniques. Historically, Warren Buffett and Benjamin Graham, along with a host of other notable investors as listed out in the “Super-investors of Graham and Doddsville” article written by Mr. Buffett, have been achieving higher returns than the DJIA for almost 25 consecutive years. This kind of success is obviously worth emulating and studying, yet there seems to be a consensus among Wall Street pundits that this form of investing is either not worth the time, or simply just a pure fluke. So what makes value investing so unpopular ?

The way I see it, there are several factors at play when one talks about practicing value investing. As Warren Buffett had mentioned, it is simple but far from easy to invest the right way. I had also conducted some informal chats and “interviews” with friends, colleagues and associates to find out their investment style, and the answers can be surprising at times. Basically, they can be broken down into the various reasons as stated:-

Difficult to Understand – The chief reason for most people to turn to “simpler” forms of investing is that value investing is perceived to be too difficult to practice. Difficulty is defined by them as being too complex (involving the analysis of many companies before finally choosing one to invest in) and too time-consuming (many hours poring over annual reports, news and data, see my point below). I would admit that this is particularly true for non-finance trained individuals who may have an uphill task in learning to read financial statements. Still, the mitigating factor is that I have seen people with IT and engineering background do equally well in value investing than accounting or finance professionals. It’s just the amount of effort you wish to put in, which boils down to the second point.

Time-Consuming – No doubt, sifting through hundreds of companies before arriving at just one is a tiring and time-consuming business. Many people are unwilling to compromise “quality family or friends’ time” and spend a few hours a day doing what seems like homework after their normal working hours ! Strangely enough, most people do a lot more thinking and research into choosing a potential life partner, which is also a process of sifting through hundreds of potential partners to arrive at just one !

Slow Returns (a.k.a. manifest impatience !) – Another BIG complaint is that the returns from value investing are too slow, and that the money is not growing at a fast enough pace. That’s the reason people turn to TA or momentum “investing” and buy and sell shares at lightning speed: they THINK it helps them to make money faster and at a better rate of return. Of course, the truth is that value investing gives you slow, but sure returns; while TA gives at most mediocre returns (taken as a % of amount invested) or at worst, causes you to lose a substantial amount of your initial capital.

Archaic – Now this was an interesting reason, I thought ! Some people felt that value investing was “old-school”; and that since we were living in a new economy (with the Internet, Skype, Blackberry, i-Pod etc.), this would inherently imply that such old techniques could not possibly work any longer.

Despite the amazing amount of negativity regarding value investing, there are actually still a few people practicing it in sunny Singapore. Take a look at several blogs such as Berkshireh and 8percentpa and you will find a wealth of information regarding value investing. Perhaps it is a blessing in disguise that not too many people are into value investing, otherwise Mr. Market would probably be rendered obsolete should that happen !


Anonymous said...

I must agree that Berkshireh and 8percentpa are among the best investment blogs.

I'm a practitioner of FA but my market timing is horrible as I tend to pick up a stock whenever it is cheap enough without realizing it is trending downwards (that is usually why an excellent stock can hit my 'cheap' level, haha).

musicwhiz said...

Hi there,

I think you can complement your FA with value investing principles to see what a good price is to enter into a company, based on the margin of safety concept. In that way, you don't need to time the market, let the Mr. Market come to you instead.

Good luck !

Wile said...

Aug or Feb this year, you could pick really good stocks which you have been "eyeing" for long.

On the other hand, I do like to invest in good companies which industries are not popular now.

Value investing is the way to growth wealth over long term. I found it through the hard way :)

Thanks for your blog MusicWhiz!

musicwhiz said...

Hi Wile,

You are welcome, thanks for visiting my blog as well ! :)

Regards, musicwhiz