When we are asked if we see ourselves as value investors or growth investors, we don’t know what to say. If investing is buying an asset at a price significantly less than its value, isn’t all investing value investing? Conundrums like these have meant that the term value investing has been increasingly misused or even abused. Anand Sridharan of Nalanda Capital in his recent blog helps us understand the issue:
“The term has become an oversimplified label for formulaic buying and selling of cheap crap with little regard for the nature of the underlying business. While this isn’t illegal, it is a misnomer. This activity is better represented by replacing “value” with “cheapness” in all media references. Cheapness investing, cheapness factor, cheapness index, cheapness style-box and cheapness screens. What is called value investing is often neither value nor investing.
This confusion is especially severe since the greatest proponent of the term – Warren Buffett – hasn’t practiced cheapness investing in five decades. “Value investing” ends up leading a double life, one referring to Buffett and his disciples and another to mechanical application of cheapness filters…..learners get confused between value and cheapness. Instead of starting with “what’s worth owning”, many start with “what’s cheap”.”
Instead he prefers to call himself a ‘business owner’ as it best defines what he does or we reckon what investing should be anyway:
“Understood in the right spirit, it covers everything: timeframe, nature of business, priorities of investor, how to think about stock-price.
First, “own” suggests an indefinitely long timeframe, if not permanence.
Second, this in turn implies a very high bar on businesses that are worth owning. If a business isn’t sustainably safe and good, it is impossible to own for an extended period. Automatically, the first and most important question becomes “is this business worth owning at all”. An owner is limited to far fewer businesses than an investor…Just as we are a lot more discerning with the home we own than the apartment we rent.
Third, focus is entirely on business, not stock-price. Before owning, we spend all our time understanding the nature of the business, the context it operates in, what makes it sustainably good and what risks can spoil the party….Owners lead a sedate life tracking business performance, not a frenzied one following price action.
Fourth, for the few businesses that are worth owning, owners seek a rational valuation not a cheap one.
Fifth, this automatically puts in perspective the relative importance of stock-price vs business fundamentals. Stock-price matters, but only occasionally. Except on rare occasions when markets offer a rational price for owning a business, squiggly lines can be ignored.
Lastly, without a “business owner” mindset, it is impossible to give time for compounding to do its thing. A business owner’s mind isn’t preoccupied with selling out, much like the owner of a farm or a home. He isn’t even looking for a quote on most days. On an ongoing basis, the question on an owner’s mind is “how’s my business doing”, not “what’s it quoting at today”.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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