(Dear Walter, did I ever tell you that you truly are the man?)
If there was one way to keep subjectivity at bay, that way would have been through the use of numbers and looking at businesses from a quantitative perspective. Basic math is all we need in investing to do well in investing. At least, this is my way. And you are not compelled to agree with me. Warren Buffett evolved from a quantitative type investor to include qualitative aspects of a business. For example, how would you know some 50 years ago that Coca Cola would experience tremendous growth over the next 50 years? This is subjective and contingent on judgement. As such, the quality of the investor’s judgement matters. Warren would look for ways to ascertain that the moat would continue to grow for a long time. He looked at advertising expenditures, studied advertising journals, talked to managers and suppliers and also scoured external sources that validated to him that a company’s products can grow in unit volume and increase in price, surpassing the general inflation rate of the day. He was what you would call a scuttlebutt. The problem is that in such investments, the investment’s performance is only as good as the investor’s judgement.
And for many investors, this is not the way to invest. For me, I personally prefer to look at clear cut cases of undervaluation. An example would be a company has a building worth $100 mm on its balance sheet which has been fully paid up. Also, it has little debt. But perhaps currently, its business is undergoing some issues and has reported a temporary 2 years of consecutive losses. As a result, the market capitalization of the company may be quoted at $60 million. Now, that, to me is almost a clear cut case of undervaluation. There are several benefits with regard to this approach, which is a purely quantitative approach. I list the benefits below. They are:
- There is no need to waste your time talking to management when you buy a basket of such stocks. On average, an investor who applies such an approach will be more right than wrong. Now, you really have to ask yourself this question : Would I prefer to be right on average or wrong on average? The question, I believe, answers itself.
- There is no need to attend annual general meetings.
- There is less subjectivity.
- There is no need to compare companies and look at relative valuations.
- There is no need for a scuttle butting and deep deep research which many retail investors do not have the time for.
These ideas are not proprietary to me. These ideas are laid for all to see out there in cyberspace. The only problem is that people refuse to acknowledge their shortcomings as investors. Walter Schloss was a huge role model for me. He was stubborn and stuck mostly to the quantitative approach to keep subjectivity at bay. And he acknowledged his shortcomings as an investor. He says he is never going to be Warren Buffett. This is a little snippet of what Walter said regarding his inclination to the quantitative side of things.
As you are starting out as an investor, it would be a lot safer if you stuck to the numbers and leave your predictions and biases out of the equation. If you can do basic arithmetic, you can have more than decent investing results. And Walter is a prime example of that.
We are all biased to some extent with regards to life, investing and everything in between. The idea is to have an awareness of it as it percolates into your consciousness. This awareness is a deep knowing and this knowing can be practiced to some degree. Looking at Walter’s little admission on where he stands, it is quite clear that he knows his strengths and weaknesses. That is perhaps the mark or a characteristic of a good investor.
This is a short post. I hope that this has shed some light on investing. I agree that all intelligent investing is value investing. But we need to know where we stand in regards to the spectrum of value investing. And I choose to stand in the “deep value” part of the spectrum, which is perhaps, one of the least talked about in investing circles. I think I could practice deep value investing for a long time to come. Walter Schloss did it for 50 years. Why can’t we?
As always, may all readers be blessed with abundance, happiness and health!