'The secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it.' -- Warren Buffett, 1984
It has been another 25 years since Warren Buffett said this. But the statement still rings true. He is now even more famous than before. The number of books on him has multiplied and business channels now have divisions that track his activities on a daily basis.
While Buffett is the most famous, there are others who are successful value investors in their own right and also receive ample media attention.
But if you looked around to see how professional money managers go about their business, you wouldn't find too much of value investing there.
The logical question then is 'Why not?' We believe there are certain behavioral stumbling blocks that explain why there are very few value investors despite all the media coverage the discipline receives.
Knowledge doesn't translate to action
Unfortunately, knowledge doesn't always translate to behavior. It is common knowledge that we should use helmets, buckle up our seat belts, avoid smoking, take medical insurance etc. but we don't strictly follow them.
It takes deliberate action on our part for us to form habits, mere knowledge is not enough. If we are not able to always do the right thing in such important matters, it is not surprising that we don't choose the best path when it comes to investing.
One size doesn't fit all
The general tendency of investors is to find that magic formula -- a method that applies to all situations. In fact, the one time everyone asks for stock tips is when there is market euphoria. The right answer during such times is -- 'don't buy anything'.
But that's a difficult answer to digest. On the other hand, when markets are unduly pessimistic, there are value picks everywhere. Value investing often doesn't offer picks when we are most interested. That makes it a hard discipline to follow.
Patience in the Internet age?
A few months ago Bharti Airtel had come out with a campaign called the 'impatient ones'. That seems to be an apt description of most investors. The way we have evolved, we are hard wired for short term rewards.
Short-term thinking comes naturally to us. It takes training and mental conditioning for us to shake off the habit and reorient our investment horizons.
Value investing requires long term time horizons because there is no guarantee that out of favour stocks that value investors prefer investing in, will suddenly come back in favour.
Standing out from the crowd is difficult
As explained above, the best value picks come exactly at the time when there is pessimism all around. As Buffett himself said, 'The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.'
Unfortunately, that means one has to do the exact opposite of what others are doing. Buy when others are desperately selling and vice versa. Since we are hard wired to stick to the crowd, it is inherently difficult for us to do the exact opposite.
To conclude, it is not the lack of intelligence or knowledge because of which there are so few value investors. The answer lies in our behavioural pitfalls. We need to master them in order to practice value investing.