In Part 1 we examined the first hallmark of a value investor - Resistance to Social Pressure.
In Part 2 we examined the second hallmark - A Constrained Approach to Risk/Reward.
Part 3 explores another defining characteristic of the Value Investor - An Appreciation of Data and Analysis.
Part 3 - Portrait of a Value Investor - An Appreciation of Data and Analysis
“Ignorant value investor” is an oxymoron, much like “rolling stop” or “mandatory volunteerism”*****.
That is because the crux of value investing is determining the relationship between intrinsic value vs. market value. To do so, you need to dig into the all-important metrics (e.g., PE ratio, price-to-book, free cash flow).
Knowledge is a pre-requisite of value investing.
You might be wrong. But you aren’t ignorant.
And this is noteworthy. The desire to seek and analyze data is a quality separates value investors from other types of investors.
(NOTE: It ought to go without saying that this does not mean that growth-oriented investors unanalytical or ignorant. But this is 2018... and MPI's Legal Department thinks I should say it anyway - ahem).
"This does not mean that growth-oriented investors are unanalytical or ignorant."
Some people get sold right on the showroom floor. They see a shiny new investment with the latest bells and whistles and think, "I want that".
Value investors don't do this. They're not sold until they've gotten a chance to get under the hood, checked things out themselves, done a little research.
Here is a significant personality quirk of value investors; they do not invest based on "the way things are". Consider for a moment how different that is, and what it means.
"Value people" invest in the way things are not... but should be. (Feel free to add the word, "damnit!" at the end, if you like. It captures the spirit).
Investing in the "way things are not" requires great self-confidence that borders on defiance. It can lead to such internal conversations as ("Am I crazy?... No. I'm not crazy. Everyone ELSE is crazy! ...They'll see.)
Such confidence does not spring spontaneously out of nothing, like the universe, or boy bands.
It requires numbers. Ones that provide a sense of comfort, of proof, even of inevitability that things will change.
Value investors are more data-driven and analytical in their approach because they have to be. No one would invest in those companies otherwise.
So what are the implications of this trait?
In terms of identifying which clients may be hidden/latent value investors, those who show intellectual curiosity in fundamental analysis/research are potential candidates for value approaches.
In addition, higher scores on conscientiousness and introversion are associated with a more analytical approach to data. (Come to www.marketpsychinsights.com for more information on our proprietary profiling tools).
This data-driven nature is also a useful consideration in presenting investment options to clients and communication in general.
Value investors appreciate explanations involving quantification. In addition, they are more likely to enjoy (and take comfort) in receiving reports and research.
Value investors don't need the world to agree with them. They don't eveb need tremendous upside.
They just need to be right. Preferably sooner than later.
Visit www.marketpsychinsights.com for more information on how you can determine who among your clients might appreciate a value investing approach.
And hey... let's be careful out there.
Frank Murtha, Ph.D.
*** I did not make this up. "Mandatory Volunteerism" was an enforced extracurricular program at my, apparently irony-proof, high school in suburban New York.