A couple of years ago, we interviewed Tom Russo, an American investment manager, for Wealth Insight. He runs a hedge fund named Gardner Russo. He is also a well-known practitioner of value investing and has a rare 25-year track record of beating the S&P 500 index.
While the interview is too long to distil here, his explanation of what value investing is and how investors should approach stock selection is the most vivid one I have seen. He takes off on something Warren Buffett once said that investors should evaluate stocks not as if they were buying perfume, but as if they were buying vegetables! It's a fascinating image, bringing to mind the archetypal Indian housewife applying intense scrutiny to every aspect of what the vegetable vendor is offering.
How does one buy vegetables? Says Russo, "When one looks to buy a head of cabbage, one looks to the leaves, to their color, their feel, their appearance, their smell, their touch and any number of other variables, all of which collectively inform you as to whether or not one is getting their money's worth when they shop for vegetables. In addition, one assures to their own satisfaction that the selected item is actually the one which they desire. It is typically the case that one then engages in bargaining to buy the product that they have determined by their own analysis to be worthy of purchase to attempt to obtain that item at a lower price. The margin of safety comes from assuring yourself on all accounts that the item of desire is worthy and by driving a tough bargain when purchasing."
And how does one buy perfume? "You buy it through attractive cosmetic counter professionals designed through their dress, demeanor and delivery to lift as much money from your pocket as possible. With assurances that whatever perfume it is that they sell will change your life, one is disarmed and surely susceptible to fascinations"
Unfortunately, the second method sounds more like the way many investors choose stocks, or for that matter, almost any financial product.
This column was first published on June 2015.