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The 'Value' in Value Research

How does our relentless adherence to value investing enhance your investing returns?

The 'Value' in Value Research

There are people who think the word 'Value' in the name of Value Research is just that - a word chosen because it sounds like a good name for an investment research company. Like a computer company called 'Apple' or a petrochem company called 'Reliance' or something like that - just a brand with no deeper significance. But that's not true. There is a whole world of investing hidden in that word 'Value'.

Of course, that's not something that has been discovered anew by Value Research. Some time ago, while searching for something on Google, I came across an article with the rather provocative headline, '30 Years Ago, Warren Buffett Gave Away the Secret to Good Investing and Correctly Predicted No One Would Listen'.

Of course, the web is filled with deliberately attention-grabbing headlines which rarely tend to be true. However, this headline is an exception. It really is true. In fact, the secret that Warren Buffett gave away had first been given away 50 years before that by Benjamin Graham. That was 1934 - the year that Graham and his collaborator David Dodd published their seminal tome 'Security Analysis'. The secret that Graham, Dodd, Buffett and many others have discovered is 'value investing', something very few investors understand and follow.

The funny thing is that if you give in to your curiosity and start reading up on value investing on the internet, you may come away with the idea that value investing is dead and has been dead for many, many years now. Why is this? Why do people insist that value investing does not work anymore? The answer lies in a fake idea of what value investing is. Conventionally, value investing has suffered from a mechanical, numbers-driven definition of what it is. Unfortunately, value investing as a concept has become hostage to some trivial ratios like price-to-earnings which have some role to play but are actually a side issue.

Let's pay attention to what Buffett himself once said. In the 1992 letter to shareholders, Buffett wrote, "Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield.

Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase. Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value."

In essence, what Munger and Buffett are saying is that the simplistic, ratio-based ways of judging value are no longer useful. All investing is both for value and growth, for it's only growth that can generate value in the future.

As Charlie Munger once said, "All good investing is value investing." The simplest and yet the most comprehensive definition of value investing is buying something for less than its intrinsic worth.

At Value Research Stock Advisor, our team considers value to be the final filter on our process of selecting and recommending the stocks that we think you should buy. Nominally, Stock Advisor is focused on quality stocks which are available at a reasonable valuation with a long-term perspective. But I'm merely stating the obvious there. Everyone in the investing world says this, or something like this.

I mean who would ever say the opposite? Can you imagine someone saying that they are focused on low-quality stocks that are available at high valuations and only have a short-term perspective? However, talk is cheap and many people end up actually doing this kind of anti-investing despite the best of intentions and the grandest of statements.

At Value Research, we break down these goals into many steps and a matrix of checks and balances that ensure that the individual elements - quality, value and the long-term perspective - all stay intact. It's a process that combines data as well as subjective judgement, both in perfect balance.

However, there have been many times when investments succeed at every one of the stages of our process but fail at the value stage. In fact, this was very much the case at the launch of the service. The months preceding our launch in November 2017 had been particularly good for stocks and that actually made things very hard for us. We launched with 10 stocks and we had in our 'A' list at least another 10 that we had to keep hidden from our members. The reason was simple - they were perfect in every way but they just were not good value. They did not fit the fundamental principle that is embodied in the name of our company. As time passed and the markets fluctuated, we were able to include most (but not all) of them to our list of recommended stocks. This adherence to the principles of value investing proved to be a boon for our members and significantly enhanced their returns. Note that these were the same companies that we had already identified but simply held off on just because we were not convinced with the value they offered.

An important part of what Value Research Stock Advisor delivers to you is not just the list of stocks in our main list of recommendations and our 'Best Buys Now' set, but also a continuous eye on basic principles like value investing. An individual investor may get excited about a stock and forget the principles for a while, but we won't.

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