A drop of wisdom about value investing

Every year, investors who hang on to Warren Buffett's words have two occasions to look forward to. One is the release of Buffett's annual letter to the shareholders of Berkshire Hathaway, and the other is the annual shareholders' meet of the company. The letter comes in February, and this year's edition duly arrived on the 27th of last month. In this letter, which is generally 10-15 pages long, along with routine shareholder stuff, Buffett lays down some simple principles - often illustrated by some anecdotes - that all investors should keep in mind while investing.

Just like the letter, the Berkshire meetings are also a sharp contrast to other companies. They are always interesting and fascinating, not just to those who have invested in the company but also to practically every investor in the world. At the meeting, after the legalities of a shareholder's meet are concluded, Buffett and his partner Charlie Munger answer questions from shareholders for several hours. Buffett and Munger, whose combined age is now 187, answer a set of questions selected by a panel of well-known external experts and are not known beforehand to Buffett and Munger. They generally (but not always) concern some aspect of Berkshire's businesses.

Since Berkshire is a diverse conglomerate, and the two are not - unlike most company managements - scared of awkward questions, the two old men, in their grandfatherly way, frequently take the answers out to general principles of business, investing and life itself. This makes the Q&A a fascinating teaching session for just about everyone. Last year's meeting was obviously online only, and since Munger does not live in Omaha, the city where Berkshire is headquartered, he wasn't there. Munger's absence meant that like so many other things, COVID had made the meeting a lot less interesting.

However, on February 24th this year, Munger fans had a taste of what they had missed - the online shareholder's meet of a rather obscure company called Daily Journal. This is a newspaper company that has transitioned to being - of all things - a software company and Munger is its chairman. The Q&A was just as fascinating as that at the Berkshire event but obviously a lot shorter since Daily Journal is a much smaller and simpler business than Berkshire Hathaway.

One of the most interesting answers that Munger gave was about the concept of value investing. He said, "Value investing will never go out of style. Because value investing-the way I conceive it-is always wanting to get more value than you pay for when you buy a stock. That approach will never go out of style. Some people think that value investing is you chase companies that have a lot of cash and they're in a lousy business or something. I don't define that as value investing. I think all good investing is value investing. It's just that some people look for values in strong companies and some look for values in weak companies. Every value investor tries to get more value than he pays for."

The last sentence there sums it up beautifully. It's just the simple concept of just buying something for less than its intrinsic worth. However, that shifts the onus to the investor's skill from some formula that involves the company's financial ratios. It's a judgement, and can't be done at scale.

As Munger goes on to explain in the answer, "... in wealth management, a lot of people think that if they have a hundred stocks they're investing more professionally than they are if they have four or five. I regard this as insanity. Absolute insanity. I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they're way above average. ... I call it deworsification ... I'm way more comfortable owning two or three stocks which I think I know something about and where I think I have an advantage."

Most good investors know very well that there is such a thing as too much diversification, although Munger's reason is somewhat unusual. Too much diversification can be bad because our brains are just not big enough to evaluate so many investments - even for one of the world's best investors!