Over the past decade, I've spent hundreds, possibly thousands of hours studying, researching and writing about the greatest investors of all time.
A lot of my time has been spent researching the so-called Superinvestors of Graham and Doddsville, a reference to Warren Buffett (Trades, Portfolio)'s famous essay in which he extolled the virtues of value investing at a time when the rest of the market was transfixed with the efficient market theory. This includes Buffett and his right-hand man at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Charlie Munger (Trades, Portfolio).
These aren't the only value investors I've written about over the past decade. Other investors who've featured in my articles regularly include Seth Klarman (Trades, Portfolio), Mohnish Pabrai (Trades, Portfolio), Irving Kahan and Walter Schloss.
The one thing that links all of these investors is the fact that they invest with a value mentality. They are all looking to buy stocks that are trading at a discount to their conservative estimate of intrinsic value.
In some respects, that's where the connection stops. Even though all of these investors are looking for value, they approach the market from different perspectives. Munger, for example, will only buy a stock when he is convinced that it is the best that it can be. However, Klarman is looking for assets that might not be the highest quality, but which have a knowable payment date. This means he is continually looking for new investments (something Munger wants to avoid), but it helps when calculating the value to ensure there's always a high turnover in the portfolio, producing cash for new opportunities. Pabrai, on the other hand, is looking for deeply undervalued stocks. He follows an approach that's more like Ben Graham's than Munger's, even though the latter is one of Pabrai's mentors.
What this shows is that there's no one set strategy for success in value investing. All of these legendary value investors have focused on the core principle of value and built their own strategy around this idea.
However, by focusing on these successful investors alone, we're missing a big part of the investment universe. For every one Klarman or Buffett, there are thousands of failing investors.
These are not just hobby day traders who don't know what they're doing. Many professional hedge funds lag the market over the long term, despite all the time and effort they devote to finding stocks.
To be a successful investor, you need to acknowledge your mistakes, find what went wrong, learn from it and move on. The same is true when studying businesses. We can learn a lot from a successful business, but we can learn even more from business failures. It's easy to see what went wrong in these cases.
With that in mind, it seems to be a mistake to concentrate solely on the successes of investors like Buffett, Munger, Kahn and Klarman. These are very successful, but we can only learn so much from their success. They've made fortunes buying cheap stocks. The question is, how do you find cheap stocks? Many value investors have lost fortunes buying stocks they thought were cheap, only to find themselves owning value traps.
Put simply, we need to make sure survivorship bias does not influence our decision process as we focus on these highly successful investors and ignore the rest. It is just as important to understand why other investors didn't succeed in the market as it is to understand why the likes of Buffett and Munger have succeeded. After all, on some occasions, these two legendary investors have risked everything.
Luckily, on the occasions when Buffett and Munger borrowed huge amounts to invest in stocks in the early parts of their careers, the trades went well. That hasn't been the case for thousands of other investors. Luck has a significant role to play in success as well.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett on His Lack of Insight into Real Estate
- Charlie Munger: Sometimes It's Better to Raise Prices
- Searching for Advice in a Crisis: Lessons From Seth Klarman​
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