Tuesday, September 4, 2012

Chan, The Value Investors

Ronald W. Chan introduces an interesting cast of characters, many of whom may not be familiar to readers. In The Value Investors: Lessons from the World’s Top Fund Managers (Wiley, 2012) we meet Walter Schloss, Irving Kahn, Thomas Kahn, William Browne, Jean-Marie Eveillard, Francisco García Paramés, Anthony Nutt, Mark Mobius, Teng Ngiek Lian, Shuhei Abe, V-Nee Yeh, and Cheah Cheng Hye.

Irving Kahn, age 106, has the distinction of being the oldest living active investment professional. Both he and Walter Schloss, who died this year at the age of 95, were students and later employees of Benjamin Graham, so they have impressive value investing pedigrees. Their first jobs were with Wall Street firms; eventually they founded their own highly successful businesses.

I mention the job history of these two men because I was struck by how relatively late in life (of course, not by Kahn standards) many of the value fund managers interviewed in this book found their true calling. Mark Mobius, for instance, of the Templeton Emerging Markets Group fame, started his career as a business consultant (to be more precise, a consulting research coordinator) in Tokyo, studying consumer behavior in the region, and later founded his own research-oriented business consulting firm. Cheah Cheng Hye, co-founder of Value Partners, the largest asset management company in Asia, worked in journalism for eighteen years before he entered the financial world as a stock analyst.

Other future value fund managers started off in finance but faced a different kind of hurdle. They were hired by firms who were devoted to growth investing. They felt uncomfortable in their jobs, though not necessarily understanding why. It took them some time to realize that they were, for whatever psychological/intellectual reasons, at heart and in mind value investors.

Value investing is in many ways an intellectual no-brainer. It’s smart bargain shopping. You buy a lot of pasta at 50% off because the supermarket messed up its inventory but avoid the strawberries that are on sale because they’re half rotten. Simple enough. On the other hand, value investing is extraordinarily difficult emotionally. You buy a stock that you think is undervalued only to see it become even more undervalued (and that’s if your analysis is correct). You may buy more if you’re self-confident, but you have no external validation. The market is telling you that you got it wrong. And, yes, the market is often right.

The value investors that Chan profiles, all of whom have handily beat their benchmarks, are not a particularly stressed lot. In fact, many of them explain what investing techniques they use (in some cases merely diversification) to be able to sleep soundly at night and avoid stress. I suspect, however, that the real explanation lies not so much in methodology as in personality. It takes a special kind of person to take the inevitable lumps (such as not participating in the dot-com boom) as well as to enjoy the long-term, often slow-grind upside of being a talented value investor.

Chan’s book is a good read. Value investors may make some new international friends. Struggling individual investors may find a style that resonates. And frustrated, antsy twenty somethings may come to realize that life doesn’t end at thirty.

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