The most successful style of investing...

yet very few people practice it.

"The secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it." – Warren Buffett, 1984

It has been another 25 years since Warren Buffett said this. But the statement still rings true. He is now even more famous than before. The number of books on him has multiplied and business channels now have divisions that track his activities on a daily basis. While Buffett is the most famous, there are others who are successful value investors in their own right and also receive ample media attention.

But if you looked around to see how professional money managers go about their business, you wouldn't find too much of value investing there. The logical question then is ‘Why not?’ We believe there are certain behavioral stumbling blocks that explain why there are very few value investors despite all the media coverage the discipline receives.

Knowledge doesn’t translate to action
Unfortunately, knowledge doesn't always translate to behavior. It is common knowledge that we should use helmets, buckle up our seat belts, avoid smoking, take medical insurance etc. but we don’t strictly follow them. It takes deliberate action on our part for us to form habits, mere knowledge is not enough. If we are not able to always do the right thing in such important matters, it is not surprising that we don't choose the best path when it comes to investing.

One size doesn’t fit all
The general tendency of investors is to find that magic formula - a method that applies to all situations. In fact, the one time everyone asks for stock tips is when there is market euphoria. The right answer during such times is – ‘don’t buy anything’. But that’s a difficult answer to digest. On the other hand, when markets are unduly pessimistic, there are value picks everywhere. Value investing often doesn’t offer picks when we are most interested. That makes it a hard discipline to follow.

Patience in the internet age?
A few months ago Bharti Airtel had come out with a campaign called the 'impatient ones'. That seems to be an apt description of most investors. The way we have evolved, we are hard wired for short term rewards. Short term thinking comes naturally to us. It takes training and mental conditioning for us to shake off the habit and reorient our investment horizons. Value investing requires long term time horizons because there is no guarantee that out of favour stocks that value investors prefer investing in, will suddenly come back in favour.

Standing out from the crowd is difficult
As explained above, the best value picks come exactly at the time when there is pessimism all around. As Buffett himself said, "The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.' Unfortunately, that means one has to do the exact opposite of what others are doing. Buy when others are desperately selling and vice versa. Since we are hard wired to stick to the crowd, it is inherently difficult for us to do the exact opposite.

To conclude, it is not the lack of intelligence or knowledge because of which there are so few value investors. The answer lies in our behavioral pitfalls. We need to master them in order to practice value investing.

25 Best Warren Buffett Quotes

On Investing

1. “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
2. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
3. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
4. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
5. “Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful”.”

On Success

1. “Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”
2. “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
3. “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”
4. “Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.
5. “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

On Helping Others

1. “If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”
2. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
3. “I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give virtually all of those claim checks to charity when my wife and I die.”
4. “It’s class warfare, my class is winning, but they shouldn’t be.”
5. “My family won’t receive huge amounts of my net worth. That doesn’t mean they’ll get nothing. My children have already received some money from me and Susie and will receive more. I still believe in the philosophy - FORTUNE quoted me saying this 20 years ago - that a very rich person should leave his kids enough to do anything but not enough to do nothing.”

On Life

1. “Chains of habit are too light to be felt until they are too heavy to be broken.”
2. “We enjoy the process far more than the proceeds.”
3. “You only find out who is swimming naked when the tide goes out.”
4. “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
5. “A public-opinion poll is no substitute for thought.”

Funny Ones

1. “A girl in a convertible is worth five in the phonebook.”
2. “When they open that envelope, the first instruction is to take my pulse again.”
3. “We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’”
4. “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
5. “In the insurance business, there is no statute of limitation on stupidity.”