Welcome to Value Investing: Finding Your Style
For those people who have not heard of Fast Money, it is a show that brings 5 of Wall Street’s “top” traders and summarizes the day’s action and how to trade the next day. Full of charts,options and interviews with million dollar CEO’s, the show is pretty entertaining. No value investor would touch some of their stock picks with a 10 foot pole. Let’s be honest, it’s going to take a lot of convincing to get any value investor to buy Potash (POT) or Monsanto (MON).
But today was different. The Fast Money crew did a show on “Finding your style”, something that every investor has to go through at one point. Basically, each trader presented different ways or styles that one could make money in the market. Each trader presented what works for them. For example, Guy Adami relies on trading volume and market sentiment (whatever that means).
In a perfect world, it would be great to invest like Warren Buffett. Truth is, Warren Buffett is truly a unique individual that somehow finds a way to be a couple of steps in front of everybody. Although one can buy what Warren Buffett buys, there are drawbacks. In one quarter, Target (TGT) appeared as one of his holdings. In the next quarter, it was reduced. Even Warren Buffett had to find his style. Before becoming a value investor, Buffett tried everything, including charting. It wasn’t until he read The Intelligent Investor that “it clicked”.
Personally, I tried many different value investing styles before settling on my current style. The first contrarian investing book I read was David Dreman’s Contrarian Investment Strategies: The Next Generation. After I read that book, I bought all his other books. Next, I bought Pat Dorsey’s book and tried the almighty discounted cash flow model (DCF). While I read these books, I used Investopedia’s simulator to track my performance. I did OK but I knew I could do better. Instead of trying to be like Dreman, I started to be like Alex Garcia. The whole contrarian is in me, but I sprinkled in Greenblatt’s Magic Formula and Professor Greenwald’s emphasis on assets.
You will see this in the value investing community, where no one value investor is identical to another. Bill Miller invests in companies Warren Buffett would never touch (i.e. Amazon). Warren Buffett invests in companies Walter Schloss would never touch. Of course, I am assuming Walter would never touch a company like American Express. Why? Amex does not have the hard assets Walter Schloss likes.
How does one find an investing style?
In one word, experiment. Sites like investopedia.com and marketocracy.com allow one to experiment as much as possible without risking any money.
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- February 18th
Good post. I’m a newbie who is also trying to find my strengths and weaknesses. You touch on a very important point that a lot of people overlook. I see many people trying to CLONE someone like Warren Buffett, rather than trying to find some attributes that fit them.
For instance, very few will ever be like Buffett, not just because of analytical or intellectual differences but, because hardly anyone is as patient as he is. Buffett did not make any major investments for several years in the early 80’s and early 70’s, if I recall correctly. I don’t know how many have the patience to do that.
Conversely, you have superinvestors like Martin Whitman who have such a good skill in analyzing balance sheets, that I wonder how many will ever reach anything like his balance sheet skills.
Noone will be like Warren Buffett. As stated in the article, he is wired to always be a step in front of everyone else. While everyone is busy analyzing rails… he has moved on. His picture had already been painted.