is Value Investing?
- Water Street Advisers Form ADV Part 2 – Schedule F – Item:
Advisory Fees And Services 1 (d))
Value-investing is a method of investment selection popularized by
Benjamin Graham in The Intelligent Investor, a book first
published in 19491.
It is the strategy of buying an undervalued asset – a security
whose intrinsic value is below its price.
The signature of this
strategy is an investment portfolio that consistently operates at a
below-market risk – this signature being most prominent in the
riskiest market sectors. Graham described the key to establishing
this signature as coming from the “margin-of-safety” gained from
holding an undervalued portfolio – a resilience against the
pricing volatility normally found within a market that will
materialize from acquiring portfolio assets at a below-market price.
For providers of portfolio management services – investment professionals -- value-investing has never been a popular discipline. The research expense associated with the strategy can be prohibitive – involving the fundamental analysis of the financial information for individual securities issues. Also, the stability of the returns can be ruinous to their business – when markets turn frothy, their clients will likely leave to chase a bubble in securities prices.
In practice, value-investing has been an attractive strategy only for investors with an overriding requirement to control investment risk. For these investors, value-investing provides the opportunity to reap the higher returns normally available within the riskier investment sectors at a tolerable level of returns volatility, across the full cycle of market conditions.
It is also, by its nature, a buy-and-hold strategy. The investments selected for a Water Street portfolio will be held for a minimum of five years (“Investment Period”). This means that value-investing is also a “least-cost” strategy – once selected, the investments within the value-investing portfolio require little trading or “rebalancing” activity.
In light of these considerations, my business is limited to managing investment portfolios held by domestic property-casualty insurance companies.
Benjamin, The Intelligent Investor, Harper & Row, New
York, New York, 1949.