There are several common characteristics that often present themselves in stocks that are thought to be attractive to those who follow a value investing strategy. From high dividend yields to low price-to-book values, here’s a list if you are new to the concept of value investing.
Charlie Munger, the Vice Chairman of Berkshire Hathaway, former hedge fund manager, and billionaire value investor, was instrumental in changing Warren Buffett’s way of thinking about value investing. Charlie insisted that the investor would be better served by focusing on better quality businesses, even if the price were higher, because those businesses could be held for decades, continually churning out cash and profits for the owners. In fact, it was this influence that resulted in Berkshire Hathaway shifting from acquiring undervalued “cigar butt” companies such the textile mills for which the firm was named to high-quality companies such as Coca-Cola.
In 1950, William Ruane, or Bill Ruane as he was known, took a course on value investing taught by Benjamin Graham and David Dodd at Columbia University despite having graduated from Harvard Business School. One of his classmates was Warren Buffett, with whom he formed a friendship. Years later, when Buffett dissolved his investment partnership, he recommended that any partners still interested in value investing put their money with Ruane, who had launched his own firm, Ruane, Cunniff. The flagship value investing vehicle of the new firm was the Sequoia Fund, an open-ended mutual fund. Over the next 38 years, the Sequoia fund outperformed the S&P 500 by compounding at 15% per annum versus 13% for the broader index.
Walter Schloss, a legendary value investor who learned directly from Benjamin Graham, the father of value investing, never graduated from college and was hired as a runner on Wall Street in 1934, at the age of 18. Schloss enrolled in the New York Stock Exchange Institute, where he took courses from Benjamin Graham on how to value businesses, find value stocks, and manage money. Using the lessons he learned there, Schloss launched his own value investing fund in 1955, with a starting balance of $100,000, eventually growing to manage money for as many as 92 investors. For more than 50 years, he earned a 15.3% compounded annual rate of return, turning a $10,000 initial investment into $12,344,268, far outstripping the 10% return offered by the S&P 500 during the same period, which would have resulted in only $1,173,909.
In addition to penning several of the most important value investing books in history, Benjamin Graham, the father of value investing, was one of the two partners in the Graham Newman Corporation, the investment fund through which he put money to work. It was at this firm that Warren Buffett worked early in his career, learning from the master. As he amassed an astounding investing record, Graham divided his portfolio into several categories, or “operations”. These served value investing students well for more than seventy years and some still have value today.
How Investors Who Practiced Dollar Cost Averaging Were Richer Within Only 2 Years of the Credit Crisis Meltdown
Citing data provided by Vanguard, one of the premier mutual fund and 401(k) providers in the world, The New York Times recently reported that 60 percent of 401(k) accounts now have more money in them than they did before the stock market crash and worst recession since the Great Depression began two years ago.