The Business of Value Investing.pdf

64 The Business of Value Investing

The key to successful stock market investing is being able to stay

in the game for many years. Avoiding margin is a big step in avoid-

ing a complete wipeout. Buffett said it best when he remarked, “ If

you depend on borrowed money, you have to worry about what the

world thinks of you everyday. ”^4

Focus on Absolute Returns

Value investing focuses on analyzing businesses and committing

capital to those opportunities that are the most compelling. It

should come as no surprise then that the focus for value investors is

and should always be absolute returns.

An absolute return philosophy is one that has consistent prof-

itability as its key objective. You may be reading this wondering,

Don ’ t all investment advisors and investment managers desire to

consistently deliver profi table returns? While the clear answer is yes,

the goal of most investment professionals suggests no. This is not

because they don ’ t want to generate profi ts but instead because the

vast majority of the investment industry focuses on relative returns.

A relative return approach accepts the notion that markets are risky

in the short term but believes that, in the long term, investors will

benefi t from the general growth in the economy. As a result, the

relative return approach focuses its efforts on allocating capital

across various asset classes and industries. The ultimate effect is a

broad portfolio that comes very close to mirroring the general stock

market indexes. The vast diversifi cation of the relative portfolio will

greatly reduce volatility, which has the effect of creating returns that

broadly mimic those of the overall stock market. Relative return

investors accept these market - matching returns because the major-

ity of individuals will be reporting the same or similar returns. You

won ’ t lose your job if you deliver a negative 15 percent in a year

when the stock market declines by 12 percent. Economist John

Maynard Keynes said it best when he remarked, “ Worldly wisdom

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