Iconic Value Investors and Their Strategies
Value investing, a proven investment approach, has been championed by some of the most iconic investors in history.
In this short article, we’ll take a look some of the strategies of iconic value investors who have helped to refine this approach to investing, whilst also remaining faithful to its core principles. Many of them have been so successful that their ideas have made a lasting impact on the world of finance beyond just the value investing school of thought.
We will explore the enduring lessons and principles of these investors, examine their innovations and refinements to the value investing approach, and we’ll take a look at the particular forms of value investing strategies they’ve deployed in different market environments.
Benjamin Graham – The Father of Value Investing
Let’s start at the beginning, with Benjamin Graham. Often referred to as the father of value investing, Graham laid the groundwork for this investment philosophy. An economist and academic, as well as an active investor, his two books ‘Security Analysis’ and ‘The Intelligent Investor’ are not only staples, they’re also foundational – the first cohesive and explicit formulation of ideas about how stocks and securities that are undervalued can produce outsized returns.
His school of value investing, also known as the Graham school, emphasized buying stocks at a discount to their intrinsic value and focusing on a margin of safety. The enduring lessons from the dean of Wall Street include the importance of fundamental analysis and a long-term investment horizon. His value investing formula and principles have guided countless investors over the decades.
Although there are many later takes on this approach, in Graham’s work you’ll find all the key principles upon which value investing is built.
Warren Buffett – The Oracle of Omaha
Warren Buffett, a devoted follower of Benjamin Graham, is the most renowned value investor of our time.
His value investing strategy involves identifying high-quality companies with strong competitive advantages and holding them for the long haul. Buffett’s investment philosophy centres around buying undervalued stocks and businesses with sustainable moats. The concept of an economic moat is usually credited to him (from 1986 to 2012, Buffett had employed the term “moat” within Berkshire Hathaway’s shareholder letters more than 20 times), and is perhaps his greatest contribution to the development of value investing.
His focus on particular value investing metrics, such as return on equity and free cash flow, help him to evaluate potential investments, and he typically takes a very long-term perspective when considering new investments.
Charlie Munger – Buffett’s Trusted Partner
Charlie Munger, Warren Buffett’s trusted partner and Vice Chairman of Berkshire Hathaway, has been instrumental in shaping Buffett’s investment approach. Munger’s value investing strategy emphasizes rational decision-making, patience, and the importance of understanding a company’s competitive advantages. Although less well known by the general public, his insights have contributed enormously to the success of Berkshire Hathaway’s value investing style.
Seth Klarman – The Oracle of Boston
Seth Klarman, often referred to as the Oracle of Boston, is known for his disciplined and patient approach to value investing.
One of Klarman’s areas of specialization is distressed securities investing. Distressed securities refer to the debt or equity of companies that are in extreme financial distress or facing bankruptcy. These assets are often trading at very significant discounts to their intrinsic value due to the perceived higher risk associated with their financial condition.
Klarman’s approach to investing in distressed securities involves extensive research and analysis to identify opportunities where the market has overreacted to negative news or circumstances, leading to undervalued assets. He seeks out companies with sound underlying fundamentals that he believes have the potential for a turnaround or recovery.
In some senses, this is “value investing on steroids” because distressed securities often trade at far greater discounts than the kind of stocks other value investors focus on. Note, however, that Klarman is known for being cautious and risk-averse, and he often holds significant amounts of cash in his portfolio as a hedge against market volatility and uncertainty.
John Templeton – The Pioneer of Global Value Investing
John Templeton, a pioneer of global value investing, believed in seeking undervalued stocks across different markets worldwide.
His investment philosophy focused on identifying value in various regions and industries. Templeton’s approach to value investing underscores the potential benefits of diversification and a global perspective. With the computerisation of stock markets having made data from around the globe easier than ever to access, combined with electronic brokerage platforms offering a vast array of stocks from markets around the world, Templeton’s ideas have never been easier to capitalise upon.
Bill Miller – The Contrarian Value Investor
Bill Miller gained fame for outperforming the S&P 500 for 15 consecutive years as the manager of the Legg Mason Value Trust fund. His value investing strategy involves contrarian thinking, leading him to invest in companies with depressed stock prices but strong growth prospects. Miller’s approach showcases the potential rewards of challenging prevailing market sentiment.
Joel Greenblatt – The Creator of “Magic Formula” Investing
Joel Greenblatt is known for his “Magic Formula” investing approach, which combines value and quality factors to identify attractive investment opportunities. His strategy involves ranking stocks based on earnings yield and return on invested capital. Greenblatt’s investing approach highlights the potential of a systematic value-oriented system.
Mohnish Pabrai – The Indian Warren Buffett
Often referred to as the Indian Warren Buffett, Mohnish Pabrai follows a concentrated value investing approach. His strategy involves cloning the investment ideas of successful investors like Buffett and holding a small number of carefully selected stocks for the long term.
This concept of cloning the investments of other successful value investors, often referred to as “copycat investing” or “mirror investing,” involves replicating the investment strategies and positions of renowned investors who have demonstrated consistent success in the market.
By identifying and following the moves of these accomplished investors, Pabrai and others like him aim to benefit from their proven expertise and insight. Cloning can be particularly appealing to those who may not have the time, resources, or confidence to conduct in-depth research on their own.
However, it’s essential to approach cloning with caution, as blindly mimicking another investor’s portfolio without understanding the underlying rationale and risk tolerance can lead to suboptimal results. Successful cloning requires a thorough understanding of the chosen investor’s philosophy, a compatible risk profile, and a commitment to long-term discipline, recognizing that investment strategies and positions may evolve over time.
David Einhorn – The Short-Selling Value Investor
David Einhorn gained fame for his value investing approach, which includes both long and short positions. His investment philosophy involves identifying overvalued stocks and shorting them while holding undervalued positions for the long term.
This isn’t something that you’ll really find us discussing much elsewhere on this website, as we consider it a more advanced approach better suited to funds and professional money managers overseeing large portfolios. It can, of course, be a very profitable approach, as Einhorn’s track record demonstrates. Perhaps the main benefit of shorting though is that it can reduce overall volatility in a portfolio, and help to minimise losses for long positions during bear markets. Unless you’re already an experience investor, I suggest you consider some of the other simpler risk management strategies that we’ve covered in our other articles here before you consider short-selling.
Common Themes and Principles Among Iconic Value Investors
Despite their diverse backgrounds and approaches, iconic value investors share common themes and principles. These include a focus on fundamental analysis, a long-term perspective, the importance of patience, and a willingness to go against the crowd when justified by solid research. Their innovations and unique approaches each have their own pros and cons.
By adopting some of the methods used by these legends of investing, and recognizing their common themes and principles, you will avoid many of the challenges and pitfalls of value investing, and equip yourself with a strategical approach to investing that has been proven over many decades through many market environments.
The strategies of iconic value investors have left an indelible mark on the world of finance. From Benjamin Graham’s enduring lessons to Warren Buffett’s timeless value investing metrics, these investors have demonstrated the effectiveness of value investing in generating wealth over the long term.