Value Investing - of Values and Prices

I was once a religious follower of the church of value investing, but I broke away from the faith. The very fact that I call it a religion was reason enough for me to leave. 

Every investor associates the term value investing with something different. Even with those who call themselves value investors, the definition gap widens. That is why I now only refer to myself as an investor. 

The moral principles which matter most to me are the fundamental company data and the price I pay for the stock. Some people will look at me in surprise and ask, “Isn't that value investing?” Yes, it is, but without the religious aspect of following any rules to the letter.

Loss of regulations

As a proper value investor, one cultivates the writings of the founder of religion. The father of fundamental securities analysis, which is considered the basis for value investing, is Benjamin Graham and one of his disciples is none other than the great US investor Warren Buffett. 

Buffett's investment approach moved away from Graham's teachings over the years - and that was a good thing. He realized that business value does not depend solely on the factors Graham held up in his teachings. Buffett's winning insight was the importance of quality related to a business model, which plays a big role in valuation. Without this “spiritual” insight, no one would know who Warren Buffett is today. 

Pay the price – get the value

I like the question Christoph Olbrich often asks during presentations, “Would we also buy and hold the entire company?” Christoph is not only a board member of Gutmann KAG and head of the equity investment team, he is above all a passionate company analyst and equity investor (so we certainly never run out of things to talk about). What is he trying to say?

Warren Buffett kept saying he did not care if the stock market closed for years:

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

He makes a clear distinction between the value of the company and the price paid for it on the stock market. Christoph does the same. It does not matter whether he would buy a single share or the entire company for our customers at the identical price, of course with the exception that the total amount would be different. However, economically there would be no difference. Because you pay the price, you get the value. 

No signal, no stress

The stock market signals us every second where it thinks the value of a company is. Depending on the economic and geopolitical situation, the price can therefore quickly change dramatically. However, the value of the company itself is far more stable. 

If we take the company off the stock exchange in its entirety, this signal will no longer exist. I dare say it would be a blessing for the owners. We would still be able to value the company, follow its development and, as the controlling owner, have free cash flow at our disposal. We could use it to reduce debt, make acquisitions or pay dividends. At the same time, we would no longer be watching a flickering share price on the screen every day. 

Our clearly defined goal

When we, at Gutmann, seek out, review and buy outstanding business models, we think like Ben Graham (from his book The Intelligent Investor): 

“Investment is most intelligent when it is most businesslike.”

Next time you meet a colleague from the equities team, feel free to go in depth with them about businesslike investing and learn more about the business models in your mandates.