Is Value Investing Too Complicated?

One question you ask me in the coaching sessions and in free 30-minute meeting is: “Investing like Warren Buffet must be complicated; how do I know it’s not too complicated for me? “

I get it. Gaining avg. 20% percent per year for decades, would leave most people thinking that only Warren Buffett can figure this strategy out. However, the reality is different. 

 “Warren Buffett Invests according to four simple principles. One of the greatest strengths of Warren Buffett is his ability to make things simple. His principles are straightforward and easy to remember.”

Stig Brodersen, Value Investor, Author, and Business Owner

The four principles that Stig mentions in the quote above are shared by Warren Buffett and his business partner Charlie Munger in annual letters and in interviews over the years. They only invest in companies that they are capable of understanding, and once they are over that threshold, they want a business with a durable competitive advantage and to have management in place with integrity and talent. And finally, no matter how wonderful this company is, it is not worth an infinite price. So, when they buy the stock of this quality company, they buy it when the price of the stock is low compared to the company’s actual value.

 Warren Buffett is not using complicated calculus; obscure indicators and he is not following random people’s stock advice on Facebook. Neither should you.  

 Value investing is not about being lucky and it’s not like the efficient-market hypothesis that many people on social media still seem to swear by. The hypothesis claims that stocks are always priced at the correct market price because people that are trading the stock have all the necessary information and hence, they know what they should pay for the stock. As you might have noticed on Facebook, this is not true at all – many people that have bought stocks are asking “why”-questions: “why is the stock going up” or “why did the price of X company drop today”. 

Value investors are asking questions before buying the stock because we want to ensure it’s a wonderful business. But aren’t Buffett just lucky? A monkey tossing a coin would do just as good or better, right? If Buffett was the only one that did so well as a value investor, then this could’ve maybe been true. That he had special gifts, or it was pure luck. But in a speech and later printed article, Buffett explains that he is not the only one with this value investing strategy that has done extraordinarily well. The article is called “The Superinvestors of Graham-and-Doddsville” and the link here is a downloadable PDF-file of the article.

 The value investing ideas are simple and common sense but because of all the difficult investing lingo on trading platforms and in the finance news, some people might think that investing is complicated. But Charlie Munger speaks the truth with humor and tenacity: 

 

“That’s a very simple set of ideas, and the reason our idea has not spread faster is that they’re too simple! The professional classes can’t justify their existence if that’s all they have to say. If it’s so obvious and so simple, what would they have to do for the rest of the semester?”

Charlie Munger

To learn directly from Warren Buffett read this article about where I get my Buffett information: Free Resources to Learn from Warren Buffett