Value investors distinguish themselves through the strict observance of a simple but powerful set of virtues, of which discipline, fortitude and craftsmanship shape the foundations.
They combine a contrarian mindset with a resolute focus on capital preservation. In that respect, they endeavor the taking of calculated risks upon a few selected occasions, oftentimes betting against the herd’s suffrages, and only after they identified a tangible margin of safety.
Assumed capable of absorbing unfortunate developments, and underscored by a steep divergence between the asset price and its intrinsic value, margins of safety take different shapes, for instance when fast-growing compounders sell for ridiculous multiples of their prudently assessed earning power; or, on other occasions, when strategic assets sell for a fraction of their reproduction value.
Of course, most acute mispricings occur when a particular industry undergoes deep distress. It is against such backdrops that enterprising investors can discover extraordinary businesses that have been tarred with the wrong brush, and thus unduly sold off.
At all times mindful of their own fallibility, value investors insist on never revolving too remote from their actual circle of competence, by nature limited, for they noticed well how whoever caught exalting himself will be promptly humbled.
However, if a qualified prospect surfaces, their keen business logic commands to pounce on it with vigor. In doing so, they typically seek to profit from urgent, distressed, uninformed or emotional sellers, thereby evidencing that the contender who is prudent and lies in wait for an opponent who is not stacks the odds in his favor.
Instructed by observation and experience (a.k.a mistakes) — see 31 Lessons Learnt (Sometimes Painfully) About Value Investing And The Money Management Business — I try to pursue mispriced gambles off the beaten path, sifting through financial carnage and out-of-favor securities.
Sometimes there are valid reasons to hope amidst a climate of total abdication, and this is when I like to act.