Value, not momentum

by Chetan Parikh – CIO

In a brilliant book “Hedge Hogging”, the author, Barton Biggs, writes about buying on the basis of value and not momentum.

“Investing on the basis of value, not price momentum, is our religion.

Warren Buffett articulated this philosophy best with his manic-partner analogy. At a talk I attended, in one of his musings, he expressed it something like this:

Suppose you are an equal partner in a good business with a manic-depressive partner named Mr. Market. From time to time, Mr. Market will only see the favorable factors affecting your business and will then become so euphoric about the prospects of the business that he will come to you and offer to buy your half at a ridiculously high price. So, of course, you should sell it to him.

At other times, seeing only trouble ahead for your firm, he becomes deeply and in his despair offers to sell you his share at an outrageous discount to its intrinsic value. Then, you should buy it from him.

Buffett went on to say that it was irrational, the height of foolishness, to sell an asset you were confident was undervalued just because its price was falling. In other words, Mr. Market can be an old fool (or maybe a young fool) who, from time to time, becomes hysterical. Sometimes, in his madness, he sees ghosts. At others, he imagines the good fairy touching him with her long golden fingers.

You are perfectly free to ignore Mr. Market or to take advantage of him, but it will be disastrous if you fall under his influence. Suppose the price you could sell your home at was quoted every day. For several months the quotation steadily declined. Would you then sell your home, the home you were comfortable in and satisfied with, just because its price was declining? Of course not! In this sense, an attractive investment is similar to a home you are happy to inhabit.

Mr. Buffett’s value philosophizing sounds eminently sensible, but it doesn’t work when you are trafficking in commodities and you have short-term-performance sensitive clients.”

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