Value investing, how practicable can it be?

Warren Buffett, a renowned investor, is almost the icon of value investing. There are many investors who claim they are the fans of value investing. With the success of Buffett's investing performance, it seems there is a halo on those people when they claim they are practicing value investing. There are many bloggers in the local community claiming they are big fans of value investing as well. I buy most of the ideas of value investing but I cannot say I am one of them because I hold a couple of disagreement toward the concept of value investing.

Value investing, by the term per se, puts it very clear that investment on a particular stock should be made only when the stock price is at best below its intrinsic value. Therefore understanding the value of a stock is most fundamental of this investing. In other words, without the knowledge of the value of stocks it is only empty words when one says he/she is practicing value investing. The point is that, however, buying stocks below their value is a very good concept, determination on their value is another story though.

There are many ways of valuation out there and some of them are more applicable for some industries. This is fine as long as investors can pick the most appropriate valuation tools for a particular stock. However, except those very straight forward tools like P/E and P/B which are based on audited financial reports, the other tools like PEG, DCF, DDM....etc are rather artistic meaning that it appears to be very scientific but indeed many personal judgment or estimation is needed when doing so. A slight deviation on the judgment could lead to significant difference on the outcome, ie., a stock's intrinsic value which is the cornerstone of the methodology of value investing.

As I said I like most of the ideas of value investing such as margin of safety (literally the essence of value investing), buy when others in fear and stock selection based on fundamental analysis. They are not only conceptual in theory but also practicable in real life. People may see confusion and contradictory statements in this post because at one point I questioned the effectiveness of valuation methodologies which is the cornerstone of value investing but on the other hand I said its ideas are practicable. True is it appears to be. Indeed the concept of intrinsic value is the major disagreement that I have on value investing. Let me put it this way. When one says, after using the most appropriate valuation tools for a particular stock, the intrinsic value is $X based on the personal judgment on factors A, B & C in the calculation and the data in the past financial reports. However the $X could vary in a big extent along with the different estimation on the factors A, B & C yet a purchase decision is based on, $X, the outcome of the calculation. On the other hand, many of us know that financial reports are tricky business. Apart from those management boards deliberately cheating, presentation of figures and entries of items in the financial reports are largely a drama especially for those companies with declining performance. However, data in the financial reports also play a significant part in the valuation calculation.

The concept of value investing is to buy when price is below value or to sell when value fell below price. However as I said before the value of the $X is so difficult to be determined.  Peter may gets $10 while Jack and John may get $9 and $11 respectively when they use different evaluation tools and different personal judgments on the factors yet they all claim they are practicing value investing.  When the figure of the value per se is so unreliable so how sensible can the decision be?

The other disagreement I hold against value investing is that the latter advocates that unless there is change on the fundamentals of a good stock, the holding is for good. We have experienced a few global stock market crashes over the past decades or more often big plunge of individual stocks. In the bad times good stocks would also be suffered from irrational selling. It was a good timing to buy though but for those whom has already heavily invested might suffer from mental stress especially when stock price hit below the margin of safety. Despite such those value investors did not panic but would not feel great neither unless they have a deep pocket to buy more. Although timing the exact moment when the market would crash is only the privilege of God but indeed there were always traces of something has gone wrong before the crash. Isn't it better to dispose the holding when the market is about to plunge to avoid the mental stress, even if just a little bit? The best of all is that one can buy more with the same amount after the crash or enjoy a higher dividend yield.

Indeed one only needs to make a few right decisions throughout his life then it is good enough to have a decent living. Do nothing between decisions and doing nothing is doing something. Boring? As Soros puts it, good investing is boring.