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Jack Schwager, the author of Market Wizards series, when answering a question on whether value investing works, turned to the wisdom of Joel Greenblatt, one of the foremost experts on the subject.
Schwager quoted this from his interview with Greenblatt –
Value investing doesn’t always work. The market doesn’t always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn’t work. And that is a very good thing.
The fact that the value approach doesn’t work over periods of time is precisely the reason why it continues to work over the long term.
You see, the biggest problems in the long-term practice of value investing are that –
- It flies in the face of anything taught in business schools where most influencers/experts come from, and
- It requires a painful degree of patience because it is only over long periods of time that the market eventually gravitates toward value.
As Schwager quoted Greenblatt –
It is very difficult to follow a value approach unless you have sufficient confidence in it. In my books and in my classes, I spend a lot of time trying to get people to understand that in aggregate we are buying above-average companies at below-average prices. If that approach makes sense to you, then you will have the confidence to stick with the strategy over the long-term, even when it’s not working. You will give it a chance to work. But the only way you will stick with something that is not working is by understanding what you are doing.
This is a very important statement Greenblatt makes, that the only way you will stick with something that is not working (temporarily) is by understanding what you are doing.
Sadly, most people participating in the stock market don’t really understand what they are doing. This is especially when making money gets quick and easy, and they are doing great at it.
Like Aesop’s wolf in sheep’s clothing, they play a role contrary to their real character, which often leads them to the slaughterhouse.
However, the lack of patience of such people to invest with a long-term horizon creates the opportunity for the few committed to long-term holding periods.
In the battle between impatience and patience, the latter wins.
All in all, Greenblatt’s simple idea is so insightful. Value investing works (over the long term) because it sometimes does not work (in the short term).
With over eighteen years of practicing value investing with sincerity and with decent success (purely based on personal standards of success), and seeing a lot of my fellow investors drop out due to their disbelief in its continuity and now ruing their decisions, I can vouch for this powerful idea.
Dear Vishal,
Enjoy reading ( and re-reading ) your articles, keeps up the motivation and faith in the long term. Personally I am on a 10 year experiment of investing in a select basket of stocks, no matter what happens and see the result. In the second year now and yes very much in the red, but having ( keeping) faith in the long term
Thanks again,
Ravi
Thank you for the Appropriate post at the very appropriate time. In tamil there is a great saying,” Poruththaar Bhoomi Aazhwaar”, means,”The One Who Waits With Patience, Will Rule The World”.
Thanks for well thought article when it is needed the most. This reminds me of story we all have grown up with of “Tortoise (Value investor) and Rabbit (trader). Slow and steady wins the race.
Truth is always simple and you are spot on in your summarisation. There is always a time lag for the market to react. If you are an early thinker, you need to have patience till the market movements fully pans out. As you rightly said, it is the impatience of others which will create opportunities for the value investor.
It is difficult at best to keep the Value course! Dividends & price are its rewards, which is the golden fleece of my investment returns over fifteen years.
Haven’t been investing methodically long enough to confirm this. Will let you know in 5-10 years.
Dear Vishal,
Your articles are very meaningful and provide value to the point. This article has come at the time when I am reading Greenblatts book “the little book that still beats the market”. Finding this book very good explaining the methods of value investing but only patient investors can prove it right as value investing.
Regards
Deepak
I am not yet investor, but would like to join ur Path, still reading and preparing myself for Passive Earning..Wish me best of good strategy n Value investing(Offcourse Good luck too)..
I have one ques :
Thanks a lots for sharing lots of knowledge in very simple and short words
Thanks once again Sir 🙏
Very nice post and thanks for writing this for us.
Really all things are true which is written by you.