This blog post was largely inspired by deep value investor Tim Melvin from Marketfy. I strongly encourage you to check out Marketfy.com
I am a big believer in value investing. While I often combine both technical and fundamental analysis in some complex concoction, if I can find a good deal on a stock’s VALUE, I will snatch it up. If a stock is trading at a high multiple or way above the book value, I stay away.
The argument goes that if a company’s book value is more than the stock price, eventually the price will catch up. This holds that although the market may be inefficient in the short-term, it is efficient over the long-run. However, good luck finding these deals today. As of this writing, it is November 2014 and the S&P 500 is hitting new highs.
Patience is a virtue in investing – you must be willing to wait until these deals appear. You shouldn't try to time the market anyway, but with value investing, you don't have to! The fact that you're buying below market value creates a natural timing mechanism. All you have to do is sit back and wait until the stock’s intrinsic value is matched. Note: don’t stick with a predetermined price forever, because intrinsic value changes quarterly.
Because patience is profitable, you can become a much better investor by remembering this:
"Don't play just because the casino is open."
Tim had this rule in one of his videos and it hit me like a ton of bricks. I thought it was an effective and thoughtful way to phrase the discipline it takes to become a profitable investor. He points out that the average individual investor underperforms not only the market in general, but inflation too… that sucks! It's all because the individual investor trades in and out of stocks too often. Because the “casino” is open, they feel they must act.
There's no shame in holding off on investing. Remember that it only takes a few well-calculated investments to build a fortune. If you keep cash for sell-offs like in 2008, you easily make your money going in. If you had the discipline and grit to endure the sell-off and bought when the world was pessimistic, congratulations.
Remember, you don't have to make moves because everyone else is. Opportunities will present themselves if you wait. They'll be great companies with a valuation grounded in economic and business reality.
Then you'll be a very happy investor.