“Value investing does not appeal to the masses. If it did, you would never be able to buy a bargain,” he said in a presentation at Talks at Google.
“The secret to understanding value investing is to figure out what a business is worth, and then basically buy that business at a ‘wholesale’ or discounted price,” he says.
The value investing legend notes that stocks selling below their intrinsic values — bargain stocks — are usually found only during times of great uncertainty, and investors who can spot these stocks get rewarded once the market uncertainty subsides.
“Because of the fear surrounding uncertainty, many people are willing to sell stocks well below intrinsic values and oftentimes at bargain-basement prices. Typically, this happens because a company, an industry, or in some cases the market at large have a problem, which is usually temporary. Regardless, history has proven that investors who buy these bargains will frequently be rewarded when the uncertainty clears up,” he says.
How it all started
Arnold Van Den Berg is the Founder and CEO of Century Management and serves as Chairman of the CM Advisors Family of Funds Board of Trustees. With years of industry experience behind him, he still actively manages investment strategies at the firm.
Although Van Den Berg had no formal college education, his extensive market knowledge can be attributed to rigorous self-study and tremendous dedication.
He began his career by working for several financial services companies, but soon realised that he wanted to be in a business that he loved and at a place he believed in.
He was curious why during the stock market crash in the early 1970s some funds went down less than others. Eventually, he discovered that those funds were doing better because they focused on value investing. So in 1974, at the bottom of the market, having finally found an investment philosophy he could believe in, Van Den Berg started Century Management.
“I began to study many investment philosophies to try and gain a better understanding as to why so many managers went down so much for so long. What I discovered was that value managers, such as Benjamin Graham and particularly his disciples, protected their clients’ capital better and provided more consistent investment results than managers using other investment strategies. In addition, value investing resonated with me at a personal level as it was, and still is, consistent with how I live my personal life. At that time, I figured I was either going to make a lot of money or it was going to be the end of the world,” he says.
Van Den Berg says the investment business is not just about wealth management, but also life management as good investment advisers also get involved in health, wealth and lifestyle issues of their clients.
Talking about what investment philosophy his company believes in, Van Den Berg says he just tries to align his own personal investments with those of his clients, as it goes a long way towards removing conflict of interest and keeps everyone focused on doing what’s right for clients.
Capitalise on value gaps
Van Den Berg says the main focus of investors should be to recognise and capitalise on value gaps. Simply put, value gap is the difference between the price of a stock and the underlying value of the business.
The legendary investor says he believes that in the short run, market gyrations move stocks all over the place, but the underlying value of a business is what defines price over long run.
Value gaps happen in all industries and all sectors. They happen in small as well as large companies. They can occur one at a time, or all at once in major market downturns. It is for this reason that he always advises investors to not limit their investments to any market-cap size or sector of the market and encourages them to invest wherever they may find value, he says.
Never predict the market
Van Den Berg also warns investors against predicting or timing the market, and advises them to keep their focus on buying businesses at attractive prices.
“Most of the people who have accumulated the greatest wealth in this business have done so not by predicting the future, but by buying companies at such attractive prices, and thereby discounting the majority of the problems people fear. And, as usually happens in life and also when buying stocks, most of our fears are never realised. When investors own companies at prices that already reflect existing and future problems, as some of those problems never materialise, they likely find themselves with nice profits and thereby we should understand and appreciate that the greatest wealth is created in buying great values, and not in trying to predict the future,” says he.
The legendary investor also listed out some lessons that he has learnt during his investment journey:-
- Reading helps make better investments
It is important for investors to read about as many businesses as they can, and make sure to stay up to date on the ones that interest them from an investing standpoint. As investors read more and more about different businesses, they start getting a good sense of which industries have attractive business models and which ones have lousy business models and that can help them make better investment decisions.
- Self-discipline key contributor to success
Self-discipline is a key factor that contributes to an investor’s success in life and in investing. The most self-disciplined human beings are more likely to achieve their goals than others. Discipline in investing means always thinking about the worst case scenario as well as disciplined buying and selling and margin of safety. The worst-case scenario has a higher probability of happening than expected, and when it happens, it’s almost always worse than expected.
- Be careful of leveraged businesses
He says the number one lesson he has learnt during his entire investing career was to be very cautious while investing in leveraged businesses which often result in the most capital losses. “There are many times when investors would first buy a company and the balance sheet would look conservative. But the management team of the company then proceeds to get aggressive in issuing debt and the balance sheet deteriorates, often due to a large acquisition. Not being sensitive enough to the deteriorating financial situation of these companies can cause investors to lose money. In other words, investors should remain careful as the margin of safety that is there at the purchase date may evaporate after a major change in financial leverage,” he says.
It is essential for investors to follow good principles and morals in life as it makes them better equipped to take crucial business decisions. “Many times in business and in life you get into a situation requiring a serious decision. If you have the right philosophy, you’ll make the right decision. I was determined I would develop the principles that would guide my life so that, god forbid, if I ever got into a position where I had to make a crucial decision, I would choose to live up to the principles,” says he.
There are times when investors have to make tough decisions which may not necessarily be good for them but it may be the right thing to do. Van Den Berg encourages investors to trust their instincts and make the right decision as things never go wrong when correct decisions are taken. “When you must make a decision that’s not necessarily good for you but it’s the right thing to do, you’ll never go wrong doing the right thing. If you do the right thing, things will work out better even if you don’t think so at the time. That’s what guided me, and that’s what still motivates me today,” he says.
In order to become a successful investor, it is important for investors to be totally focused on the task. As the market is generally volatile in the short term, investors can face a lot of ups and downs in their investment journey and it is only absolute focus and resolve that can make their minds incredibly powerful to deal with extreme circumstances.
- Study the subconscious mind
To achieve this extreme level of focus, it is essential to do extensive study of the subconscious mind, which is the key to unlocking an individual’s potential. “You can gain in your life – whether it’s investing, in marriage, in family, in friends – by studying the subconscious mind. The subconscious mind does not think, it acts. It’s just like typing into a computer,” he says.
Sharing his own experience, he says that he has learnt three important lessons from his study of the subconscious mind which has helped him become a better investor.
1. Be totally honest with yourself
To get the most out of the subconscious mind it is important to remain totally honest with oneself. “You cannot deceive yourself. Because if you do, your life will get messed up and confused. But if you have a truth, if you always stick to the same principle and you work that principle repeatedly in your mind, your subconscious mind will program you into the type of person you want to be,” he says.
2. Have faith
Another important learning that Van Den Berg has had from studying the subconscious mind is that it is essential to have faith and the belief to achieve one’s goal and vision. “We find through studying the subconscious mind that belief is so powerful that it can influence your genes and DNA. Belief is the single most important thing in life,” he says.
3. Use repetition
There are many instances when investors due to some tough circumstances lose faith or confidence in their own abilities. In such cases, one should use repetition as a tool to get their confidence back. “Use repetition for whatever you want to do. Always repeat the things you want to become, the things you believe in. That’s what I did during my whole career. I programmed my subconscious that I would become successful and have a great family. I had everything mapped out. They all seemed impossible, but they all came true because of that realisation,” he says.
4. How to achieve true prosperity
To achieve true prosperity and inner happiness, it is important to have a life that has a sense of equanimity and control over circumstances. “If I had no money at all, I would still have abundance because I have a mindset of abundance and I feel that prosperity,” he says.
(Disclaimer: This article is based on a presentation of Arnold Van Den Berg at Talks @ Google and various other videos available on YouTube)
At ETMarkets, we go beyond Mumbai to bring you success stories of people who have made it big in stock investing from humble beginnings. Do check out these 15 inspiring stories of the Dons of Dalal Street.