It’s Okay to be Different, As Long As..

Some time ago I met a friend, a senior investor, and we talked a little bit about one of the most famous stock investor in Indonesia: Mr. Lo Kheng Hong (LKH). According to this friend of mine, LKH deserves not to be called as 'Warren Buffett of Indonesia', because there are some fundamental differences (of way of investment) between LKH with Buffett. For example, LKH is not a long-term investor like Buffett. In 2002, LKH bought United Tractors (UNTR) at the price of Rp400 per share, but in only 3 years later he had it sold. While Buffett, since he bought the shares of Coca-Cola in 1989, until today, or more than 25 years later, these shares are still in the portfolio of Berkshire Hathaway.

The above opinion might be correct, but on the other hand the statement also brings me some thought: To be a successful stock investor, should we invest in exactly the same way with Warren Buffett, without any difference at all? But if so, then why LKH, which was said to invest in a different way with Warren Buffett, still made it to become rich like he is today?

The discussion reminds me with a seminar presented by Mr. Buffett at Columbia University in 1984, in commemoration of 50 years of the publication of the book titled 'The Intelligent Investor', the world's first book on value investing written by Ben Graham, the grand teacher of Warren Buffett and also all value investors around the world. In the seminar, Buffett explained the investment performance of some value investors, including himself, which were better than the average performance of the market, in this case the US stock market. For example Buffett Partnership, which is between 1957 to 1969 had successfully recorded an average gain of 29.5% per annum, or well above the rise in the Dow Jones of only 7.4% per year.

But the point is, in the seminar Buffett repeatedly said that although he and the other fund managers adopt the same idea of value investing, but each fund managers had their respective style of investments, that were different from each other. Previously, the following are some of the name of investors/fund managers of value investing as told by Buffett in the seminar:

1. Walter J. Schloss
2. Tom Knapp
3. Warren E. Buffett himself
4. Bill Ruane
5. Charles T. Munger (he later became the second person in Buffett’s Berkshire Hathaway)
6. Rick Guerin, and
7. Stan Perlmeter

Okay, then what are the differences of 'investment style' among the seven investors above? Here we go. Walter Schloss was the type of investor who likes diversification in which he held more than 100 different stocks, and this was in contrast with Charlie Munger who held less than 20 stocks in his portfolio. Then Tom Knapp, he preferred to be in control of the company (which he bought the shares), so he only invested in small companies where he could become the majority shareholder. And this is contrary to the investment way of Bill Ruane, who prefer to buy stocks of large companies. If Warren Buffett had a work-out method in his investment strategy, which through this method he bought stocks that the price movement is not affected by the ups and downs of the market, then the six other investors did not apply the same strategy. but interestingly the performance of one of them, namely Rick Guerin, was better than Buffett. Finally, Stan Perlmeter, which might be due to his background who never attended the school/college of finance and also never directly attending seminars/courses of Ben Graham (Mr. Stan had only met several times with Buffett), then he had never done a complicated analysis in selecting stocks, like how about the company's performance in the next year, how the trend of stock price, and so on. And this is different from Buffett who often analyze the company in depth, including calculating the intrinsic value of the stock, because Buffett had been an investment expert from the beginning, with a master's degree in the field of economic science from Columbia University.

But still, the investment performance of Mr. Stan also far better than the market average.

Some of the differences mentioned above are only partially. In practice, each value investors invest in their very own ways, which can be very different from each other. And that is why the composition of the portfolio of the seventh investors above also different. When one of the above investors buying a particular stock, then it does not mean that the six others will also buy the same stock. In fact, none of the seven investors that were trying to take a look into the other’s portfolio, because each investors has thair own choices.

Then how could the above value investors are all successful in beating the market? What was the similarity among them all? Well, in fact there is only one thing in common: Both Walter Schloss, Tom Knapp, until Stan Perlmeter, all of which only buy stocks that, after they count carefully, have a value that is significantly higher than the purchase price. In short, they all bought shares worth US$ 1 at the price of 40 cents or less. About the target price, how long the holding period, or how about the future prospects of the company, etc., in value investing there is absolutely no specific benchmark. If you read again the book 'The Intelligent Investor', then even though the book was so thick with more than 1,000 pages, but it only teach one thing, ie to buy shares at a price much lower than its value, and no other rules. If you read the other books about value investing, the essential point remains the same. A value investor who was relatively young but already rich (manages assets of over US$ 1 billion) named Seth A. Klarman, has also written a book entitled 'Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor'. And again the core of the book is also the same: Buy shares at a price lower than the intrinsic value of the company. Perhaps I should emphasize that, in his book, Mr. Klarman said that he had several different of investment strategies compared to Warren Buffett. For example, if Buffett prefers to buy shares then holding it forever, then Mr. Klarman is occasionally buy and sell his shares (stock trading). However, since the core strategy remains the same, ie the value investing, then Mr. Klarman is still made his own success.

So let us settle this: It’s okay, LKH is probably not like Warren Buffett, where they have a lot of differences both in terms of investment strategy and portfolio composition (LKH’ portfolio is clearly different compared to Berkshire Hathaway’s, because LKH invest in Indonesia while Berkshire in the US). But well, in fact LKH is still become a great investor, is not he? Because he is a true follower of the concept of margin of safety. You must also realize that, it is not possible for anyone to fully imitate the methods applied by Warren Buffet or LKH in investing, because each investor has a characteristic of their own, such as the length of investment experience, educational background, the amount of funds under management and so on, which is certainly different each others.

But if you already understand the essence of value investing itself, ie the margin of safety, then that's enough! You know, Lionel Messi and Cristiano Ronaldo have their own style in terms of scoring, where Messi focus on technique while Ronaldo focus on power. However, because both are very capable of doing that (scoring), then both are worth praised as the world's best football player, right? The point here is not how you score goals, but how many goals you can make. If you want to use some somersaults technique in kicking the ball and scoring goals, but if your shot is actually off the mark, then what’s the point of your ‘awesome’ technique??? In value investing, it is the same: Whether you apply diversification or just holding certain stocks, whether you select blue chip stocks or second liners, whether you hold the same stocks for years or prefer to trading it in a shorter period (just, do not be a day trader), then it all does not matter! Because the most important thing is, you have to buy the stock at a price that is significantly lower than its value. Why is that? Because only with  that method you can be called as a value investor, where you will have a great opportunity to beat the market, as has been successfully done by the senior value investors who already mentioned above.

Note: If you are a new visitor of thpartner.com, further details about the margin of safety, you can read it here. About how to calculate the value of shares, whether lower or higher than the price, it also have been regularly discussed on this website. Please find it in previous articles, it’s free!

Okay, but is that that simple? I only have to buy undervalue stocks then it’s done, just like that? Well, of course it is not that simple. Based on my experience, beyond the strict rule of margin of safety, then over the course of your investment, you will also find some other rules that can be customized with your own character as an investor. For example, I’m a type of cool investors who do not care about short-term/daily fluctuations. That's why some time ago I bought some commodity stocks even though they're down (because of the bad sentiment in the sector), as long as the stock has good fundamentals and the purchase price is not too expensive. But if you cannot be that cool, then you are advised to take blue chip stocks only. I, at certain times, am brave enough to put 100% of my money in stocks, but some other investors may prefer to keep some cash. I do not know whether this investment style will be maintained in the future, or, for one reason or another, have to be changed. But definitely, from the beginning onwards, I will always buy shares with good fundamentals at low prices.

And Warren Buffett is also the same. In the 60s, he liked stocks with PBV that less than 1 times, even though the company is somewhat chaotic. But today he prefers stocks of well-established companies, although the purchase price is no longer that cheap, as long as the purchase price is still lower than the intrinsic value of the company. In essence, Buffett on this day is very different from himself 40 years ago, although the two men (Buffett on this day, and Buffett in 1960) were both applying value investing. It’s okay to change some of your methods/strategies, or to be different compared to other investors, as long as you keep applying the magic formula: The margin of safety.

Okay, anyone want to add?