What are the key messages?
HM says that the most important thing is to value things right and to act rationally when prices move.
“For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope.”
“buy at a price below intrinsic value, and sell at a higher price”
HM negates technical analysis by using random walk theory which states “a stock’s past price movements are of absolutely no help in predicting future movements”
HM negates momentum investing by explaining that “if something cannot go on forever, it will stop.”
The form of investing that remain… “we are left with two approaches, both driven by fundamentals: value investing and growth investing. In a nutshell, value investors aim to come up with a security’s current intrinsic value and buy when the price is lower, and growth investors try to find securities whose value will increase rapidly in the future.”
Here the comment from Joel Greenblatt is pertinent "This estimate of value includes an estimate for future growth in earnings or cash flow.”
“most analytical approaches would say that all those other characteristics—financial resources, management, factories, retail outlets, patents, human resources, brand names and growth potential— are valuable precisely because they can translate eventually into earnings and cash flow.”
“The quest in value investing is for cheapness.”
“The primary goal of value investors, then, is to quantify the company’s current value and buy its securities when they can do so cheaply.”
Growth investing’s goal is to “is to identify companies with bright futures.”
“The difference between the two principal schools of investing can be boiled down to this:
Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price.
Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to produce substantial appreciation.”
"the choice isn’t really between value and growth, but between value today and value tomorrow.”
“Growth investing represents a bet on company performance that may or may not materialize in the future, while value investing is based primarily on analysis of a company’s current worth.”
“Joel Greenblatt: One of Buffett’s major contributions has been to extend the idea of value beyond the simply “cheap.” Buffett looks for “good” businesses that are available at an attractive price. The concept of growth is incorporated into the calculation of value.”
“I think it can fairly be said that growth investing is about the future, whereas value investing emphasizes current-day considerations but can’t escape dealing with the future.”
Using historical example of “Nifty fifty investing” in the US market during the period of 1960’s where growth stocks which were considered “quality” were bought at very high valuations and that did not end well.
He warns against ones ability to “for the long-term persistence of growth—and for the ability to predict it accurately.”
“There’s no question about it: it’s harder to see the future than the present. Thus, the batting average for growth investors should be lower, but the payoff for doing it well might be higher.”
“In general, the upside potential for being right about growth is more dramatic, and the upside potential for being right about value is more consistent. Value is my approach. In my book, consistency trumps drama.”
Value investing is not easy and it “depends on an accurate estimate of value.”
“the next important thing is to hold it firmly.”
Because “being correct about something isn’t at all synonymous with being proved correct right away.”
“The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less.”
“Seth Klarman: Ideally, considerably less. The bigger the discount, the bigger your margin of safety.”
“An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse. This one statement shows how hard it is to get it all right.”
“Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out. Thus, there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third: you have to be right.”