Learning from investing mistakes: Lessons from the Ben Graham Centre’s 2015 Value Investing Conference

It is not easy being a value investor, but it can certainly pay off when the timing is right.

Two keynote speakers from the Ben Graham Centre’s 2015 Value Investing Conference in Toronto on April 15 shed light on what it takes to be a successful value investor and the opportunities it brings.

Both took a look at history to show why the value investing approach works. Here are some of their messages.

Russell Napier: Lessons from the history of financial markets

Napier, author and founder of the Electronic Research Interchange, a research and investing information company in London, U.K., and co-founder of the Library of Mistakes, a public book collection in Edinburgh, Scotland that chronicles financial errors throughout history, discussed one of the fundamental errors of investors in the past 150 years. He pointed out that investors typically associate technology breakthroughs with permanent low inflation. This can help to create bubbles where share prices rise and are overvalued.

“People spend far too much time looking at the demand and not enough at the supply. If you’re looking more at the supply, you’d come to the conclusion that these technological breakthroughs can not deliver permanently higher growth with permanently lower inflation,” he said. “That partially explains the high valuations today.”

He suggested what will eventually bring the markets down is for inflation to rise to four per cent or higher. This might prompt the U.S. Federal Reserve to hike rates, making stocks a less attractive option. Another possibility is that deflation might occur, which would again bring down the markets, as all prices in the economy drop.

Deflationary periods create opportunities for value investors to buy stocks at bargain prices.

“I think there is potentially a deflationary event coming. Equity prices will be coming down and you’ll get a cheap opportunity to buy,” he said.

Frank Martin: Worry top-down and invest bottom-up 

Martin, Founder and Chief Investment Officer of Martin Capital Management LLC, a U.S.-based investment advisor company, stressed the importance of bottom-up investing, an approach that places less emphasis on the significance of economic and market cycles. This is in stark contrast to top-down investing, which involves looking at the economy and forecasting which industry will generate the best returns.

Most investors do the latter. Martin cited seven periods in history dating back to 1900 to show that investors react predictably and try to forecast the future based on the current situation. He outlined how such reactions had an impact on the markets. 

In contrast, he stressed that value investors do not follow the herd in reacting predictably. Instead they focus on doing fundamental analysis of companies and investing in those that seem to have potential for long-term intrinsic value appreciation and a high margin of safety (the difference between the intrinsic value of a stock and its market price).

“The wise investor steps out of the moment and reflects on the three most important words in investing: margin of safety,” he said.

Doing so is not easy since it’s human nature to conform.

“In reality, only one in 100 has been able to stand up to the monolithic Mr. Market (a hypothetical investor devised by Ben Graham who is driven by panic, euphoria and apathy),” he said.

The conference also included panel sessions with value investing professionals and corporate executives who shared their personal advice and investing strategies.

Value Investor panel:
William Browne, Managing Director, Tweedy, Browne Company LLC; Francis Chou, President, Chou Associates Management Inc.; Richard Oldfield, Chairman, Oldfield Partners LLP; Ole Nielsen, Founder & Chief Investment Officer, Nielsen Capital Management; Guy Spier, Founder & Managing Partner, Aquamarine Capital.

Corporate Executive panel:
Fokion Karavias, Chief Executive Officer, Eurobank Ergasias; Mark Leonard, President and Chairman of the Board, Constellation Software Inc.; Evangelos Mytilineos, Chairman and Managing Director, MYTILINEOS Holdings S.A.; William C. Weldon, Former Chairman of the Board and CEO, Johnson & Johnson.

The annual Ben Graham Centre’s Value Investing Conference is the largest conference of its kind in Canada and aims to explain, discuss and debate the principles, practices and various applications of value investing from a global context.

Frank Martin, Founder and Chief Investment Officer of Martin Capital Management LLC, speaking at the Ben Graham Centre’s Value Investing Conference