Patience, a tolerance for pain, and a margin of safety. These three qualities brought Richard Oldfield success in value investing.
Oldfield, Chairman of Oldfield Partners LLP in London, U.K., shared the focus behind his investment strategy with students in Professor George Athanassakos’ value investing class.
In particular, he pointed out the old idiom, “Patience is a virtue,” couldn’t be truer in value investing.
“Not only does it mean you should wait and be very long term, but patience is also synonymous with suffering, as in the passion of Christ, and suffering is something that value investors get used to,” he said.
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Short-term pain; long-term gain
Oldfield discussed the experiences of three fund managers whose patience paid off:
Longleaf Partners Funds’ Southeastern Asset Management – Although Longleaf outperformed the market from 1991-94, it later had some disastrous years in the late ’90s when it trailed behind Standard & Poor's (S&P) 500 index by a wide margin. Another golden era followed in the early 2000s. Oldfield Partners invested in Longleaf in 1999, during the down period when its stock was cheap, and was rewarded when the stock later rose in value.
“They certainly didn’t offer a track record at that time, but the value investing approach was very strongly rewarded,” he said.
Phoenix Asset Management – Like Longleaf, Phoenix started out as a success, followed by a five-year period of underperformance where it trailed the S&P. But it, too, picked up and has since outperformed the index.
“The figures were very difficult for clients to cope with and you need a really good understanding between clients and managers to tolerate this,” he said.
Peter Cundill’s Cundill Value Fund (now Mackenzie Cundill Value Fund Series) – Canadian value investor Peter Cundill was known for brave investing, but was an underperformer from 1975-98. But from 1998 on he had an impressive record. When he retired in 2006, he had one of the best track records of Canadian investment managers. The fund then continued to flourish under his colleagues.
“This really encapsulates how important long-term patience is and how you can wait a very long time for value to come through and for your approach to be vindicated,” said Oldfield.
Occupational hazards come with the territory
But while waiting for the payback, Oldfield warned value investors typically must endure painful periods when their investments might decline. They might even need to endure value traps, when the stock they buy appears to be cheap and then only gets cheaper and never rises in value.
“Value traps are the occupational hazard of the value investor,” he said. “If they didn’t exist then the whole proposition wouldn’t work because it would be too simple.”
And because value traps and other hazards exist, value investors need to always have a margin of safety.
“There should always be room in an assessment of a company for things to go wrong,” he said.
Here are some other themes discussed:
Forecasting
“We are not great believers in forecasting. There are so many examples of quite disastrous results,” he said. “We do, on the other hand, spend a lot of time being skeptical of other people’s forecasts and some of our best returns we’ve had have come from that skepticism.”
Analysis paralysis
“This is when you ask 27 more questions or you go out and look at seven more competitors and that makes it even harder to come to a decision,” he said. “You shouldn’t succumb to analysis paralysis.”
Value investors are born, not made
“My belief is you can learn how to do value investing, but whether you are a value investor is something that is pretty much innate,” he said. “It’s in the blood either to be the type who looks first at valuations and who is interested in cheap stocks, or the lover of glamour who is interested in growth and in lines which grow to the sky. I think that is the basic divide between most investors.”
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