Patience: The Hard Part of Value Investing

I came across an excellent value investing related website from a fund manager in Canada. The website is called Value Investigator by Michael Irwin who runs the ABC Funds in Canada

They have a section where they provide commentary on some of their current ideas – Value Favorites. The Value Vault section contains old ideas that have been sold. The Value Library section contains some good articles and their commentary on value ideas. I found an excellent article in this list that talks about the toughest aspect of being a value investor – and that is being PATIENT.

I am taking the liberty quote some relevant parts here:

“Firstly, let me admit that the easy part of value investing is finding cheap stocks. We start off by diligently researching a company’s balance sheet, prospects, hidden assets, potential liabilities, and etcetera. As a second line of defense, we will also review a company’s technicals or stock price chart patterns to give us a trading perspective. Ultimately, if a stock cuts it, we attempt to buy our position. This process, in all candour, is the easy part of value investing. Now the hard part of value investing begins… and that is the patience of waiting it out until the general market (i.e. other investors) catches on to our new investment purchase. The realization of our ultimate price target, unfortunately, may take weeks, months or even years to play itself out.”

In all three cases, their market prices declined below our initial purchase price. At times it appeared that no one even cared about these fundamentally cheap stocks in spite of the fact that all three offered dividend yields of 1.5 to 2.5%. Moreover it was of little consolation to investors that these shares were trading at over 50% below their net asset or intrinsic value. We were questioned many times why these stocks traded so poorly and when (heaven forbid) might we throw in the towel and sell out. Clearly, patience and discipline became the hard part of value investing.

“In conclusion, we offer the following observations:

At the early stages of value purchases there is considerable frustration and investment agony until a particular stock’s value is recognized and its share price climbs.
Once recognized, the value stock rapidly runs up in price. This sudden appreciation and transformation from value to momentum share play will equally test a value investor’s resolve regarding the “when to sell” decision.

When all is said and done, I honestly believe that fundamental value investing, notwithstanding the time element, always wins out in the end.”

Read the entire article here

About Adib Motiwala

Portfolio Manager at Motiwala Capital LLC
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2 Responses to Patience: The Hard Part of Value Investing

  1. matt says:

    one issue I find with this strategy is that you are assuming the market will eventually discover the disparity between the price and the underlying value of the equity, thereby ultimately resulting in price appreciation.

    in many cases, the opportunity cost associated with waiting for this “discovery” is so high that even when you are right and the market finds out, you’ve lost too much money in the interim by missing other opportunities.

    I also find it interesting that many value investors think there is a strong correlation between popular metrics like P/E ratios/balance sheets and price action, even when there are virtually no studies or historical precedent supporting the connection. The theory seems kind of half-baked and unscientific, at least to me…like most cargo cults, the plane never seems to land for a lot of value investors.

  2. adibmoti says:


    thanks for the comments. Let me address them one by one.

    If the valuation work is done correctly and thesis plays out as expected, I would expect the disparity in price and value should correct. How long that takes? No one knows for sure. As Irwin said, it can take weeks, months or even a few years.

    Coming to your point about ‘opportunity cost’, I would much rather experience this than lose money. What is opportunity cost ? The chance that you can invest that same money in another investment that does better in the same amount of time. How do you know what the other investment is going to do and are you sure about it ? As long as one is rewarded over the course of the investment and in sufficient terms, that should be fine. Also, remember the concept of Margin of Safety is the key principle at work here. It ensures you only buy when you have a good margin of safety as you estimates, calculations, thesis could be off. Also when you buy with a sufficient margin, your returns tend to be better.

    Coming to your last comment about studies, check this paper from Tweedy Browne about various studies done that prove that value methods have worked over several decades across several countries. Value investing is not just investing based on P/E or other ratios. However, even investing based on these simple strategies have done very well over long periods of time. Check the post here.