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How the New Age Value Investors Marched off the Cliff
During our portfolio reviews and private advisory sessions for value investors, we discovered a mental blind spot that resulted in heart-breaking losses for many otherwise very intelligent value investors.
During the value investing bubble of 2005 to 2007, the sexy words in the mushrooming value investing community are "special situations", "distress investing", "asset plays", "spin-offs", and "misunderstood prospects".
Yet if you really think about it, the common thread of all those strategies is to buy low-quality assets or business unites under distress or "special" situations. One spin-off newsletter charged subscribers $20,000 a year just report about how the parent is planning to push out an unwanted and misunderstood division.
Those value investors, in their quest of extra performance, get a little too fancy. They forgot the time-tested teachings from Benjamin Graham. In "The Intelligent Investor", Graham wrote:
"The risk of paying too high a price for good-quality stocks--while a real one--is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to "earning power" and assume that prosperity is synonymous with safety."
Graham's foresight about human nature is prescient. But he did not foresee how his disciples would spin around words like "low-quality" into fancy new strategies like "asset plays", "misunderstood situations", "spin-offs", "distress investing" and "event-driven special situations".
We call those investors the "new age" value investors. Where are those asset players now in 2009?
They all got burned during the crash of 2008. They all forgot that special events or catalysts can never change the fundamental nature of a business.
Only two wise old men did not get swept away by the value investing mania: Warren Buffett and Charlie Munger. They never uttered those dirty words like "asset plays" or "distress investing". Warren Buffett remembered very well the biggest mistake of his career: Berkshire Hathway as an "asset play".