Brandes and Value

This piece on visiting with the Brandes firm in California is authored by Bob Thompson, an investment advisor and strategist with Canaccord Capital in British Columbia. It's more about value investing than Brandes, but seems like an interesting article anyway.

One thing I like is that Thompson's piece reminds us that investing is as much art as science. I've read where Peter Cundill has said the same thing. And ties into Walter Schloss saying you never really know a stock until you own it.

Anyway, back to Thompson's article on value investing:

There are two keys to doing it well. First, an intrinsic value has to be determined for the company, based on the attributes of the business, independent of the stock price.

Once this is determined, this value can be compared against the stock price to see if there is a Margin of Safety (MOS). In other words, can the stock be purchased for 30 per cent, 40 per cent, or 50 per cent below its true value?

It is more difficult than it seems because first it takes a lot of skill to come up with an intrinsic value for the stock, especially when it may be different from the view others come up with.

Second, and the reason that value investing works, is that investor emotions get in the way of people making logical investment decisions. As Ed Blodgett of Brandes said “People are inherently wired up improperly to make money in the market.”

He referred to the fact that people have a fight or flight response that allows us to run when faced with danger. In other words, when we see a bear in the woods, we run or try to get away.