Value investing is a form of investing that I believe will remain alive for a very, very long time. Now before you ask, how can I make such a claim like that, let’s dissect what value investing entails and what it means to be a value investor.
Value investors purchase securities of companies when they are undervalued, and they have reasonable certainty that the gap between the price and value will close at some time, preferably earlier than later. That’s how simple value investing is in theory; it is all about estimating probabilities and betting when you have reasonable confidence that they are in your favor.
As in other areas of life, there never is absolute certainty- you have to act on incomplete and inaccurate information. The key to being successful then is about how you act with that imperfect information that you have at hand, not with trying to collect more information that is highly likely not to be there at all. Success in investing is not about collecting copious amount of information or about working with complex valuation models- it is simply about interpreting what information you have better than your competitors.
In order to be able to interpret the information more efficiently than your competitors and retain a competitive advantage, you must be very skilled at managing your emotions. If you let your emotions guide you, regardless how “intelligent” you are or despite being a numbers genius, your competitor that is emotionally detached and doesn’t allow the disturbances of the market affect his judgement, will have an advantage over you. I am not suggesting that being mathematically adept is not important, because it is- it simply is not the most important thing in investing.
Regardless of whatever complexities the future might hold for investing, value investing is a form of investing that will not go out of favor because the need to interpret information will always be there. There will not be any artificial intelligence that is good enough to have executive judgment, like us humans already possess. Bottom line, value investing is all about using your executive judgment effectively. It’s not about the numbers or the technical knowledge, although that is a necessary part of being a good investor; a great investor on the other hand, goes beyond the facts and uses them in a way that will be favorable to him.
As long as there is the need for thinking and human judgement, there will be a need for value investors.