Opinion: So few amateur value investors around... for a good reason

I have suggested in the past—and this isn't anything unique from me—that there are very few value investors in the institutional world because of the institutional imperative. It simply isn't possible for the majority of the fund managers to become value investors. They would literally get fired after a few poor quarters. In fact, if I were a fund manager, I think I would follow more of the crowd.

But how about amateur investors? Well, I think there are very few amateur value investors as well. Some who call themselves value investors really aren't in my opinion (my definition of value investing is a bottom-up approach to investing with heavy emphasis on fundamental analysis—not everyone follows this definition.)

I definitely don't consider myself a value investor and anyone reading this blog for very long would know it as well (although some people lump me into the value investor camp :) ). For instance, it's hard to consider anyone that is influenced by Marc Faber to be much of a value investor.

If the institutional environment prevents the professionals from being true value investors, how come the amateurs, who have no institutional pressures, don't seem to follow value investing?

I think the main reason is because value investing is really tough! Sure, part of it is also difficulties with overcoming psychology—humans are communal creatures and hence love to follow the crowd—but the main reason is because fundamental analysis is tough. It just takes a lot of work and continuous learning. How many can read dozens of annual reports and not feel discouraged when they don't end up investing? How many are willing to fully read the annual reports, including financial statment footnotes? The ironic thing is that value investing techniques are much simpler than other strategies. I'm not an expert on investing but the model that quantitative investors build involves far more complexity than anything a value investor does. Similarly, growth investors—some value investors do not think there is such a thing as growth investing—build out complex spreadsheets with scenario analysis, competitor comparison, and so on.

You can see how there are few value investors in the amateur world by looking at blogs or reading investing message boards. For instance, try going to SeekingAlpha, which is an investing blog aggregator, and pay attention to the number of blog entries dealing with fundamental analysis. Practically all the blogs out there deal with technical analysis (which probably falls under momentum investing), macro investing, and speculation.

I suspect these strategies are popular, not because they work, but because they are easy for anyone to follow. For instance, almost anyone can write about macro investing. Yet very few really provide anything useful. I write a macro-oriented blog so I'm dissing myself as well. I like macro stuff but the fact of the matter is that half the stuff out there are complete nonsense. The worst are the macro views that are completely erroneous. Yes, macro investing involves speculation about the future. But there are many macro-oriented investors that pass off pure speculation as facts. I try to be clear when I am presenting a speculative view and when I'm just repeating history or some academic study or whatever. But you need to be careful—on other blogs, as well as here.

Another issue with macro-oriented blogs is how some amateurs mix up economists and investors. Except for some rare exceptions—John Keynes for instance—most economists are not good investors. Macro views come out of economics but it's up to the investor to interpret and come to their own conclusion.

Technical-analysis-oriented blogs, articles, websites, newsletters, and so on, are another popular strategy. Nothing wrong with it but it is another skill that almost anyone can write about. Just like the case with macro strategies, half the stuff out there are completely useless, often contradicting each other and not providing much of a forward-looking view.

In contrast, I see very few value-investing-oriented blogs. I have a whole bunch on my websites links page but I have to admit that many of them don't perform much analysis. No offense to anyone but someone who blindly follows Warren Buffett and invests in, say, Kraft is not a value investor to me. If they do the analysis and can show why Kraft is good, then they are; but most can't justify any of their picks. In fact, many investors probably can't even tell half the products Kraft sells—how is this different from a trader who generally doesn't know much about what the underlying security represents?

Do note that you may still be a value investor for the most part but some of your investments may not be. Let me pick an example with Mohnish Pabri since it came to mind after some comment on GuruFocus. Once, Pabri said that holding Berkshire Hathaway shares is equivalent to cash. In other words, he was parking his money in Berkshire shares instead of in cash. That is just pure shoddy analysis and thinking. Yes, I'm just some guy off the street with a dubious record and I'm attacking a really good investor but consider my argument. How could anyone consider a listed security to be equivalent to cash? Furthermore, how can someone be certain that the market is not going to mark down the security price—not just today or tomorrow but for the next 10 years! Such thing is pure speculation; it has nothing to do with what I perceive as value investing. In a similar light, a lot of people who pass themselves off as value investors really are not. There is nothing wrong with that but just know what you are. If you are speculating, make sure you know it!


To sum up my view, I think value investing is really tough for amateurs. You can see this by looking around and noticing how it is not very popular. On top of the psychological difficulties, the strategy itself is quite difficult.