Nothing is more important than buying under market value

I was speaking at the A Place in the Sun show recently in Birmingham. My talk was on How to Manage Risk and Still Make Money....
I was speaking at the A Place in the Sun show recently in Birmingham. My talk was on How to Manage Risk and Still Make Money.

The two main themes of my talk were "Buy value" and "Borrow sensibly".

At the moment we are all borrowing sensibly because there isn't much credit around. But we need to make sure we've learned the lessons rather than just holding back on account of a lack of availability.

But buying "value" makes sense in ALL markets: bullish, bearish and tortoise-ish (when it goes nowhere slowly).

When we went on a major UK acquisition drive in 2003, Alise and I averaged 20% below the market value. And that was a heady bull year.

Buying aggressively insures you against the market dipping. It increases your yield. It reduces your LTV (loan-to-value) borrowing ratio and it increases your return on capital and IRR (internal rate of return).

Reading through the FT on the weekend I realised that this approach has a long tradition in the stockmarket. The article was a great piece about two wonderful characters, Irving Kahn and Roy Neuberger.

Both gentlemen are centenarians, aged 103 and 106 respectively.  Neuberger is now retired but Kahn is still active. What makes them unique is that they can both look back on track records that pre-date the 1929 crash.

Kahn explains that he ignores market gyrations and holds stock for 3-15 years.  He buys stock when it is well valued and compares his investment philosophy to an orchard. Some fruits ripen quicker than others.

Neuberger's protege, Marvin Schwartz - a mere baby at 68 - explains how Neuberger always advised him to buy in what would be a passing negative period. Kahn was asked whether experiences like 1929 prepare you for future calamities. Kahn observes that history does repeat itself but not exactly.

The optimistic conclusion is that Kahn sees being over 100 as a competitive advantage. He doesn't think people his age make the same mistakes. They learn. 

That means we can all get smarter every year and have a competitive advantage over our younger rivals. But the conclusion that I gleaned from the wisdom of these old warhorses is that sound investing philosophy does not change that much over time or across markets.

Whether it’s some new technology stock in 1929 or property in 2009, it's about finding good value. Nothing is more important than buying under the market value.