Value Investing: Time to Invest with Patience
Common sense and patience were the watchwords at the conference on value investing hosted by the Executive MBA’s Finance Club on Thursday, March 27. Two of Europe’s top fund managers, Francisco García Paramés, CIO of Bestinver Asset Management, and Iván Martín, Head of Equity Value at Santander Asset Management--who was named the best Spanish manager by Citywire magazine—explained the philosophy of value investing and its application when making decisions about purchasing assets.
The Warren Buffett strategy
The methodology of value investing, developed by Benjamin Graham and David Dodd in their book, Security Analysis, consists of identifying the intrinsic value of a company beyond the quoted price, emotions, trends and feelings in the market. This allows for the purchase of shares at a market price lower than the share value. “Ultimately, the conditions for success are those of personality and intelligence, as Warren Buffett has stated on numerous occasions”, explained Francisco García Paramés.
Bestiner’s portfolio consists of 30 Spanish and 50 international companies, including Hyundai Motor, Swatch, BMW, Thales and Schindler. According to García Paramés, they try to “understand the competitive advantages of a company in order to give us insight into its standard profit for the following year, to which we apply 15%, the multiple which has been the norm of Standard & Poor’s for the past 200 years.”
García Paramés is in favor of two types of safe investments: funds and family businesses. “All of our savings are in funds. They are the best investment, at least in my case”. At Bestinver as well, “we feel comfortable with family businesses because you have more control of managers by the family”.
With an eye on the market
Many investors seek out García Paramés’ advice, particularly after they have made errors in the past. “You always learn more from your mistakes; your successes are less noticeable and less intense”, he said.
Amongst his recommendations to investors, he highlights observing the portfolios of U.S. funds, building more defensive portfolios and having lower profit expectations.
The turmoil in today’s market offers interesting opportunities to explore. The crisis in emerging markets or the situation in the Ukraine opens up new perspectives. “Currently, we are much more interested in analyzing emerging markets than European markets.”
The importance of the safety margin
Iván Martín Aranguez delved into another basic concept of value investing. “It is important to understand the concept based on the margin of safety. I don’t buy companies that are going to increase in value but rather I buy the ones that are cheap. They’re good and they’re well-priced at this moment.” Or, to quote Walter Schloss (1916-1912), founder of Walter Schloss Partnership, “If a stock is cheap, I start buying.” “Whatever you don’t lose is profit.”
Along these lines, Martín quoted from Benjamin Graham’s book, The Intelligent Investor, which is strongly focused on human behavior. “We want good things at a good price. We are always looking for discounts, in whatever product we are going to acquire.”
The Finance Club
The closing address was given by César Álvarez, head of the Executive MBA Finance Club. He underlined the importance of reflection and patience in any investment activity.
According to Álvarez, “a close relationship exists between the investment philosophy of value investing and the lessons on personal finance and human behavior that we receive at IESE.”
The Finance Club is a meeting place for students with a continuing interest in finance, who have been through IESE’s EMBA program. Through conferences and activities, members are able to keep to up to date on trends and changes in the sector, revitalize knowledge and strengthen their network of contacts, thus deepening their understanding of very concrete topics while sharing experiences with like-minded people.