Sunday, April 01, 2007

Endorsement of Value Investing by Robert Rubin

The following is an excerpt from the biography of Robert E. Rubin, “In an uncertain world.” Bob is the former CEO of Goldman Sachs, former Secretary of Treasury during Clinton’s administration and now Chairman of Citigroup. As we know, people operating in the background of Wall Street, do not advocate highly on the practice of Value Investing. However, what follows will probably put many off their footing. In fact, value investing is scorned upon on the Street.

Bob wrote: “I had also begun to pay more attention to the stock market, applying in a limited way my father’s highly analytical approach to investing. It was based on the method laid out by Benjamin Graham – probably best known for his disciple Warren Buffett – in Security Analysis, the classic book Graham wrote with David Dodd in 1934.

Graham and Dodd believe that, in the short term, the stock market is a “voting machine,” reflecting emotion and fashion more than rationality, but over the long term, the stock market is a “weighing machine,” valuing securities based on earnings prospects, assets, risks, and other fundamentals. They argue that you should invest only for the long term, and then only when the price is below the fundamental value calculated on the basis of these factors. My father analyzed securities this way and invested with the expectation of holding for a long time. If he sold a stock after only a few years, it indicated that something had gone wrong, or that the stock had risen so much as to be highly valued.

TODAY I BELIEVE EVEN MORE STRONGLY THAT THIS IS THE ONLY SENSIBLE APPROACH TO INVESTING IN STOCKS. You should analyze the economic value of a share of stock the same way you would think about the economic value of the whole business. A stock, whether in a steel plant or in a high-tech firm, is worth the present value of the company’s expected future earnings, adjusted for risk and for other fundamental factors such as hidden assets on the balance sheet. Over the long run, the price of a stock will reflect this economic value, although the price can deviate dramatically for it for an extended period. Investors seem to lose sight of this reality periodically, with predictable results. Most recently, a large number of people incurred huge losses by following fashion, rather than valuation, in the period leading up to the dot-com and telecom collapses of 2000 and 2001. A separate but related point is that the GREATEST OPPORTUNITIES OFTEN LIE IN GOING AGAINST TRENDS.

………To look at the market and try to find securities whose prices didn’t reflect prevailing views appealed to me. A well-established academic doctrine argues that markets are efficient, meaning that the price of a stock fully incorporates all known information and judgments about that stock. A corollary to this Efficient Market Theory is that nobody can outperform the market over time. But everything I’ve seen in my years on Wall Street – and a lot of more current thinking on finance theory – says that that is simply NOT SO. By definition, most investors, even most professional, are not going to be able to outperform the market. But a few will be able to, through some combination of better analysis, better judgment, and greater discipline.”

1 comment:

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