Maximizing value (be it short-term or long-term) for any investor is the name of the game. Getting as much of a quality company for as little as possible should be every investor’s goal.
The drive for investors to pick and choose companies based on this metric is, after all, the underlying driver of efficient markets. Holding markets totally efficient would mean that no value would exist, which every investor knows is not true.
The reality is that investors, and therefore the entire market, tend to overreact to information on a given stock or industry, often exaggerating (positively or negatively) what the impact of a sudden event will be on a market moving forward.
These overreactions provide opportunities for value investors, which iconic value investors such as Warren Buffett have referred to as “mispricing” by “Mr. Market.”
The phrase “be greedy when others are fearful and fearful when others are greedy” fits right into the discussion here. The idea behind value investing is simple, yet potent, and the best investors of all time have followed what appears to be a very boring play book over and over and over again to produce incredible results over a long period of time.
Of course, it should be noted that timing market movements and assessing whether a reaction is an overreaction or just plain prudent is a difficult thing to do. In recent years, Mr. Buffett has refined his strategy to incorporate quality as an investment metric.
Long-term investors considering a value approach may also find value in assessing companies based on their durable competitive advantages; after all, buying an “excellent company at a fair price” is a far better thing to do than buy a “fair company at an excellent price.”
Invest wisely, my friends.
