Value Investing

What is “value investing”?

Literarily translated to Portuguese as “investimento em valor”, value investing is an investment approach that combines fundamental analysis with the principle of the margin of safety.¹

For this combination to be made, it is necessary that the practitioner dissociates the price of the analysed asset from its intrinsic value so that he can buy or sell the asset depending on the difference between these two figures (price and value).

When and where was value investing born? Tough to say…. One could argue it was born along with commerce, since receiving more value than the price paid (“buying well”) or delivering less value than the price received (“selling well”) are possible outcomes in virtually any negotiation and sough after by traders thousands of years ago.

Formally, however, value investing was born with the 1934 publication of “Security Analysis”. In this book, Benjamin Graham and David Dodd organized the philosophical structure and the techniques of this investment approach, whose teaching had been started by Graham in 1929 at Columbia University, in New York. It was precisely because he had lost a good part of his net worth during the Great Depression that Graham decided to develop rules to insure an investor’s success regardless of market conditions.

“Security Analysis” was later complemented by the second, less academic Graham book (available in Portuguese), “The Intelligent Investor”, which many consider the best investment book ever written.

Another important Graham legacy is his being the original mentor of Warren Buffett, the second richest man in the world and widely recognized as the best investor of our time. Buffett, who during the beginning of his career, à la Graham, would opt for higher diversification and focus on quantitative aspects of his holdings (price-to-earnings and price-to-book ratios, price to net current assets, etc.), throughout the years and under the influence of his partner, Charlie Munger, started to concentrate on qualitative aspects (how to identify competitive advantages and their durability) and hold less issues, thus departing from the original Graham style.

It is important to note that, following the rule of always comparing price to value, the value investing approach is much broader than some would assume and is not restricted to capital markets (as an example, one can always demand a margin of safety when buying real estate). Also, the distinction — created by market participants — between “value investing” and “growth investing” is misleading: many value investors, including Buffett himself, have pointed out that growth is just one of the components in determining value and, as such, properly computed by the reasonable investor. Munger puts it best: “All intelligent investing is value investing.”

¹ In Benjamin Graham’s words: Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.”


Value Investing in Brazil

Brazil’s capital market has its peculiarities. It is a relatively young market, with a short-term mentality, with high interest rates, with few companies of diluted control, and with its main index (the Ibovespa) subject to excessive concentration in businesses in the same sector, whenever they represent the most traded issues in the market (as happens today with commodity producers, highly dependent on macroeconomic cycles and on the world’s hunger for raw materials; also as happened in the late 1990s, with telecom companies).

None of the above prevents the practice of value investing. The characteristics and mechanics of the Brazilian market only require an adjustment of the principles and practices that work in every other market — demanding a margin of safety, operating within one’s circle of competence, knowing to separate investing from speculation (focusing on the former), knowing emotions (of the investor and of the market, collectively) and watching not to fall in their traps, knowing competitive advantages, studying businesses’ accounting, their cash flow dynamics, their controlling interests, etc.

In truth, as the peculiarities of the Brazilian market create discrepancies between price and value, they create the very opportunities from which value investors can profit. It is up to each one of us to identify these opportunities…


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Todo o material e conteúdo divulgados neste website e nos eventos realizados pela Value Investing Brasil C. T. Ltda. têm natureza meramente informativa (com objetivo de educar a comunidade brasileira de investidores com foco em valor), não deve ser considerado oferta de venda de qualquer valor mobiliário, fundo de investimento, título e/ou ativo (não constituindo o documento previsto na Instrução CVM 409 e alterações seguintes nem o prospecto previsto no Código ANBIMA de Regulação e Melhores Práticas para os fundos de investimento) e não caracteriza qualquer atividade de consultoria de valores mobiliários por parte da Value Investing Brasil C. T. Ltda., de seus executivos e/ou de outros profissionais que tenham seu trabalho reproduzido ou que sejam citados. A Value Investing Brasil C. T. Ltda. não se responsabiliza por informações incorretas que sejam reproduzidas. Decisões de investimento tomadas com base nas informações contidas no material e conteúdo aqui descritos são de responsabilidade exclusiva do investidor. A Value Investing Brasil C. T. Ltda. não comercializa nem distribui quotas de fundos de investimento ou qualquer outro ativo financeiro. Ações e fundos (e outros valores mobiliários como derivativos etc. e outros ativos como commodities etc.) são investimentos de altíssimo risco, podem resultar em significativas perdas patrimoniais para seus investidores e seu desempenho passado não garante resultados futuros.