- Ronald Chan studied successful value investors to find the qualities that led to success.
- He realized that what’s perceived as “value” can vary based on the investor and the company.
- Individuals can be successful by investing in their circle of competence and understanding value.
Growth and value investing are two terms that are sometimes loosely thrown around. But what do they mean? And what are the benefits of each approach?
Growth investing is a strategy that emphasizes capital appreciation, or buying stocks that are expected to rake in above-average returns. For example, Cathie Wood’s firm, Ark Invest, is widely known for its basket of ETFs that leverage growth stocks. In 2020, the firm’s flagship ARK Innovation ETF (ARKK) saw about a 147% gain.
Value investing is more focused on company fundamentals, often involving stocks that are trading below their intrinsic values.
Ronald Chan, the founder of Hong Kong-based investment management firm Chartwell Capital Limited, is a value investor himself. In his 20 years in the industry, he’s tried to understand the skills it takes to beat the stock market.
He studied the life and career experiences of successful value investors around the world to find the qualities that led to their success. His learnings, compiled in a book, include insights from names like Howard Marks and Walter Schloss, who was a disciple of Benjamin Graham, the original father of value investing.
He realized that what's perceived as "value" can have different meanings based on the investor and the company. Chan says it isn't so much about formulas and ratios as most investment books point out, but the acumen of the investor.
"And that is the reason why I decided to set out and travel around the world in Europe, Asia, and in America, to speak to all these fund managers of different demographics, and understand what are the commonalities of them," Chan said.
There are four main qualities Chan says they possessed. First, they kept their composure regardless of the economic climate. Second, they were all long-term thinkers. They weren't trying to profit from the market in the short term. Instead, investments had a five-to-10-year outlook.
Third, they had a sense of stewardship. They wanted to make sure they did the right thing for their investors. And finally, they all showed intellectual humility, and were always trying to learn.
Advice to individual investors
Chan points to three main takeaways from what he's learned that can help anyone navigate value investing.
First, don't try to beat the market. Instead, focus on your long-term goals and the returns that are reasonable for you.
So, if your goal is to generate a 5% or 10% return, figure out a principle or a formula that works best for you. The approach has to be one you feel most comfortable with. And be realistic with the expectations. If a 50% return is what you are after, then you are probably out of your mind, says Chan.
Second, an easy way in is to stick to your circle of competence, rather than venture into a sector you aren't familiar with. In other words, ask yourself what you're most interested in and what you know best. This process works for anyone, regardless of the industry.
Everyone is a shopper, Chan says. It just varies by product and sector. If the grocery store is your lair, then ask yourself which products are popular in that area. The same goes for those who love sports, and so on.
That means if the oil sector is popping off in headlines and you aren't familiar with the industry, it's probably best to avoid venturing into it.
Third, value investing is about paying the right price. One good indicator is looking at the price-to-earnings ratio, which is usually listed as P/E ratio on a stock's data page. It reflects the value of a stock's price relative to its past or estimated earnings per share and helps determine whether a company is over or undervalued.
"Value investing is really about paying the right price and seeking downside protection in an investment. Just in case anything goes wrong, at least you are not going to lose your shirt," Chan said. "And, I guess that in a way is an advantage, it's a way of looking at the world. It's not really just thinking about the upside, but also about the downside."
For companies that have hard assets, it may make sense to look at their books. These might be industrial companies that have equipment, for example. However, the same process would work as well with companies that don't require land or warehouses. Understanding the different types of value a company holds is fundamental to determining a fair price.