Bruce Greenwald, a professor focused on value investing at Columbia University’s Graduate School of Business reminds us that every time you buy an asset, such as a share, thinking that it will produce relatively high returns in the future, another investor is selling that asset thinking that it will produce relatively low returns in the future.
One is always wrong.
“Any sound investment process must, therefore begin by answering the question of why, more often than not, it places the user on the right side of the exchange?”
In other words, ask “What is my edge?”
The problem is that the vast majority of “investors” are convinced they have an edge, in the same way that in Lake Wobegon all children are above average, or most students claim a better than normal sense of humour (95% apparently).
Clearly, “the edge” you claim must stand up to rigorous scrutiny, because, equally clearly, 50% of investors will be below average.
There is hope: “There are well-documented investment approaches that have been recognised for at least 75 years which, if carefully followed, will enable any investor to outperform the market by a significant margin on average over many years…These approaches generally [fall] under the name of Value Investing.” (Greenwald)
The surprising fact is that true value investing – rather than a simplified non-thinking form – is followed by only a small minority of share buyers.
Which is good news for those who do understand and practise it, but a pity for those who either fail to put effort into learning, or who understand but opt for a more “exciting” path.
Why does value investing work?
Greenwald says studies have shown value investors outperform the market by three percent points or more per year, and the reason the outperformance persists is rooted in the psychology of individual investment behaviour:
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