When the market suffers a correction, the first instinct for a value investor, or any other types of investors for that matter, is to survive the fall. Walter Schloss has made a name in finding undervalued and unloved securities in America since the 1930s. When Schloss was asked how he survived the Great Depression and why he invested the way he did, he answered, “Obviously, Ben Graham was the teacher who showed me the way, but it was also my four years of military experience that shaped me into who I am. I learned that if I can simply survive the market, just like surviving in the war, and not lose money, eventually, I will make something.”
Now, it is not enough that you yourself survive and stay the course, your investments have to survive too. Staying the course does not mean that every company needs to be held throughout. Some businesses experience fundamental changes that warrant a re-evaluation but the majority probably will not. The key takeaway is to keep a cool head and not be swayed by ephemerals and the noise of the crowd.
So, what determines how well a company survive a market downturn? This is an important consideration before you invest in a company, or as V-Nee Yeh, the co-founder of Value Partners Ltd said, “What I learned after Black Monday was that when a crisis hits, business sustainability is the biggest insurance against a downturn. In that sense, the cash flow generation in a business is the most fundamental and rational basis for determining value.”
‘Cash flow generation’ – how, how much, how well is a good place to start, before you even put any money in.
Use your own judgement
A correction is a chance to have another look at your valuations and the names you hold in your portfolio. It is very easy to follow the crowd and surmise that what you once perceived as having good value may not actually be worth their price, but is this so?
Mark Mobius said, “What I learned from this mistake was never to take other people’s advice when making an investment decision! Always make decisions based on what you have learned and act on the information that you have gathered. Even if you turn out to be wrong, at least you can learn from your own mistakes.”
In addition, any contrarian investor would find these words from Ralph Waldo Emerson compelling,
It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.
Survivors need to remember that it is “long term”
Surviving isn’t a frozen moment in time, but is in fact a continuous effort to maintain equilibrium in your mindset and in your investment approach no matter what the market conditions are. A constant reminding to yourself of the end goal as an investor. A retaining of beliefs in yourself, your methods and investment decisions.
The best reminder may be found in Benjamin Graham words, that “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.“
*Many of the quotes were taken from “The Value Investors: Lessons from the World’s Top Fund Managers” by Ronald W. Chan.