Value Investing is seductively easy. Summarized into one sentence, Value Investing is the art of picking stocks that are undervalued, a.k.a. buying a dollar for 50 cents.
The big problem – paraphrasing what Johan Cruyff said about football – Value Investing is a simple concept, but it is extremely hard to invest with simplicity.
How Value Investors Buy Books
Consider the following analogy:
Put yourself in the shoes of a Value Investor in a book store. Having a natural inclination to buy stuff that is undervalued, you will automatically be drawn to the table with a big sign saying:
- Books 50-80% OFF!
…and therein lies the problem.
Buying a book is a bet with an asymmetric outcome. The downside is that you will buy a book and it might turn out to be a waste of your time, plus the $10 to $30 it cost to purchase it. The upside, however, is close to infinite. A good book can fundamentally alter your life.
Coffee consumption is another good example. If you could only drink one cup of coffee a day, you would probably not drink the first cup of joe available to you. You would be more selective. You might even be willing to pay more for the right one.
Mistakes of Omission
Most of the books on the discount table are crap. They are there for a reason.
The Value Investor, focused on the table of discounted books, might end up finding a book that is good enough to be worth the purchase.
At the same time, his attention is turned away from the books that can truly alter his life.
Do you disagree? Let us know in the comments below!