Inspired by Warren Buffett and distilled over my 50 years in the field, here are some basics guidelines and simple precepts that can point you in a productive direction when you’re making investment decisions.
ERR ON THE SIDE OF CONSERVATISM
Don’t let hope or optimism color your reading of the facts. If anything, understate your assessments. As noted value investor Benjamin Graham advised, leave a margin of safety – a large margin (think of it as building a bridge strong enough to carry a 30,000-pound truck, but then only being willing to drive a 10,000-pound truck over it).
KNOW THE FIELD IN WHICH YOU WISH TO INVEST
Over the years, my firm has concentrated on businesses we know well. We’ve had a particular interest in financial services (banks, thrifts, and insurance companies), healthcare, auto aftermarket companies, and manufacturers of certain proprietary products. Buffett calls it operating within your sphere of competency.
CHECK OUT YOUR OWN BACKYARD
Any number of investment opportunities can present themselves right in your own area, and proximity makes it easier to get to know the folks minding the store. Since we’re headquartered in suburban Detroit, we frequently go out and “kick the tires” of companies we’re following in Michigan or the adjoining states of Indiana and Ohio. To quote the famous sermon, sometimes there are “acres of diamonds” in your own backyard.1
BE A CONTRARIAN
You can’t possibly know when the “perfect” time is to buy, but if you’re minimally aware of trends, you can make reasonable projections. It’s like the old saw about buying straw hats in January, when they’re cheap, in anticipation of making a profit selling them when demand is up in July. We made a great contrarian investment for our clients some years ago, at a time when healthcare was looming as an issue on the political horizon. It was a Michigan company called MEDSTAT (no longer a publicly traded company), which did outcomes analysis for healthcare organizations. We realized this service would be increasingly important, but at the time, MEDSTAT’s principal asset, its database, didn’t even appear on its balance sheet. We started buying shares and were rewarded years later, when the stock soared as the result of a buyout by a Canadian company. The return for our clients was more than six times their average costs.
Value Investing is like farming. You cultivate, you sow, you water, and then you wait. It takes time before the crop comes in. Likewise, the Value Investor needs farmer-like patience and persistence – which I can tell you from years of personal experience. We make investments just about every day, but we sell only occasionally. As in the MEDSTAT example above, eventually you reap the harvest.
To sum up, investing is not gambling. It’s work – hard work – and you will make mistakes doing it. But with seriousness, maturity, dedication, and a willingness to take risks, you can succeed and “make capital out of experience.”
1 “Acres of Diamonds,” by Rev. Russell H. Conwell (1843–1925), Baptist minister, lecturer, and founder of Philadelphia’s Temple University.
Past performance does not guarantee future results.
George P. Schwartz is Chairman and CEO of Schwartz Investment Counsel, Inc. and co-portfolio manager of the Ave Maria Rising Dividend Fund and Ave Maria Bond Fund.13018172-UFD-6/17/2021