Broadening Horizons

Anyone bothering to take even a cursory glance at my bookshelves at home would be quick to point out the unusual concentration of value investing books. Whilst I profess to be an open-minded and inquisitive person, there is nothing in my book collection to suggest a digression from the theories I’ve been broadcasting in this blog.

Although it pains me to admit it, I have been suffering a severe bout of what psychologists label confirmation bias. Put another way, like most mortals I have been seeking information that merely conforms with and supports my pre-conceived opinions.

Apparently no amount of Daniel Kahneman’s, Michael Mauboussin’s or even James Montier’s books on investor psychology and behavioural finance will free me from falling into the very same traps that are so aptly described by these thought-provoking authors. Having spent several months extolling the virtues of the “value” approach to investing, the truth remains that very little time and effort has been assigned on my part to read-up on, let alone analyze, the virtues of rival investing schools and styles.

The last two weeks however, saw yours truly devoting valuable vacation time to perusing the less travelled path, or in my less-than-poetic case, the works of those advocating passive/index investing such as John Bogle, and growth investing, in this instance represented by Louis Navellier.

Truth be told, the theory behind passive / index investing is a sound one. After all, the asset management is by and large, a shameless return-reducing machine. All the same, in spite of the mounting evidence in favour of this rather placid, “sleep-easy” approach, I still find it hard to accept that it’s not even worth trying to “beat the market”.

Turning onto the other “rival” camp, the growth field is another story. Profitable growth is actually one of the three core components of any sound investing strategy. To borrow from the excellent writings of the respected Columbia University Professor Bruce Greenwald, the other two components (for the more curious readers out there) are:

1. Asset value
2. Earning Power

It’s plain to see that the precepts above are based, if not strictly on hard facts, then at least on readily ascertainable values. Profitable growth is, by its very nature, a tenuous variable that is notoriously difficult to forecast, let alone achieve. With the notable exception of heavily regulated sectors and monopolistic concerns, consistent growth is an unlikely feature at most companies.

Common sense notwithstanding, I’d go as far as to say that the growth “space” is populated by a combination of overly optimistic, often deluded, gambling types. These folk are masters in the greater fools game where price paid matters little and the supposed “investing” strategy is in fact a speculative pursuit that can be best labelled as “buy high, sell higher”.

Having gone full circle in my attempt to broaden investing horizons and rid myself of my self-fulfilling bias, I am happy to say that all investing in the literal sense of the word is by definition value investing.

Indeed, one would be right to question if there is any other type!