The investing world is upside down. Today, if you want to lend money to a good payer you will have to do it with a negative yield, that is, you will have to pay to lend your money. Swiss, german french and dutch 6 to 8 year government bonds have negative yields. Corporate bonds from great companies also have negative yields. Investors seem to prefer losing money rather than keeping it in cash or investing it in other asset classes.
What happened to the time value of money? Faced with this, what are the best choices that guarantee safety of capital and an adequate return?
What really works and achieves consistent returns is Value Investing. For the past six decades, Warren Buffett and Charlie Munger are living proof of the success of Value Investing. Investing in the stocks of great companies, with strong balance sheets, above average returns, durable competitive advantages and honest and able managers, at prices below their fair value is still the way to go for these legendary investors.
In a time when the financial world seems to make no sense, it is even more important to have a value philosophy and stick with it.
Investing in Value is buying 1 euro for 50 cents, it´s buying a lot of value with little money. The secret of investing in stocks can be boiled down to the thorough analysis of the assets and their ability to generate cash in the future and the discipline and patience to buy only when the asset is cheap and to sell when it reaches fair value.
Most investors have tremendous difficulty in executing such a simple recipe: Buy when everyone else is selling – because the news are bad – and sell when everyone else is buying – because the newas are good. However, most people do the exact opposite. Financial institutions prefer strategies with lots of transactions that allow them to be the greatest beneficiaries of the clients's wealth.
In a world where everyone know the price of everything and so few know the real value of the assets, most of the investors do not have an investment horizon or the adequate temperament to apply this recipe and benefit from the compounding returns over time. The individual investor, that can and should have an investment horizon of decades, should allocate a significant part of his portfolio to stocks – the asset class that has achieved the best returns on capital in the last 115 years: 9,5% a year despite two world wars, several recessions a great depression and the financial crisis of 2008.
Investing in a diversified portfolio of stocks from excellent companies bought at a sgnificant discount from their true value – with a margin of safety – is the best way to protect and grow your financial patrimony. These businesses entitle you to dividends – nowadays much higher than bonds and deposits – and capital gains over time. These companies are money making machines for their shareholders. The secret of investing is that there is no secret: invest with a margin of safety and buy from pessimists and sell to optimists.