Charles Martineau

So why value invest­ing is a great invest­ment philosophy?

Not because War­ren Buf­fett became rich thanks to value invest­ing. Its because the premise behind value invest­ing is this: Us, humans, are not so smart as we might think. Hence, we must come up with some tools and phi­los­o­phy to pro­tect us from our igno­rance (and emo­tions) when we invest money.

In Secu­rity Analy­sis by Ben­jamin Gra­ham and David Dodd (sixth edi­tion, p.703) there is a great line on what makes secu­rity analy­sis (value invest­ing) a great approach to investment:

In secu­rity analy­sis, the prime stress is laid upon pro­tec­tion against unto­ward events. We obtain this pro­tec­tion by insist­ing upon mar­gins of safety, or val­ues well in excess of the price paid. the under­ly­ing idea is that even if the secu­rity turns out to be less attrac­tive than it appeared, the com­mit­ment might still prove a sat­is­fac­tory one.

Its a phi­los­o­phy that shares the same thoughts of the great philoso­pher Karl R. Pop­per — “Our knowl­edge can only be finite while our igno­rance must nec­es­sar­ily be infinite.”

I may also add that value invest­ing offers the chance for investors to increase their odds to find com­pany with a “black swan*” future success.

* A black Swan event does not nec­es­sar­ily leads to a neg­a­tive consequence.

That is why value invest­ing is great — not per­fect — just great.