Adapted from GuruFocus
In a recent letter to investors, credit-focused asset manager Arena Investors reflected on how value investing has evolved over the years. The backdrop to Arena’s ideas in this letter is the venerable and very influential thinking on value investing developed by Benjamin Graham.
Graham’s practice of value investing, and originally that of the most famous investor who learned from him, Warren Buffett, centered on the idea that shares should always be worth at least a business’s liquidation value, that shares trading below this value are cheap, and that investors who acquire a diversified selection of such shares will do well without having to rely on collective thinking—“the market”—to ultimately reflect underlying business value. With this approach, successful outcomes could instead involve an action such as a liquidation, takeover or restructuring.
Arena points out, however, that most value investors today, while buying at a discount to what they believe is a company’s value, are relying on the market to realize their investment theses. Graham famously said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” These investors hope the market eventually weighs their investments in their favor.
But Arena sees no reason to depend on the market to vindicate an investment. Instead, Arena focuses on investments where the entry point is not only below the inherent value, but also where there is a clear path to value realization. This is in fact a Graham-like approach, one which Arena finds far more compelling.