Things that concern me, things that don’t: Priorities of a Value Investor

Dec 03, 2024

I’m about to do something that might not seem very smart for a stock newsletter publisher: I’m not just highlighting the winners; I’m calling things as they are.

As I’ve said before, I’m an investor first, and as an investor, you have good years and bad years.
This year hasn’t been a stellar one for investors focusing on European small caps and following the value investing method. While it feels like everyone around me is raking in impressive gains, I’m staring at a red number: currently, I’m at -4%. Just a few weeks ago, it was still slightly above zero.

I’m not entirely sure why this time feels different. Over the past 20 years, this has happened before, and I’ve always managed to recover those losses (CAGR >11% over those 20 years). 2007 and the first half of 2008 were particularly tough, for instance.

Seeing a stock halve in value while its underlying qualities remain intact doesn’t bother me much—I can handle that volatility. But after a series of exceptional years, amplified by the pandemic and the AI boom since 2017, it’s starting to weigh on my emotions.

And those emotions are the biggest danger. That’s why I began my course, and later my book, with this theme. Most of the articles I write are meant to deliver a message to you. But this one is primarily a reminder to myself about what truly matters.

Key Concerns

Permanent Loss of Capital

The worst nightmare for any investor is losing capital that can never be recovered. This happens when you invest in companies with fundamental problems, poor management, or industries in structural decline. Value investors aim to avoid these so-called value traps through thorough analysis, avoiding speculation, and a strict focus on preserving capital.

Overpaying

Paying too high a price for a stock is a classic mistake, even among experienced investors, especially in rising markets. As Benjamin Graham said: “Price is what you pay, value is what you get.” Buying quality only makes sense if the price aligns with the underlying value.

Misjudging Competitive Advantages

A sustainable competitive advantage—such as patents, strong branding, or cost efficiency—protects businesses from competitors. Without these advantages, an investment becomes vulnerable. Misjudging this “moat” often leads to permanent capital loss.

Poor Capital Allocation by Management

Even a good company can be undermined by management that mismanages capital. Think of overly expensive acquisitions, reckless dividend payouts, or a short-term focus at the expense of long-term growth. Evaluating management and its capital allocation is therefore crucial.

Overreliance on Macroeconomic Factors

While macroeconomics isn’t my main concern, I worry about companies entirely dependent on external economic factors, such as interest rates. This dependence makes an investment vulnerable.
This isn’t the same as cyclicality: cyclical businesses can be analyzed, and sometimes they offer intriguing opportunities if you understand their cyclical nature. But don’t assume too easily that something is merely cyclical.

Companies Without a Clear Vision for the Future

Investing is forward-looking. Companies without a clear strategy or adaptability pose a risk. In a rapidly changing world, such businesses lose relevance. It’s not always the strongest or best products that win.

Irrelevant Noise

Daily Market Volatility

The market fluctuates constantly, driven by news, emotions, and speculation. To me, that’s nothing but noise. The real action happens in the businesses I invest in. As Buffett puts it: “I buy stocks as if I’m prepared to hold them for ten years, even if the market closes tomorrow.”

What Others Do or Say

Following the crowd is rarely a good strategy. Whether it’s trends, stock market hype, or expert advice, I’d rather trust my own analysis and principles than follow the herd.
Market commentators and analysts often have conflicting opinions driven by short-term movements. Their focus on the present contrasts sharply with the long-term perspective of a value investor.

Perfect Timing

Trying to time the market is usually futile. Research shows that even the best forecasters rarely get it right consistently. The key is to remain invested and benefit from compound growth. That growth is ideal if you can achieve it with one stock held for years, but it can just as well come from a series of different companies.

Short-Term Performance

Whether a stock doesn’t rise in a month or a year doesn’t matter much to me. What counts is the company’s fundamental progress and the intrinsic value the market will eventually recognize.

Complex Investment Models

Many investors get tempted by complicated formulas and strategies. For me, strength lies in simplicity: understand the business, buy it below intrinsic value, and stick to the principles of value investing.

Economic News and Forecasts

While economic data can sometimes be useful, it has little impact on my individual investment decisions. Most forecasts are speculative and have minimal bearing on my long-term strategy.

Focusing on What Matters

A value investor distinguishes themselves by being selective. You don’t need to know everything, but what falls within your circle of competence, you must understand completely. As Buffett says: “I don’t look for 1.5-meter hurdles to jump over; I look for 30-centimeter hurdles I can step over easily.”

Value investing is all about focus. Direct your attention to what truly matters: intrinsic value, sustainable competitive advantage, and management quality—all at the right price. Ignore the noise of market fluctuations and popular trends. By staying true to timeless principles, you can consistently create value and leave behind the distractions of the moment.