In the beginning, there was the idea of investment – straightforward, unconstrained investment – whose goal was to maximize long-term after-tax returns…PERIOD
It was a simpler, happier time when the essence of investment was to seek out value; to buy what was cheap with a margin of safety.
Investors could go from bonds to stocks as they saw fit. If prices were too high, then investors held cash.
Then in the 1950s, a young researcher at the RAND Corporation was figuring out how much of his retirement money to allocate to stocks and how much to bonds. An expert in linear programming, Harry M. Markowitz, described his solution in a scholarly article called “Portfolio Selection” for the Journal of Finance purportedly showing exactly how to calculate the tradeoff between risk and return in portfolio construction. Modern Finance Theory was born.
It’s clear that after the financial panic of 2008, investing needed to get back to its roots in the garden of Value Investing. The best place to start is in the beginning with Ben Graham – the founding father of Value Investing. He said, “Investment is most prudent when it is most businesslike.”
Unfortunately, most investors give more attention to stock market price swings than to what the underlying businesses are doing. The value approach looks for investments at sensible prices and holds that it is wise to think first about the business and its industry. It views stocks as little pieces of whole businesses. The goal is to determine whether that business is undervalued, fairly valued, or overvalued, a systematic business-like approach to investing.