By answering these four questions, Daniel Needham, Global CIO of Morningstar Investment Management, explains the essential difference between value investing and value-driven asset allocation.
Value investing is a fairly simple concept. It's purchasing an asset at a price that's below what you think the intrinsic value or the fundamental value of that asset is.
It's very difficult to assess the underlying value of an asset, and so it requires judgement and analysis to do that, but in general that's the concept.
There are many different ways to assess the underlying value, but generally if you are conservative and buy an asset for less than its estimated price, then you are a value investor.
- What is value-driven asset allocation?
On the other hand, value-driven asset allocation is applying that same concept of trying to buy assets for less than what you think they’re worth, but doing it at an asset class level. So that is saying, do I think Indian equities are cheap or expensive, do I think emerging markets’ equities are cheap or expensive? So it’s applying that same valuation discipline, but across asset classes.
- Is this something that your average end-investor can use on a daily basis?
I think it obviously depends on what the level of experience the person has. Often times it’s less about the experience and more about the personality of the person.
When you ask the question about the daily basis, I think therein lies the challenge. Value investing is a long-term approach, and so often times you don't need to trade your portfolio on a daily basis; sometimes not even on a monthly or six-monthly basis.
So it is possible, but it takes us what Benjamin Graham referred to as the enterprising investor. So you have to dedicate time, you have to be very clear and disciplined in how you make your decisions, and you also have to be honest with yourself. It's about being objective and making sure that you don't get sucked into gambling and trading, which is the antithesis of value investing.
I think it's very doable, but like anything, it comes down to the person's discipline and the willingness to invest the time.
- Being able to actually go against consensus in order to find that opportunity-- the undervalued opportunity, is one of the hardest ones?
Absolutely, because I think that we're hardwired. We're herd animals. We're hardwired to follow the crowd. So it is actually – it’s very difficult to go against the crowd, but I think investing should be objective and unemotional. I think for investors, Warren Buffet says investors don’t have to do things brilliantly. They just have to avoid the big mistakes, and disciplined value investing is really about that; not having to own the market all the time, be willing to sit in cash and wait for a better buying opportunity.
This interaction between Daniel Needham and Holly Cook, Managing Editor of Morningstar.co.uk, appeared initially on Morningstar's U.S. and U.K. websites.
