Questions

Where do
I find
this on
the ADV
Part 2?

What is Value Investing?

(Excerpt - Water Street Advisers Form ADV Part 2 – Schedule F – Item: Advisory Fees And Services 1 (d)) 

Value-investing is a method of investment selection popularized by Benjamin Graham in The Intelligent Investor, a book first published in 1949¹.   It is the strategy of buying an undervalued asset – a security whose intrinsic value is below its price. 

The signature of this strategy is an investment portfolio that consistently operates at a below-market risk – this signature being most prominent in the riskiest market sectors.   Graham described the key to establishing this signature as coming from the “margin-of-safety” gained from holding an undervalued portfolio – a resilience against the pricing volatility normally found within a market that will materialize from acquiring portfolio assets at a below-market price.

For providers of portfolio management services – investment professionals -- value-investing has never been a popular discipline. The research expense associated with the strategy can be prohibitive – involving the fundamental analysis of the financial information for individual securities issues. Also, the stability of the returns can be ruinous to their business – when markets turn frothy, their clients will likely leave to chase a bubble in securities prices.

In practice, value-investing has been an attractive strategy only for investors with an overriding requirement to control investment risk. For these investors, value-investing provides the opportunity to reap the higher returns normally available within the riskier investment sectors at a tolerable level of returns volatility, across the full cycle of market conditions. 

It is also, by its nature, a buy-and-hold strategy. The investments selected for a Water Street portfolio will be held for a minimum of five years (“Investment Period”). This means that value-investing is also a “least-cost” strategy – once selected, the investments within the value-investing portfolio require little trading or “rebalancing” activity. 

In light of these considerations, my business is limited to managing investment portfolios held by domestic property-casualty insurance companies. 

¹ Graham, Benjamin, The Intelligent Investor, Harper & Row, New York, New York, 1949.