Value investing does not always work. Put more precisely, there are periods of poor performance and underperformance. As Joel Greenblatt has pointed out, if it wasn’t this way, everyone would do it. The good news is that, in the long-term, value investing consistently delivers satisfactory investing returns.
What is required is the patience to wait until the market recognizes the mispricing that you uncovered and re-prices a stock to reflect its intrinsic value. Sometimes the market recognizes this quickly, but frequently, it takes several years for this to happen.
This is one important reason why investing in good businesses makes sense. With a good business, time is on your side. There is less risk of the business losing value, and over time many good businesses grow in value so you get a double dip: the price increases to intrinsic value and intrinsic value grows. With a lousy business, time is your enemy as you face the risk that the business will deteriorate or burn through its liquid assets and lose value.
Here a useful list of characteristics of a good business from value investor Richard Pzena. The list can be used as a checklist when analyzing and thinking about an investment.
High Barriers to Entry
Responsible Management Team
Strong Balance Sheet
Low Capex Requirements
High-return Reinvestment Opportunities
Commodity Inputs – suppliers have low power
Obsolete technology – newspapers
No Strategic Vision
Legacy Costs – high cost producer
A Commodity Product
Poor Corporate Governance
Prone to litigation
High Maintenance CapEx Requirements