After the success of Warren Buffett, there is a whole class of investor called the value investor. Normally, this is not a bad way to invest; some of the most famous investors of all time used this method. The first official value investor I’m aware of is Benjamin Graham. Graham is the man who defined and codified this investing style in the book, "The Intelligent Investor." The most notable recent icon of value investing has to be Warren Buffett.
Pure value investing assumes that, in the long run, if your estimation of the value of a company and stock are correct and you buy a stock that is undervalued, the market will eventually recognize it and reward you with profits. Graham himself famously said in The Intelligent Investor, "In the short run, the market is a voting machine, but in the long run it is a weighing machine."
When the market is rational, value investing is a viable and generally profitable investing method. However, during manias (where greed controls) or during crashes (where fear controls), the method breaks down because the market is no longer rational; it’s emotional. Manias and crashes are stages where the market is clearly ONLY a voting machine.
In both crashes and in manias, you cannot count on rational valuation to protect your investments or to use as a basis for investing, respectively, since most investors are not acting rationally. Therefore, do not take comfort in your value assessments of stock investments in the current crash. As Lord John Maynard Keynes, one of the most famous economists in history, famously said, “The market can stay irrational longer than you can stay solvent.”
If you’re waiting for the “long run” to bail you out, remember another of Keynes’s famous sayings: “In the long run, we’re all dead.”
Welcome to the 2008 market crash.
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