Charles Brandes: On Independent Thinking and the Enduring Principles of Value Investing

In his book Brandes on Value: the Independent Investor, Charles Brandes shares his insights, inspired by more than 40 years of experience and a successful track record as a global value investor. Charles underscores why having an independent mindset—unhindered by group-think—focused on a fundamental approach to global value investing remains the best way to pursue alpha, for investors serious about meeting their long term financial goals.

The book digs deep into why and how value investing has worked, amid changing economic and market cycles, for more than four decades. “I have seen its results; I know it works, and I’m confident it can build wealth for those who apply its principles,” Mr. Brandes notes.

According to Mr. Brandes, value investing requires a propensity or strong will to take a different path from most investors. “When everyone is herding to something shiny or new, value investors will most likely be among the few who are not.”

Learn why Mr. Brandes believes the enduring discipline he adopted more than 40 years ago still makes sense today.Below are key takeaways from
the book.

Why Value Investing?

In a nutshell, value investing has worked for two reasons: It consistently focuses on the relationship between value and price, and it takes advantage of innate human foibles.

Over the last half century, a group of like-minded investors has been achieving superior results, watching portfolios grow, taking some profits, and working to manage risk over the long term. How did these investors succeed? Did they employ complicated theories, such as market timing, technical analysis, the efficient market hypothesis, or the intricate tools of academics, market technicians and algorithm writers? Quite the opposite, they accomplished their goals the old-fashioned way: through fundamental, classic value investing.

The three potential benefits of value investing:

  1. Buying into companies at attractive prices may help lower your risk – especially compared to growth investing and other strategies.

  2. Possible lower short-term volatility – defined as fluctuations in returns from month to month or quarter to quarter.

  3. Potentially reduced trading costs – because value investors tend to hold securities longer than growth investors do. Fewer trades can mean lower costs over time with a potentially large cost savings for the patient investor.

 

Behavioral Biases Can Work to the Advantage of Value Investors

Most people make investment decisions based on psychological biases even without realizing it. For example, research in the area of behavioral finance reveals that flaws such as faulty intuition, extrapolation, over-optimism, anchoring and hindsight make investors susceptible to surprises and disappointments. And when these occur, investors tend to overreact, resulting in poor decisions.

To counter such biases, investors should consider a disciplined approach that stresses a pre-established rational process rather than personal preferences or out-of-context judgments.

Value investors understand that human nature is far more predictable over time than the day-to-day swings of the stock market. By understanding the lessons of behavioral finance, investors can apply a rational approach in a market crowded by irrational participants, and expect much improved results.

Staying the Course

“As a committed value investor, I never make predictions. But I will make an exception now and predict that times will certainly change, but the superiority of value investing never will – not unless they find a cure for irrational human behavior.” – Charles Brandes, Brandes on Value: the Independent Investor

Here are some time-tested tenets explained in detail in the book to help investors stay the course:

 

“The investment world is light years away from what it was when I started in 1968, and yet it’s the same in many ways,” Mr. Brandes observes. “Market complexity has evolved to create new and challenging environments. But the natural law of price and value has not changed, and neither has human behavior.”

“To move closer to your long-term financial goals such as saving for retirement, it is important to keep an independent mindset, oblivious to short-term market noise and focused on a fundamental, bottom-up approach to global value investing. I believe this remains the best way for investors to generate alpha over the long term.”