Value investing – it’s a phrase that gets tossed around a lot, especially among those of us who want to be a bit more hands-on with our investments. It’s one of the strategies Warren Buffett swears by, and it’s all about finding “hidden gems” in the share market. These are individual shares that value investors believe are worth more than their current price tag. You spot them, buy in, and wait for the market to catch on (hopefully).
This podcast is about building wealth slowly but surely. So, naturally, we’ve got a few reservations about value investing. To be fair, though, value investing isn’t as speculative as some other active investing strategies out there. At the same time, we’re big fans of exchange-traded funds (ETFs) and index funds for their simplicity and diversification (which, as we'll discuss later, Warren Buffett also touts as well). And value investing isn’t always aligned with the way we like to do things…
Even so, value investing might be what you’re looking for, depending on your risk tolerance and how much time you want to spend analysing the market. We get that not everyone shares our “wealth requires patience“ mantra, and that’s totally okay. This episode is all about opening up that conversation.
In this session, Tash and Ana have brought in Brandon van der Kolk from New Money to join the discussion. Brandon’s a big believer in value investing, and he’s here to share why he thinks it’s a sensible strategy when you combine it with principles from passive investing. So, if you’re curious about how to implement a value investing strategy, or if you just want to hear a different perspective, you’ll want to stick around.
Just remember, we’re not here to tell you what to do. Our aim is to lay out general information about the different paths you might take on your journey to Financial Independence. As cliche as it might sound, what works for one investor might not work for another. It’s important to understand all options and their risks before making any investing decision – and if you're in doubt, speak to a financial adviser .
What is value investing?
In our previous episode, we introduced value investing, so this is a quick recap for those who might need a refresher.
Value investing, a strategy made famous by our investing hero Warren Buffett, is all about buying shares for less than they're worth and selling them when their price goes up. Essentially, you're trying to beat the average market returns by finding "hidden gems” (i.e. undervalued companies that others might be overlooking).
There are four main things to consider:
First, understanding the business . This means getting a good grasp of what the company does and how it makes money. Think of it as getting to know a new colleague – what do they do, and how do they do it?
Second, finding a moat . In simple terms, a moat is what gives a company an edge over its competitors. It could be a unique product, a strong brand, or some other advantage that helps it stay ahead.
Third, understanding the management . This is about knowing who runs the company and ensuring they're capable and trustworthy. You want people in charge who know what they're doing and have the company's best interests at heart.
Fourth, finding a good company at a fair price . It’s like shopping for deals – we want to buy when the price is fair, not when it’s through the roof. Similarly, we don’t want to overpay, even for a great business, because what we pay now will affect our potential returns later. This means being patient and waiting for the right opportunity, even if it takes a while.
What’s the success rate on value investing?
Warren Buffett might be one of the rare investors to have successfully done it. But in reality, even the Wall Street pros, with all their fancy degrees and full-time jobs in finance, can’t consistently beat the market. About 90% of them don't do better than just buying an index fund (a fact Mr Buffett himself readily acknowledges). So, if the experts struggle, it's understandable why common advice says regular folks shouldn’t bother with value investing.
The very few people who consistently beat the sharemarket are statistical outliers. They often have a mix of skill, luck, and unique circumstances that sets them apart.
Besides, they usually have the right mindset to begin with. These investors stay calm and rational despite what they see on the news. They stick to their strategy, do their research, and don't let market ups and downs throw them off course.
Most of all, those who manage to succeed once have been trying to get it right for a very long time. Trying to beat the market is incredibly difficult, and we believe it's usually not worth the effort compared to simply following a more passive, long-term investment strategy.
Why would someone choose to become an active investor rather than invest in ETFs?
For many people, the desire for control is a big motivator for choosing value investing. Let’s say you're someone who really cares about where your money goes. When we invest in an index fund, that typically means buying shares of every company in that index, even ones you might not agree with.
On the other hand, value investing allows you to choose companies that align with your personal ethics and avoid those that don't. Of course, that level of flexibility comes with a big responsibility. But if they enjoy digging into businesses and understand the risk, it makes sense to invest in them actively.
Lastly, while the average long-term return might be around 7 to 10 percent, some folks look at that and think: “I can do better”. They believe that by picking the right shares, they can outperform the market. Sure, stats say most investor won’t beat the market. But for some, the fun factor of gaining a potential profit, even if odds are heavily stacked against them, is worth a try.
How do you structure your portfolio?
This might come as a surprise, but Brandon says even the folks at the Berkshire Hathaway meeting – the Mecca for value investors – often lean on the wisdom of passive investing.
Warren Buffett himself frequently suggests that low-cost index funds are a sensible choice for most investors. Despite his reputation for picking individual shares, Mr. Buffett believes in keeping things simple and sticking with a strategy that has proven to work well for a long time.
For instance, over the last 30 years, funds tracking the S&P/ASX 200 index have delivered an average annual return of around 9%. This consistency is hard to beat, and Brandon says value investors might only succeed 30-40% of the time with their individual share picks. That's not exactly comforting if you're just starting and only have a bit of spare cash to invest.
Brandon likes digging into individual companies, but he knows that, over the long term, passive investing tends to win. That’s why, even though he got lucky with Tesla early on, most of his money still goes into passive investments.
So how does he structure his portfolio? He says it really depends on what the individual is comfortable with and what their goals are. Brandon’s personal rule of thumb is to keep about 90% of his money in passive investments like ETFs or index funds. This gives him broad exposure to the market and help him ride the overall growth.
The remaining 10% is his playground for more speculative bets. This part is where he can invest in individual companies he believes in, buy some cryptocurrency, or explore other high-risk assets. The idea is to keep him grounded in a long-term view whilst giving him a taste of the thrill that comes with chasing higher returns.
That being said, Brandon doesn’t discourage you from trying value investing. Just remember not to get too carried away with any one investment. He suggests that a good way to think of investing is to treat it like building a house. Get the foundation right, then you can add the fun details however you like.
Are you comfortable following the strategy knowing many people fail? Why would you choose active investing over passive?
Brandon had a candid response to this: he’s doing it because he finds researching companies genuinely fascinating.
Having said that, he admits that his early attempts were a bit like throwing darts at a dartboard – random and often misguided. Like many of us when we were just beginners, he watched YouTube channels and bought shares based on what others recommended (which didn’t always pan out).
What changed for him was adopting a more rational and disciplined approach. He mentioned a "four-step approach" that helped him improve his returns over time.
Naturally, we had to ask about his experience with Tesla. Was it luck or skill? Brandon was honest, acknowledging that luck played a role. But he also did his homework and took a calculated risk, meaning he didn’t go all in on one share. In fact, his initial investment was $5,000 – a decent sum, but not life-changing.
These days, Brandon’s got his sights set more on passive investing, especially with the market being so expensive at the time of writing. In fact, he hasn’t made a value purchase all year, which he says is pretty normal for value investors. They tend to bide their time, only making a few big moves every couple of years when they spot a real bargain worth grabbing (after careful consideration, of course).
Can you time the market with ETFs?
Brandon doesn’t see the point in trying to outsmart the market with ETFs. It goes against ETFs' very purpose, which is to match the market's performance, not beat it. Trying to time the market introduces a level of speculation and complexity that's unnecessary for most investors. And he’s clear that for these folks the focus should be on long-term growth, not quick gains.
However, Brandon isn’t keen on thematic ETFs, like those focused on AI, crypto, or even specific sectors. He feels they sit in a strange middle ground – neither pure value investing nor straightforward market tracking. For him, they lack the clarity and simplicity of traditional index-tracking ETFs, like the S&P 500.
This leads to Brandon’s main point: he cautions against buying into these without understanding what you're actually investing in. One thing that often confuses people is the marketing around these ETFs. For instance, the so-called "crypto" ETFs aren’t actually buying Bitcoin or Ethereum. They’re more into blockchain-related businesses. So, if we think we’re getting a piece of the crypto market, we might end up with something completely different.
Personally, Brandon prefers the classic index-tracking ETFs. He’s not losing sleep over missing out on the latest thematic ETF trend. Sure, they make for a fun topic at a party, but history's got a way of showing us that steady wins the race. Over time, the market tends to go up, and with the index ETFs, you ride that wave without the stress of wondering if a particular sector will fizzle out.
What are your best tips for someone wanting to get started?
First off, Brandon says taking your time is key when starting out. Opportunities are rare because it takes time for the market to misprice a stock significantly. Plus, value investors do a lot of research to ensure they’re making rational choices. Most of the time, you won't find any, so buying a few good stocks in a year is normal and expected.
While you’re at it, stick to what you know – your circle of competence. Think about where you spend your time and money. What are you passionate about? What do you do for work? These questions can guide you to companies you might understand better.
For instance, when everyone’s buzzing about stocks like Nvidia due to massive returns, it’s easy to feel FOMO. But if you don’t understand the different uses for graphics cards or the tech behind them, toss it in the “too hard” pile and move on. No point forcing interest. There will always be other opportunities. Stay focused and stick to the plan.
Second, invest in what excites you. If, for example, you’re more into video games, look into companies that create the video games you enjoy. Investing should be engaging, not a chore. The more interested you are, the better you’ll understand the company.
Finally, you need to be prepared to weather tough periods without making impulsive decisions. If market fluctuations make you anxious and compel you to act, value investing might not be for you. Remember, while value investing involves actively picking shares initially, the goal is to avoid reacting emotionally to regular highs and lows of the market.
Final thoughts
There’s so much to cover that we can’t fit it all into a single episode. But to sum up, value investing requires us to be selective, patient, and rational. Focus on your areas of interest and expertise and resist the urge to act on market noise. Obviously, there are plenty of positives and risks here. However, like many things in life, you can potentially reap the rewards only when you stick to something for the long haul.
For those interested in diving deeper into rational investing, Brandon has some excellent resources available online. He creates YouTube videos at New Money, and also co-hosts the Young Investors Podcast with Hamish Hodder. He also runs New Money Education to explore rational way to go through passive and active investing strategies like Warren Buffett.
And if you enjoyed this episode, please give us a five-star rating, write a review, or share it with a friend. Follow us at @getrichslowclub or @tashinvests and @anakresina if you want to see more tips and insights like this.
Happy investing!
Tash and Ana
