‘Value investing’ refers to buying an asset at a price that is significantly lower than its intrinsic or true worth. The logic behind this is that markets may misprice assets, allowing investors to buy these mispriced assets at a discount, which will subsequently realise their actual value, resulting in significant returns for the investor.
As we all know, Warren Buffet and Charlie Munger are the most famous value investors. This duo was regarded as an unrivalled power in the world of investment, having consistently compounded their wealth at a pace far higher than the overall market, resulting in an outsized net worth in the billions. However, this investment combo was made up of three people, including Rick Guerin, a less well-known but equally experienced and talented investor.
Their circumstances were inevitably interconnected because of their common principle of buying assets for cents on the dollar. Rick Guerin worked with Buffet and Munger in the 1970s, and he even owned a stake in Buffet and Munger’s legendary investment entity, Berkshire Hathaway. Buffet, Munger, and Guerin were involved in several worthwhile investments in 1970s, including ‘Blue Chip Stamps’, ‘See’s Candy’, and ‘Wesco Financial’.
However, Rick Guerin went on to use leverage, something Buffet and Munger had traditionally shunned during their financial careers. During the 1973-74 stock market slump, Rick Guerin, who was susceptible to margin calls on his borrowings, lost a considerable chunk of money, as well as the years of advancement he had made in capital accumulation with Buffet and Munger. Furthermore, he was obliged to sell his Berkshire Hathaway holdings for $40 a share (which is now worth more than $6,20,000 per share). Buffet famously stated that he and Munger understood that they would become extremely wealthy if they kept patience and played the long-term game, and hence were not in a hurry to make money.
Though Guerin managed to recover his losses during the next decade, yet he had not attained the same level of success as Munger and Buffet in the decades that subsequently followed. This is because the initial non-compounding years will have a significant long-term impact on your wealth accumulation. Guerin missed out on the non-compounding years since he lost a lot of money in the 1970s and his capital dwindled as a result of his massive leveraged investments. On the other hand, Buffett and Munger were gradually but steadily building their wealth for the long-term, and particular to mention here is that it was without taking any sort of debt or leverage.
Buffett and Munger’s strategy, which was marked by patience and commitment to key investment principles, resulted in significant returns. In contrast, Guerin’s use of leverage and subsequent losses during slumps in the markets demonstrate the hazards involved with too much borrowing. Guerin’s example demonstrates the need of careful, patient investing that avoids undue leverage for long-term success in investments.