The concept behind the value investing philosophy is simple: investors can realize tremendous gains by purchasing securities that trade well below their intrinsic value. In his books Security Analysis (1934) and The Intelligent Investor, (1949) Benjamin Graham—the godfather of value investing—explained to investors that, "a stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price."
Graham's investment philosophy has helped many of his disciples get rich. As of 2020, his most well-known follower, Warren Buffett, is the world's fourth-wealthiest man with a net worth of more than $69.2 billion. But Buffett is not the only investor who has benefited tremendously from adopting Graham's approach to investing. Below are five value investors that aren't very well-known, despite having an impeccable track record for beating the market year after year.
- Though not as well-known as Warren Buffett, there are many highly successful value investors. They include:
- Michael Lee-Chin is the Chairman of Portland Holdings, a Canadian holdings company.
- David Abrams runs Boston-based hedge fund Abrams Capital Management.
- Mohnish Pabrai runs the Pabrai Investment Funds.
- Allan Mecham heads Arlington Value Capital Management out in Salt Lake City.
- Tom Gayner, as Co-Chief Executive Officer of Markel Corp., manages the insurer's portfolio.
Born in 1951 to a teenage mother in Jamaica, Michael Lee-Chin is one of Canada’s most benevolent billionaires. After finishing high school, Lee-Chin migrated to Canada to further his education in engineering. He entered the financial sector at the age of 26 with a job as a mutual fund salesperson. As Lee-Chin went door-to-door trying to convince households to purchase mutual funds, he developed an obsession with discovering an invariable formula that he could use to make clients wealthy—and himself, too.
Years later he found that formula and codified it into five characteristics shared among wealthy investors:
- They own a concentrated portfolio of high-quality businesses.
- They understand the businesses in their portfolio.
- They use other people’s money prudently to create their wealth.
- They ensure that their businesses are in industries with strong, long-term growth.
- They hold their businesses for the long-term.
Armed with these five laws, Lee-Chin borrowed half a million dollars and invested it in only one company. Four years later, the value of his shares increased sevenfold. He sold those shares and used the profit to acquire a small mutual fund company that he grew from $800,000 in assets under management to more than $15 billion before he sold the company to Manulife Financial (MFC).
Today Lee-Chin is the Chairman of Portland Holdings, a company that owns a diverse collection of businesses throughout the Caribbean and North America. His mantra is “buy, hold and prosper.” As of May 2020, his net worth is $1.6 billion.
With very little marketing and fundraising campaigns, David Abrams has built a hedge fund with over $10 billion worth of assets under management. As the head of Boston-based Abrams Capital Management, founded in 1999, Abrams has been able to perform better than most fund managers by realizing an annualized net return of 15% for investors in the funds first 15 years.
Abrams fund is unlevered—it doesn't invest with borrowed (leveraged) funds, and it maintains a lot of cash of hand.
A look into Abrams Capital's August 2019 SEC Form 13-F filing reveals that the firm held a very concentrated portfolio of $3.68 billion with very large stakes in each of its holdings. Abrams’s large holdings in terms of value, comprising 42% of the portfolio, were Celgene Corp.(CELG) (17% of the portfolio), PG&E Corp. (PCG) (15% stake) and Franklin Resources (BEN) (9%).
Well-known for spending more than $650,000 for the opportunity to have lunch with Warren Buffett, Mohnish Pabrai follows the value investing dogma to the tee. According to Forbes, Pabrai “has no interest in a company that looks 10% undervalued. He is angling to make five times his money in a few years. If he doesn’t think the opportunity is blindingly obvious, he passes.”
After selling his IT business for more than $20 million in 1999, Pabrai launched Pabrai Investment Funds, an investment firm that was modeled after Buffett’s investment partnerships. His “heads I win, tails I don’t lose much” approach to investing is obviously working. Between 2000 and 2018 Pabrai has been able to realize a cumulative return of more than 900% for investors.
As of 2020, Pabrai Investment Funds manages $674.5 million in assets.
His portfolio concentrates on India and emerging nations, as he doesn't find many mispriced or under-valued stocks in the U.S. market.
Allan Mecham is not your typical hedge fund manager. He is a college dropout and lives near Salt Lake City, Utah, far from Wall Street, where he founded Arlington Value Capital Management. With over 1.4 billion in assets under management, Mecham executes a value investing strategy for his clients. He makes about one or two trades a year, holds anywhere from six to 12 stocks in his portfolio and spends most of his time reading annual reports of companies. His major positions, as of August 2019, are in Berkshire Hathaway (BRK.B)—Buffett's company occupies 30% of the portfolio—and Alliance Data Systems (ADS) (13%).
From 2007 to 2019, Arlington Value posted a compound annual growth rate (CAGR) of 18.36%. In 2012, it was reported that investors who invested with Mecham a decade earlier would have increased their capital by 400%.
As Co-Chief Executive Officer of the Markel Corporation (MKL), a reinsurance business that has a similar business model to Berkshire Hathaway (BRK-A), Tom Gayner is in charge of investing activities for Markel, including managing its float. The float is the funds provided by policyholders that are held prior to Markel’s insurance subsidies making claim payments. Overall, Gayner manages over $5.3 billion.
Since its IPO in 1986 through 2014, Markel increased its book value by 20% each year. On top of that, Gayner outperformed the S&P 500 by several hundred basis points every year. His strategy is to allocate funds into a large portfolio of businesses (140 stocks as of 2020) that are undervalued by the market. He values companies with good management first and foremost, favoring large-cap, global ventures.
The Bottom Line
Warren Buffett is not the only value investor that the market has rewarded. There have been many investors who have benefited greatly from faithfully executing Benjamin Graham’s strategy of selecting stocks that trade for less than their intrinsic values.