However, Warren Buffet has went through many different phases of investing. He started out with the cigarette butts, or picking up really cheap stocks that were so cheap, they were almost free but still had some value left in them. He then looked for great companies and did not care AS much about the price, he looked for great businesses and bought them even at so-so prices. Most recently, many say that he is even willing to pay a higher price than ever for companies because he believes they are great businesses that he would like to hold on to for forever.

The original Buffett, the one that strictly followed Graham and Dodd, I would say is a contrarian value investor. I would place Seth Klarman in this category as well.

If you look at his most recent acquisitions, many of them are contrarian strategies, (Bank of America) but many of them also were not taken when there were bug sell-offs. He merely bought them at prices he thought were reasonable and would provide greater than value than for the present value of it today.

I would say one of the most difficult parts about Value Investing is having the conviction that your analysis is correct, AND being patient enough to wait. After doing your analysis, you might believe there is 25% upside potential. But how long do you wait? You might wait a few months, almost a year, 1 year, 2 years, and then you start to think “wow, I might have been wrong about this investment.” And then you sell. You have to be confident in your analysis, AND also be patient enough to wait for the market correction.

I will give my 2 cents here. Whatever Mike said is absolutely true. However, you need to walk the talk. Keep investing philosophy in mind whenever you take the monetary decisions. Start a blog & share your investment ideas, network like crazy. I believe value investing is much more than statistical models. Read about Charlie Munger. The man is simply great when it comes to keeping emotions under check…

Margin of Safety by Klarman is also great, although I wouldn’t pay hundreds of dollars for it.

Warren Buffett has beat the S&P 500 in every five yard period since he incorporated as Berkshire Hathaway in the 60’s. Putting that all to luck gets into very small probabilities. Putting all other true value investors outsize gains to luck, such as Seth Klarman, and the probabilities become pretty much zero.

EMH-advocates trot out the fact that most people in any given year beat the market as some indisputable evidence that we should just all buy index funds. The issue with yearly relative returns is not negative percentage are much more bad than positive percentages are good.

For example, if the stock market goes down 50%, then the market has to go up 100% to get back to its prior level. That’s why the five-year returns for Buffett compared to the S&P are so important. Value investor buy only when (they think) stocks are undervalued, while EMH-types say buy stocks whether we’re in 2000 or 2009.

BTW, all that said, normal people SHOULD index. It’s very hard and requires a lot of patience to find the stocks to beat the market. But it’s a myth that it’s absolutely impossible to beat the market. It takes a lot of patience and skill, but it can be done.

That “97 percent” number has many issues. The S&P 500 is all large-cap stocks, but even mutual funds invest in all sorts of markets. Mutual funds really need to be compared to their constituent index (a small-cap fund to a small-cap index, for example). Mutual Funds still do fairly poorly, because of fees and because many funds have to be fully invested even if the market is overvalued. But they do not do nearly as poorly as that statistic.

Also, indexes have done “better” than many funds in part because indexation is a self-fulfilling prophecy. It becomes gospel to just buy index funds and suddenly indexing starts looking like a good investment. That can’t last forever though and returns will even out once correlation comes back down to earth, i.e. when investors start investing instead of just going into and out of index fund en masse.

In a large enough sample size, you are bound to end up with a few outliers….

Anytime!

Unrelated again, but just wanted to say thanks for all the help this site has offered me. Networking paid off in a lot of interview invitations, and one of those interviews ultimately paid off in an offer with a solid bank in my top choice location.

Thanks again for everything.

It is good to demonstrate your passion for investing, but it won’t land you a front office job by itself. You’ll need more networking, taking the CFA exams, maybe going back to get an MBA, etc. to move to the front office.