“The Graham approach perceives value as being ‘somewhat static’ as Ben Graham makes very little attempt to peer into the future. On the other hand, Buffett’s approach is focused on identifying companies that have the ability to be as successful 10 years down the road as they are today, with the intrinsic value being a reflection of the strength of the sustainable competitive advantages,” he says in an interview to a financial website.
Eveillard, who was born in Poitiers, France, in 1940, relocated to the US and went on to become the manager of the First Eagle Global Fund. He helped the fund grow from $15 million in 1979 to about $50 billion in 2019. He received a Lifetime Achievement Award from Morningstar in 2003 for building one of the most successful long-term records in the investment business, which was possible only due to his strict investment discipline.
Eveillard has offered some valuable tips for investors over the years in his interviews. Let’s look at some of these tips:
Eveillard calls patience a defining characteristic of a value investor. The lack of this quality is why there are very few genuine value investors in the industry. He says he was able to take advantage of opportunities globally and have a stellar performance because he was patient.
Conduct thorough company research
“Pay attention to the footnotes to financial statements. Incidentally, nobody would have bought Enron if the people who did buy Enron had bothered to look at the footnotes, because there were one or two footnotes that were completely incomprehensible. If you called the chief financial officer’s office, which we did, they were very evasive about those footnotes,” he recalls.
When analyzing companies, it is easy to get lost in the details or be attracted by complexity, but the most important thing is to know the three or four key drivers of the business, he says.
Understand the importance of cash
Eveillard says if stock markets go down and investors have cash, they can buy without having to sell something else. “The amount in cash and in gold is a function of how pessimistic or optimistic one is with what will happen over the next few years in stock markets throughout the world.”
Learn from mistakes
Investors need to be humble and should be able to admit their mistakes so that they can learn from them, he says, adding: “When you admit that you are wrong, you stress caution by assigning a margin of safety to your investments so that you don’t overpay for them.”
Have a long-term outlook
Eveillard says value investors need to accept the fact that their investment performance will lag behind that of their peers or the benchmark in the short term. This can lead to psychological and financial suffering. Hence, a value investor should always have a long-term outlook. “I think one of the reasons I didn’t enjoy growth investing was because it assumes the world to be perfect and certain, which it is not! Becoming a value investor allowed me to acknowledge the fact that I am uncertain about the future,” he adds.
Don’t trust the numbers completely
Investors have to follow an approach where they need to understand the business they are willing to invest in. Investors should know the strengths and weaknesses of that business rather than just the numbers as the numbers can’t always be trusted, the veteran investor insists. “We invest if in the end we think we understand the business, we think we like the business and we think the investors are mispricing the business,” he says.
Avoid judgemental errors
Eveillard says it is important to study the businesses thoroughly before investing as one wrong judgement call can lead to disaster.
“If one is wrong in judging a company to have a sustainable competitive advantage, the investment results can be disastrous. A ‘sustainable competitive advantage’ is another name for a moat. Sometimes, even the best value investors fail to see that the business has no moat or that the moat is about to disappear,” he points out.
Keep emotions in check
Eveillard stresses that the secret to investment success is to not get swayed by emotions in difficult times. “I think the secret of success of most value investors is that when times became difficult, they stuck to their guns and did not capitulate,” he says.
Avoid undue risk
Investors shouldn’t try to take undue risk and shouldn’t set unrealistic targets for themselves, says the senior investment manager. “Both closet indexing and shooting for the stars are exposing financial planners’ clients to undue risk. Both are a result of benchmark tyranny,” he cautions investors.
A concentrated portfolio is more of a bull market phenomenon than a bear market. Investors never know what can happen to their stocks. “Some people have asked me whether I just invest in my best ideas. But the truth is that I don’t know in advance what my best ideas will be, so I’d rather diversify. How come we don’t have a more concentrated portfolio? Number one, because I’m not as smart as Warren Buffett. And number two, because truly, people say, ‘well, why don’t you just invest in your best ideas?’ But I don’t know in advance what will turn out to be my best ideas. So, that’s why we’re diversified,” he explains.
Stay within your circle of competence
A value investor doesn’t need to be constantly in touch with every security in every market in the world, the market veteran points out. “Sometimes in life, it’s not just about what we buy, but what we don’t buy. By focusing your research on a smaller number of businesses that fall within your circle of competence, you can do a better job on your research. Risk goes down when you know what you are doing,” he says.
Minimize your leverage
Eveillard says investors should avoid companies that have too much leverage or banks or insurance companies that are undercapitalised. “By definition, there are two characteristics to borrowing. Number one: borrowing works both ways. So you are compromising the idea of margin of safety if you borrow. Number two: borrowing reduces your staying power. As I said, if you are a value investor, you are a long-term investor, so you want to have staying power,” he points out.
Value investing is not the right investing system for everyone, Eveillard says. But it is a unique approach as it can potentially be successfully implemented by an ordinary investor with slightly above-average intelligence and sound work ethics, he insists. Value investing also has its limitations as very few people actually have the full set of skills and personal attributes required for this approach. In the end, as Eveillard rightly puts it, “Value investing is simple but not easy.”