Brandes, 70, has been spreading the gospel of disciplined investing in sound but undervalued companies since 1974. Like Warren Buffett, the San Diego billionaire counts Ben Graham as his mentor. The author of the widely read Value Investing Today, first published in 1989, regards investing as a long-term proposition. Anything else is just speculating.
What’s the best investment you’ve made?
The most recent example, believe it or not, is Microsoft. As deep-value guys, we generally don’t buy these high-flying technology companies when they’re trading at very high price-to-earnings and price-to-book ratios. But over the last three or four years, some of the premier technology companies had gotten to a value price. The feeling about Microsoft was that the PC era was over. But enterprise-wise, everybody around the world had Windows on their PCs, and we didn’t think that was going to go away immediately. Thinking long-term and of the basic fundamentals of the company, it was a very good bargain.
What’s the worst?
We bought stock in a brokerage firm in Japan called Yamaichi Securities, in 1997. It was the third-largest in Japan at the time. The stock price looked to be pretty cheap, compared to their earnings or cash flow, their dividend and that sort of thing. This was one of the rare cases of outright fraud. Yamaichi’s reporting was fraudulent. It went to zero. So that result was not satisfactory.
You say individual investors have a big advantage over institutions. How so?
The conventional wisdom is that the institutions always have an advantage over the little guy, and you can’t fight Wall Street. That is wrong. The institutions have the same behavioural handicaps as individuals. However, they can’t overcome them, because there is so much pressure in the short term for institutions to perform.
What are the biggest risks facing the average investor?
I don’t know if your readers would believe this, but if you have a period of time for your investments shorter than three to five years, you’re not an investor. You’re a speculator.
What risks should the long-term investor be paying attention to?
Obviously, one of those would be technological change in the business that you’re invested in. And technological change has speeded up a whole lot. That is such a fundamental potential risk that you have to be aware of it. An example would be Kodak and its film business. Digital just wiped them out.
Other risks to watch out for?
Potentially, balance-sheet risk, credit risk. Of course, we saw that big-time in the credit crisis of 2008. But historically, you always have to be careful with a company that is getting too much debt on its balance sheet to survive properly in a recessionary environment.
What keeps you up at night?
Nothing, really. However, after 2008-’09, investors were scared about investing in equities—and it’s still going that way. The institutions used to have 60% in equities, 30% in bonds and 10% somewhere else. Now, they’re down to about 40% in equities. When you look at the long-term rates of return, equities are absolutely the superior place to be. If you’re a fundamental long-term investor, you just keep with equities because they always recover to new highs.