Difference between Conservative Investing & Long Term Value Investing Philosophies
A widely held belief is that long term value investing is a about investing conservatively. The belief perhaps originates from the fact that when the entire world seems to be optimistic about the future and piling up shares of all kinds of companies, the so called long term value investors disappear from the scene much like the boring accountant friend who is found missing from the most rocking parties in the town. However, in my opinion, there is a huge difference between the two styles.
Since different people understand conservative investment differently, for the purpose of this article I will define it as "investing in assets that are widely believed to be low risk". In short they run away from risk. In India, for example, a conservative investor will go do Fixed Deposit or VPF or at maximum SIP in a blue chip mutual fund. That is not a bad approach, since it seems to have given positive real return for a long time and at least it is better than the approach taken by day traders most of who seem to lose money over a long term.
But long term value approach is significantly different from this approach of "running away from risk". A long term value investor embraces and "analyzes" risk and takes advantage of it in case he/she seems to understand it well. A long term value investors also takes advantage of small, seemingly invisible trends that are nearly certain to compound over a long term. Perhaps the only "conservative" part in long term investing philosophy is making sure that the waves or tsunamis that keep appearing from time to time don't kill you. There is no use of thinking about long term if you are dead.
It is not just conservative to disappear from the so called "late cycle parties" when everybody thinks we have beaten the economic cycles for good and is busy leveraging to hilt to buy risky securities and discounting the "once in a while" events (which actually appear rather frequently if you are talking about a timeline of decades). Rather it is also sensible to run away from such parties. Similarly not investing because everybody else is optimistic and the price of a share is rallying everyday is not just conservative investing, it is also sensible investing.
Similary, investing in stocks when it appears that the world as we know is going to end and stomach of every investor in the world is churning like a mixer, can hardly be called conservative investing. Long term investors keep investing in such situations because they believe that the long term productivity growth is still going to be positive, that companies that have enough liquidity to meet their liabilities & have stable prospects of future demand will survive to take advantage of this productivity growth and because the prices of these companies are extremely undervalued. There are going to be more pandemics, more nuclear wars, more sovereign defaults, more financial crisis and more extreme weather events. But if you have your eyes open, you can still find companies which will do well during good times as well as in case when such events occur. This approach is about taking advantage of risk and taking advantage of nearly certain long term trends. It is hardly "conservative" style of investing.
Another distinction that has to be made is difference between "long term value investing" and "contrarian investing". Many contrarian investors simply seems to bet against whatever the market believes in. I believe most of them will not do too well because market is mostly right. There are only few occasions when market miscalculates a risk and you have enough insight to see that market is miscalculating the risk. Large profits come from making a contrarian bet against the market but only when you are sure about it.