Private Value Investing - Is it worth it?

matthias on 2014/03/02

How much capital do I need to justify the effort and maybe the cost for information required for value investing versus simply buying index funds? This doesn’t answer whether you can live off your investment, it only answers whether your time is spent wisely or whether you should rather invest in a fund that you trust (difficult since of course, we all believe that we’re above average).

This question came to my mind when I was contemplating the subscription of an investment research newsletter. I had followed the author’s blog for a while, built up trust and he announced that he will have to increase the price soon or even close it. Classic sales techniques worked perfectly on me and I bought it, but I should probably consider it partly education costs to justify it.

To answer the question, let’s assume we can achieve very optimistic performances as some highly talented investors did in the past.

  • Peter Cundill (Wikipedia Bio) His fund achieved annualized returns of 15.2% from 1975-2011 (mentioned in his biography orĀ here). The S&P 500 increased from 77 to 1263 from 1/1/1975 to 1/12/2011. This is an annualized return of 8% if I am not mistaken and therefore an out-performance of 7.2%.
  • Warren Buffett: He outperformed the S&P 500 by 12% from 1980-2003.

Full-time investing

PrivateValueInvesting1 To consider full-time investing (2080 = 52 * 40h), a portfolio of 1 million seems to be the cut-off point if the fees for data, research etc. are kept really low. It’s questionable whether Buffett could have operated like this, but I have to assume something. At 10 million, Peter Cundill’s returns still generate a very decent hourly wage. However, at only 100,000, even Warren Buffett might consider another job.

Part-time investing

Going forward with the more common 100000 portfolio, only part-time investing looks feasible. I’m assuming 4h per weeks here. If Buffett or Cundill could achieve their out-performance under these circumstances it would work out to reasonable 50 or 30 bucks per hour. However, if you only achieve 3% out-performance, you’re down to 10 and anything below that should make you question your effort. PrivateValueInvesting2

Caveats (from my own experience)

Most of us probably won’t change much whether we know this or not because we somewhat enjoy this process. Additionally, I believe there’s a learning process involved. Working up to 1 million and only then starting to invest may not work. Still, it should help put the fees of, say, a mutual fund into perspective.

This brings me back to my original question. How much can I reasonably spend on data, newsletters etc. assuming a certain capital, return etc.?

To illustrate, I assume a 100k portfolio and a 10/h wage requirement. Given this, Cundill could spend 5000 on fees. Being less optimistic (3% out-performance), you may want to reduce that to spending 800 maximum however. PrivateValueInvesting3 Finally, here’s the xsl file for reference: PrivateValueInvesting