Introduction

Aflac (AFL) is a Dividend Aristocrat that has increased its dividend for 35 consecutive years.

True value investors are a rare breed, because it takes a special mindset and/or psyche to successfully implement a value investing strategy. This is especially true during major bull markets like we’ve experienced since the 1st quarter of 2009. Common sense would dictate that it is much harder to find attractively valued companies during strong bull markets. Consequently, value typically only manifests during bull markets when a specific company is facing a negative situation.The secret is to determine whether the situation the company is facing is temporary or permanent.

If temporary, low valuation can represent an extraordinary long-term opportunity.If the problem represents a permanent deterioration of fundamentals, then a value trap exists. Value investors attempt to exploit opportunities while avoiding value traps. During our most recent bear market Warren Buffett quipped that “we should be greedy when others are fearful and fearful when others are greedy.”When dealing with fundamentally strong companies, this is truly sage advice. On the other hand, when dealing with fundamentally weak companies, being greedy can lead to catastrophic long-term results. In other words, greed only works when it is applied to fundamentally strong businesses that the market is temporarily mis-appraising.

Therefore, I believe it only logically follows that successful value investing strategies require investing in extremely high quality companies when they can be purchased below their intrinsic value. Moreover, successful value investing requires the willingness to focus more on long-term fundamental strength and less on short-term price volatility. But perhaps most importantly, value investors – by trusting fundamentals over price – are able to maintain the patience to give the price the time to inevitably revert to the mean.

Additionally, value investors purchasing high-quality companies are prepared to walk through short-term price declines while the company is temporarily out of favor with most investors. In fact, successful value investors understand that finding a perfect bottom is impossible notwithstanding luck. Therefore, accomplished value investors are prepared for and even expect to experience short-term underperformance – unless, of course, they get lucky. As Warren Buffett also once quipped “you can’t buy what’s popular and expect to do well.” However, I believe Warren Buffett was referring to long-term results not short-term results when offering that advice.

This belief is based on the reality that value investing implies a long-term perspective which Warren Buffett obviously embraces. Value investors are made up of tortoises racing against the hares.Value investors embrace the reality that investing is a marathon and not a sprint. But more to the point, value investors understand that it takes time for a business to generate operating results, and they understand the auction nature of the stock market over the short run. In other words, short-term market returns tend to be emotionally generated (fear or greed) while long-term returns are driven by successful business results (growth of earnings, cash flows and dividends).