Thursday, 4 June 2015

The basics of Value Investing

The basics of Value Investing

Billionaire investor Warren Buffett claims much of his success is due to his love of value investing. Unlike some investment strategies, value investing is pretty simple. If you have common sense, patience, money to invest and the willingness to do some reading and basic math’s you can become a value investor. Here are five fundamental concepts you'll need to understand before getting started.

Value Investing Fundamental No. 1: Companies Have Intrinsic Value
The basic concept behind value investing is so simple that you might already do it on a regular basis; If you know the true value of something you can save a lot of money if you only buy things when they're on sale.

Say you buy a new TV. Whether it's on sale or whether it's at full price, you're getting the same TV. Stocks are the same way: the company's stock price can change even when the company's intrinsic value is the same. Stocks, like TVs, go through periods of higher and lower demand. These fluctuations change prices but not what you buy.

Many shoppers would argue that it makes no sense to pay full price for a TV as they are often on sale. Stocks work the same way. Unlike TVs, stocks will not be on sale at predictable times and their sale prices won't be advertised. You can get stocks at bargain prices that other investors will be oblivious to by doing some detective work. 

Value Investing Fundamental No. 2: Always Have a Margin of Safety
Buying stocks at bargain prices gives you a better chance at earning a profit later when you sell them. It also makes you less likely to lose money if the stock doesn't perform as you hope. This principle is key to successful value investing. Unlike speculative stocks whose price can plummet, it is less probable that value stocks will continue to experience price declines.

Benjamin Graham, the father of value investing, only bought stocks when they were priced at two-thirds or less of their intrinsic value. This was the margin of safety that he felt was necessary to earn the best returns while minimizing investment downside.
Value Investing Fundamental No. 3: The Efficient-Market Hypothesis Is Wrong
Value investors don't believe in the efficient-market hypothesis, which says that stock prices already take all information about a company into account. Value investors believe that sometimes stocks are underpriced or overpriced. For example, a stock might be underpriced because the economy is performing poorly, investors are panicking or the sector is performing badly.

Value Investing Fundamental No. 4: Successful Investors Don't Follow the Herd
Value investors possess many characteristics of contrarians - they don't follow the herd. Not only do they reject the efficient-market hypothesis, but when everyone else is buying, they're often selling or standing back. When everyone else is selling, they're buying or holding.

Value investors only care about a stock's intrinsic value. They think about buying a stock for what it actually is - a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.

Value Investing Fundamental No. 5: Investing Requires Diligence and Patience
Value investing is a long-term strategy - it does not provide instant gratification. You can't expect to buy a stock for €66 on Tuesday and sell it for €100 on Thursday. In fact, you may have to wait years before your stock investments pay off. A buy and hold strategy combined with waiting for the right time to buy a stock you have identified is key to value investing.

1 comment:

  1. It’s good to read these basics of value investing and was very knowledgeable for me. These days, I am doing research for investments. Will like to start with short term investments and going to meet a Las Vegas certified financial planners group for it.