[This article was originally published at Rowing This Boat]
Long before I started getting interested in entrepreneurship and founded ChopChop, I was a big fan and practitioner of value investing and still a big believer today, although less active. A recent successful investment lately that once again proved the effectiveness of value investing got me to write this piece. This is a simple (not smart) and short (not long) discussion on value investing.
Value investing is an approach when it comes to buying and selling assets and liabilities, or in my context buying shares of public listed company. Warren Buffett, Walter Schloss, Benjamin Graham, Philip Fisher etc are well-known and successful practitioners of value investing. It’s a time-tested approach, sustainable way of growing wealth, with many successes and case studies. It’s a strategy that I can attest to and that has worked well for me.
In a nutshell, value investing considers fundamentals of the business, industry and economy to exploit the discrepancy between price and value of an asset . Value investors hunt for assets or liabilities that are usually undervalued, meaning it’s intrinsic value exceeds it price substantially. For example, based on analysis, you come to a conclusion that this company is worth $5 but currently is selling for $2. Identifying this discrepancy and if given that fundamentals are intact, you buy shares of this company and wait for the correction to happen.
Sometimes, depending on the company, a falling stock is a perfect time to pick up more shares. As the saying goes, buy low and sell high – buy only in a cold, calm state this rationale holds. I have observed for a while the vagaries of the market to see that the aggregate market acts differently to this rationale. During the heat of the moment of an exciting, bullish market or depressing, bearish market, this rationale falls apart. Many buy high and sell low. Doesn’t make any sense isn’t it? When the emotional side of an investor kicks in, this unfortunately happens. I am not immune to it and sometimes do fall for this emotional trap. Through understanding value investing more, it can help mitigate the emotional effect of an investor.
It’s just like shopping -buying things that are a bargain. Despite the similarity between shopping and value investing, many failed to apply the price-value discrepancy when it comes to investing. This, however, is an oversimplification of value investing. There’s a lot more to it.
Many, especially the younger generation, wants money to come in fast. It is in from late teens onwards that many will start dabbling in the stock market to make some money. However, they treat the stock market as a place to make fast money. They trade based on news and rumours, using ’technical analysis’ to time and justify their investment, and holding on to their investments for only weeks or days. Not surprising that many got burned. Value investing, so far, from my very limited experience, is the only sustainable way with higher probability of making money over time.
Money is not easy to earn. It’s hell hard. But value investing, relatively, is a easier way to protect your capital and grow your wealth if and only if:
- you have the patience to hold on to your investments for medium to long term, and
- decent understanding of financial knowledge (eg. understand financial ratios, how balance sheet, profit and loss statements work), and
- most importantly, a good control and understanding of emotions and temperament that is not easily affected by fear and greed.
1) and 2) is pointless if there is no 3). We are emotional creatures. Our emotions overwrite our intelligence and rationale at any time.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” – Warren Buffett
if you think you need money to make money, you ain’t wrong. But you don’t need large amount of money to make money. Even few thousands dollars is good to start off with. If you understand value investing, the ‘magic of compounding’ will grow anything exponentially(unfortunately, including your problems as well, for example, like the interest on your credit card debt). I will explain how powerful compounding is in the next piece.
Having said all this, I am not advocating value investing as a sure, guaranteed way of making money. In fact, it isn’t the only way to make money in the financial markets. Risk and uncertainties of losing your capital is always involved. Value investing is a way to minimize these uncertainties whilst maximising the probability of a favourable outcome of an investment.
Value investing is not something super technical to pick up. If you are new to the stock market or considering the stock market to build your wealth, check out the below 2 books by Benjamin Graham and Philip Fisher. Warren Buffett described his strategy as ’85% Benjamin Graham, 15% Philip Fisher’. If you still don’t know who is Warren Buffett and yet you want to play the stock market, go shoot yourself. Just kidding, go check him out. He’s amongst the top 5 richest person in the world and have accumulated his wealth substantially through value investing.
These 2 books have been written easily 50 years ago and is still super relevant today. It will give you a solid fundamental on value investing. Read Ben Graham forquantitative aspects and Phil Fisher for qualitative aspects of value investing. Read both, not either one. Don’t repeat my mistake.I made a big mistake reading just one of the 2, missing out some really important principles.
This will give you a big head start to financial wealth over the long-term. Buy me coffee if value investing turns out really well for you sometime down the road! All the best!
[The next piece which I will post soon is about value investing in greater detail I wrote back in 2009. I discussed the difference between long-term investing and value investing, compounding, margin-of-safety and couple of other interesting concepts which should excite you if you strive to practice value investing]
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