Hi there, so you want to know about value investing?
Value investing is simply buying a security for less than it’s price states it’s worth is. Value investing has proven to create massive long term results and most successful investors use this approach, whether they are aware of it or not is a different story. Value investing is common now, buying a growth stock, a stock which is under priced or a stock which has a margin of safety- these can all be classed as “value” investing.
Why value invest?
Value investing is simply a way for you to generate greater longer term returns than most due to your choice of stock options. Finding value can come in many forms and you should value invest as it allows you to almost make a promise to yourself, in which you are buying an asset which is worth more than the price you are paying in the status quo. Any investor should be value investing as it is smart investing.
You should value invest and it should be done knowing that you are able to expect returns long term, you don’t have to be exactly right with your method in measuring value. As long as you are in the right field with calculating value, you will promise yourself a greater chance at success in investing. Investing for value is not always commonly done, chasing the hot new thing will eliminate your chances of finding value investing. Disciplined emotions is more important in investing and this trait far outweighs anyone's ability to find “value” issues in the market.
What results can you expect through value investing?
You can almost certainly expect to beat the market, if you have the emotional aspect under control. Your ability to find bargain issues is also an important factor but this comes with practice and the ability to say no to many stocks before taking your shot. You should spend weeks to months finding a good stock and then go all in on that, this is how you beat the market- discipline in emotion and the selection process.
What if you lose money?
You should always have a margin of safety and a certain risk tolerance that you would expose yourself too. Don’t jump in the pond with both feet, yet those who crush it in the market are the ones who can do this and be right. Betting against the norm and being right is the ultimate test of emotional discipline and self esteem, but if you get it right- you will be able to have returns which are far above average. Not many have the stomach to do this and this is why most people do not beat the market.
You can safe guard against loses through diversification and some investors believe that you can still attain above average results in the stock market through diversifying, as long as you are taking equal weighted bets and those bets are not correlated to each other in any clear way. Diversification to reduce risk in my opinion is a mis conception, focusing on purchasing quality stocks will far outweigh what a multitude of stocks can give in terms of margin of safety.
As Warren Buffett would say: imagine you had a punch card and you get 10 punches, you would think long and hard about what you would invest in.
You don’t have to be right about many stocks, a few will do- you can get rich by getting it right 10 times over your whole life time.
How do you find value investments?
Typically by using various metrics to determine the stocks value in relation to the price it is selling at, yet in my opinion a good way to find the value of a stock is to understand what the future of the business is going to look like. You don’t have to understand everything about the business, as long as you can understand its likely future and whether the business is selling at a low cost in relation to the margin of safety.
Producing above average results will also come from doing what no one else is willing to do, since the norm is to discount cash flows and use basic metrics- perhaps a more unconventional investment approach would allow you to find businesses others would most likely over look. You don’t need to be smarter than the best investors, you just have to have the right emotional qualities and discipline- you need to be able to stick to your own personal philosophies when it comes to why you chose the stock regardless of what's going on elsewhere.
To conclude: Value investing is simple, simply buying small pieces of businesses in which you think are selling at a discounted price to what they are truly worth, or have greater future growth prospects to what the business shows upfront- to master value investing you must be able to read between the lines of a companies annual report and pick out key things that others would miss, this all comes with practice. Very few beat the market for a strong reason, most don’t want to do the “boring” stuff.
Investing is never boring, what’s boring is beating the market and learning nothing about developing your strategy- constantly learning and expanding on investment philosophies is the key to value investing.
Thank you for reading and have a fantastic week.
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