Value investing is probably the most simplest style of investing ( i still doubt whether there are other styles too for investing) to understand. It can however be a misguide if not properly followed. You will know all the things you need to know for value investing but you will probably do some other thing itself and you will be still in the disguise that you have invested in an undervalued security. i would just like to tell a brief about value investing because i believe each and everyone should probably at least know something about value investing which helps as a framework in your overall decision making process. Developing and following a decision making process in investing is probably difficult but knowing value investing helps. This is just an introduction for value investing and there is still a lot to be explored for everyone in value investing.
Value investing strikes to you in a second literally in a second it is so simple to understand. If i say value investing is simply buying dollar bills for cents which means you have a right to get a dollar if you pay a cent today. Value investing is buying undervalued securities which have been ignored by the market. i know that all the business school MBA’S have learnt about the efficient market theory which says market is always efficient and hence there are no undervalued or overvalued securities but i surely believe that it was a smart move by business schools to reduce your already overburdened MBA syllabus. There is no such thing such as an efficient market. There is enough historical evidence and i do surely believe there will also be enough future evidence for the same. The efficient market theory exaggerates to such a point that it says the market knows all the things which are available of the each and every business so perfectly that it has already discounted it into the stock price. Do i need to say anything else to prove that the efficient market theory is absolutely stupid theory. Managers who day in and day out run their business may also not be able to value their business so effectively. When you follow the efficient market theory the market is making a decision for you and i guess that you should not like someone else (that to Mr Market) making a decision for you.
i believe that there are situations which are undervalued in the market. Value investing is typically a situation in which the market does not realise the potential earning power of the company and quotes an extremely silly price. You as a person can guess the future earning power because of your analysis and you come to know the undervaluation of the market. You don’t have to perfectly right about what is the value of the company. Ben Graham the father or i will say the pioneer of value investing has an excellent to explain this-
You don’t have to know the exact weight of a person to tell that he/she is fat.
You can always make a rough guess as to the value of a business in a range. It is far more easy to predict the value or the worth of a business in terms of a range say (10-30) rather than an exact figure say 19 . You can then compare the value you got with the current market price per share and then decide whether the company is undervalued or overvalued relative to your valuation.
The below tweet although tweeted by me was originally written by Benjamin Graham –
The best value investing ocassion will be probably women buying groceries. #valueinvesting
— monik gandhi (@simplebs1010) March 2, 2016
You don’t have to always buy when you think the market is undervalued in the words of legendary money manager Peter Lynch-
If you don’t invest in a company you still have 100% of your money.
Warren Buffett who can be regarded as the character voldemort in Harry Potter movies which didn’t have to be named to understand which means if i say that the one you know who in value investing the first name that might come in your mind now will surely be Warren Buffett.
He says that investing is like hitting baseball pitches with the fantastic modification that there is no referee who will ever call a pitch. You can let thousands of pitches (companies go buy) and only strike on the one which you feel most comfortable.
Value investing was first pioneered by Benjamin Graham and his partner David Dodd in 1934 you heard it right it is pretty old and a time tested method right.
The best part about value investing is that it is suitably modified by each and everyone who uses it but still the foundations remain the same. It is like a book which is only filled for the first few pages and the rest will automatically fill when you do value investing with your approaches. You don’t have to get all the people agree to your approach what matters is that you are convinced and are perfectly convinced with the approach. It is YOUR approach.
Value investing should not be confused as contradicting to growth investing. i believe but are not contradicting but are rather supportive to each other. Value investing can include growth investing. Value is not always necessary to be found only in retrenched enterprises but it can always be found in some companies with a fantastic growth potential. Companies with consistent long term growth have a more than a great chance of being undervalued as the market may not always realise the future growth potential of the company. Such companies do have a moat with them. Moat is an favorable advantage with the company. You can check my article on moat here.
By future long term growth i am not talking about fancy but stupid predictions made by brokerage houses with the use of complex formulas and excel sheets which i would never understand. i believe that if a company has a durable and a long term moat you can pretty well predict the long term earning power of the business. That is very much simple i guess.
People show an awesome amount of simplicity in one thing making things complex.
I am sure you will like the world of value investing. So don’t fear anything for sure in investing keeping it simple helps in keeping it effective.
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