What is value investing? And the real sense of it, let’s discuss in today’s post.
“An investment operation is one which, upon through analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative” Benjamin Graham
There are three important criteria, Lets dig dip,
1) Thorough Analysis
What does that mean? Before investing in any kind of asset, you have to analyse the asset thoroughly. In terms of equity as an asset class, you must analyse the sector, business of company, the management, financial and the most important factor is valuation. Basically thorough analysis means, remain in your circle of competence, if it’s outside your circle, study, learn and expand your circle of competence. Think about the in and out of the company
The safety of principal amount is very
necessary, and the asset in which you are going to invest, must promises the
safety. But in equity we are going to tell, there is no safety, yes there is no
safety, but we can at least secure the downside, by buying on margin of safety.
To further understand this point, let’s see an example.
According to Klarman:
“A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world”
3) Satisfactory Return.
It’s essentially to expect satisfactory
return than greedy return, because greed is an emotion, and investor get it
wrong is first place. While considering satisfactory return focus on
compounding, and time horizon, longer the investment, it will give you great
returns.
Value investing is a philosophy, not a technique. It's a way of life for them.
In reality, value investors approach everything they do,
whether inside or outside of finance, in the same way: by using certain
criteria to make a decision and displaying emotional discipline along the way.
These patient thinkers use all available resources to make a decision, but they
do not rely on any one source. They complete their own work. Value investors
have faith in their abilities, instincts, and philosophy. Their financial
strategy reflects their unshakeable personality.
The value investor's purpose is straightforward: buy good
firms at exceptional prices in order to generate adequate after-tax returns
over a lengthy period of time.
After investors have completed their research on a company,
an appraisal of the firm's value is performed, and a reasonable price to pay
for the business is determined. The essential takeaway here is that the most
successful investors have a structure and approach to equities.
It is the market participants who make things complicated.
Warren Buffett boiled it all down to buying firms when their worth was greatly
discounted.
Unfortunately, there appear to be different definitions of
what constitutes a "great" business is; there are also numerous
techniques for investors to determine if they are getting a good deal on a
company. Even among value investors, opinions on the relationship between
corporate value and price varies. The goal is to ensure that your definition of
a "great business" matches your definition of a "excellent"
price.
The price paid is only important if it is proportional to
the value of the firm. Fair value is a destination; price and time help value
investors decide whether the journey is worthwhile. The gains have to justify
the risks. Price and value share a delicate balance in a rational market
system, since one influences the degree of the other. They should never be
separated away.
So, its not at all about extraordinary returns, its about
satisfactory returns, with safety of principal, and after having through
analysis about business, management and finance. Its not possible about that. I
will tell you; Value Investing is a great approach to follow throughout life. It
will give you financial freedom, if you do it properly.
I will write more detailed about it going forward, till then
happy Investing
Happy Investing & Trading
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