WHAT IS VALUE INVESTING?

There are many types of value investors. Value investing is just a philosophy of investing but investors can practice the same philosophy with different strategies.

Think of them as all food lovers but each of them likes different type of food. Similarly, each value investor can invest in different companies with different characteristics, but they are all based on fundamental and logical reasoning.

Some of the different type of value investors includes:

• Growth Value Investors

Investors who look for fast growing companies with huge potential.

• Deep Value Investors

Investors looking for companies selling at a sharp discount to its intrinsic value.

• Income Value Investors

Investors who look for companies that produce consistent earnings or dividends.

• Investigative Value Investors

Investors who like to research in deep detail about a company to find possible way to profit from the company, either through investing or shorting the stock.

• Specialist Value Investors

Investors who just focus on industries that they are comfortable in.

They Are All Different In The Same Way

So what are the characteristic of value investors that bond us all together? Value investors have 4 keys common trails. They are:

• Fundamental Investors

We focus on  the business of the company and not the share price. Every stock ticker is a company and we have to view it like a businessman.

• Long-term Investors

Value investors think of investings in term of years, not days or weeks.

• Continuous Learner

Investing is a life-long pursue. There is always something new to be learn in the world of investing and business.

• Stock market can be irrational

We know that the stock market can be irrational. This means that stock prices can go up or down for no logical reason. Value investors know that we can profit from the market’s irrationality, by buying low when the market is fearful and selling high when the market is greedy.

History Of Value Investing

Many “investors” in the past are mostly chartists or used technical analysis. However, Graham and Dodd basically give us the idea that we should invest like a businessman. Instead of seeing stock ticker as just a price, we should see the business behind that ticker and understand the risk and reward of that business.

That idea of value investing is first coined by Benjamin Graham and David Dodd through their legendary book “Security Analaysis” published in 1934. Many saw it as the “bible” of Value Investing.

Security Analysis

Benjamin Graham is also considered the mentor to billionaire investor, Warren Buffett, arguably the most famous value investors in the world. Given the wild success of Warren Buffett, the popularity of value investing exploded over the past five decades.

Key Concept Of Value Investing

Another important book that Benjamin Graham wrote that greatly helped promote the concept of value investing is “The Intelligent Investor”.

The Intelligent Investor

Some of the key concepts that is discussed in the book about value investing are:

• Stocks are Businesses

Stock are business and we should focus on just the business and not the stock ticker when doing our research.

• Intrinsic Value

Each company has a intrinsic value to the business, regardless of what the stock price might be. The opportunity comes for investors when the market stock price of the company differs from the investors’ estimation of the intrinsic value.

• Margin of Safety

As intrinsic value estimation requires the investors to make many assumptions about the business, it cannot be 100% accurate. An investors can compensated that by adding a margin of safety to the intrinsic value when buying a stock.

For example, if the investor estimated that Company A has an intrinsic value of $5.00 per share. He can buy it only if Company A is trading around $2.50 per share, giving him a margin of safety of 50%. In this way, even if he has made a mistake on calculating the intrinsic value, it ensures the investors still have some margin for error.

• Market

The idea that the stock market is just an illogical and highly emotional business partner you have in your investments. Everyday, Mr. Market would come to you to offer to buy or sell shares of the companies on the stock exchange based on his mood. It is up to us as investors to see if the deal is beneficial for us by comparing it to the intrinsic value of the company.

• Contrarian

Being a value investor would mean that you can see things differently as the market. We do not need to keep following what the market is doing, ie. Sell together with the market during market panic or buy together with the market during a rally.

Value investors should have the confidence to make our own decision based on logic and information we gather, instead of merely just following what everyone else is doing.