Value investing is the fundamental of Buffett’s investing strategy while it is similar to buying something while it’s on sale. An easy example would be like buying a Christmas card in January at bargain price of about half the price of the same card during festive seasons a month earlier. If you buy the Christmas card and use it the following Christmas, you would have earn a 100% on your investment. If you tend to come up with such an ideas in your daily life, implement them and compute them to become your potential returns, you are a natural value investor with good stock analysis skills in nature.
Value investing in stock markets
In stock market, value investing is you buy when prices are relative low to fundamentals (e.g., PE ratio and book value), and then wait for the prices to go up. Most stocks do not sell for a bargain price, just as most of the items in mall do not sell for half prices. Good deal do not comes in everyday, an investor would have to wait patiently for such opportunity to arrive. And you need even more patience after you buy a stock. It often take time for price to reflect its value.
The stock market also has complications. Christmas faithfully arrives in every December and the opportunity to invest comes soon after that but a good stocks do not announce their arrival. Nor you can anticipate the industry and timing always and knowing the opportunities might arise.
Value investing principles
Benjamin Graham developed the core principles for investing in financial securities. The common elements study that value investing implies an investing style that emphasizes using financial ratios such as price-to-earning (PE) or market-to-book ratios. It also commonly invoked when one does not invest in fast growing companies and sticks to conservatively financed companies such as ‘COCA-COLA’. A value investor is focuses first and foremost in preserving capital and earning high returns is desirable but secondary. But we want to preserve the capital yet still yielding high returns, and that is when value & growth come in place.
I have listed down a few principle in summary based on value investing:
- Price should not be high relative to company’s average earning
- A sharp decline generally presents a good investment opportunity
- The industry that leads the decline
- Company selected should be large, prominent and conservatively financed
The basic idea behind value investing is to purchase a stock at a sensible price using benchmarks such as earnings, dividends, assets and other that can be developed. Today’s trading platform usually offer such facility if you sign up with them. But the questions comes back to you whether you really any different from the average person who claims to be a value investor but failed to practice the basic principle? Are you?