• Mail Me @

    anand@wealthvidya.in

the word Value of value investing is explained with balance, with the weights price and value

First of all, believe me, value investing is the sure and certain path to riches and wealth creation. Benjamin Graham taught it at the Columbia University and Warren Buffett follows it to date. Graham’s classic book, “The Intelligent Investor” is the foundation on which value investing is built.

By following the teachings of Graham, Warren Buffett, and the investing wisdom painstakingly compiled on this blog, I am sure you can become a Crorepati, an Indian term for a millionaire. Come, let us together travel this highly rewarding and exciting path of wealth creation through value investing.

So, what is value investing?

Vital Ingredients of Value Investing
Following is the list of ingrained features of value investing:
  1. Safety of investment
  2. Investments based on a thorough prior research
  3. Assumption that investor is the 100 percent owner of the business
  4. There is an advantage of investing early
  5. With an intent to hold the stocks for eternity
  6. Wishing to reap the delicious fruits of dividends, bonus shares and finally long term capital appreciation; not just the gains arising from short term price movements
  7. Keeping the twin emotions of greed and fear under check
  8. Long investment timeframe

The Advantage of Investing Early from the book "The Intelligent Investor"

Investment Safety and Value Investing

Safety of investment or capital is the cornerstone of value investing. Warren Buffett prescribes two rules for investing, as follows:

  • Rule number One: Don’t lose money
  • Rule number Two: Refer to rule number one

Why should you be careful not lose money?

Because, if you lose, you will have to make twice the effort to get back to where you started.

Therefore loss aversion and safety of investment are of paramount importance.

Fine, but how to ensure investment safety?

Well, investment safety is a vast subject but we will understand it in summary here:

  • Invest but do not speculate. You should never ever indulge in day trading or margin-trading.
  • Make investments in stocks only after a thorough research of the company
  • Never buy stocks at a high valuation. Never pay a huge premium over the fair price of the stock.

Reliance on Thorough Research in Value Investing

While day traders rely on technical charts, we value investors focus on a thorough fundamental research of the company and the stock. We try to go back into the past as possible but consider at least 10 to 15 years as a minimum period required.

The study covers the following:

Statements/ Reports:
  • Annual reports of the company
  • Profit and loss account
  • Balance sheet
  • Cash flow statement
  • Directors’ report

Financial ratios:
  • Profitability ratios:
    • EBDITA
    • EBITA
    • EBT
    • PAT
Liquidity/ Solvency ratios:
  • Current Ratio
  • Debt-Equity Ratio
  • TOL/ TNW Ratio
  • In addition to above, we make an attempt to gauge the management integrity, transparency, dividend policy and so on.

The length of uninterrupted dividend paying track record of the company is also studied. This aspect is very important for us, the value investors as we consider dividends are investor’s wages.

Assume You Are the 100% Owner

An equity share of a company is not an independent,  commodity. It represents a fractional ownership. When you buy a share, you become a partner of the business. We should make an investment in an equity share/ stock with full realization of this fact. Now, how carefully will you consider the proposal to buy your highly successful neighborhood restaurant? After having bought it how will you cherish it? How will you care for it and tend to it? We should make an investment in a stock the same way. Why? Because owning a share is the same as owning a business. And, so, when you buy a share do it assuming you are buying the whole business. This how Warren Buffett makes his investment decisions.

Why? Because owning a share is the same as owning a business. And, so, when you buy a share do it assuming you are buying the whole business. This how Warren Buffett makes his investment decisions.

Because owning a share is the same as owning a business. And, so, when you buy a share do it assuming you are buying the whole business. This how Warren Buffett makes his investment decisions and we should do too.

Value Investing is for the Long term

Investing is a long term affair. Value investors invest in stocks of excellent companies with a clear intent to hold them for ever; unless something fundamentally or irreversibly goes wrong with the company.

value investing advises that outstanding stocks are worth keeping forever

Warren Buffett advises investing in stocks assuming that the stock market will be closed for the next ten years.

What is the logic behind this long term philosophy?

There are a few sound fundamental reasons for this as follows:

The Power of Compounding:

Long investment period actually creates lasting wealth; not investment genius. Time creates wealth through the operation of the power of compounding. Albert Einstein discovered the power of compounding. In simple terms, compound interest principle produces the spectacular multiplication of the principal or the corpus after about 30 years. This is evident from the following graph:

Spectacular Value Investing results are produced by the power of compounding

We can reckon from the above chart that the wealth line starts climbing steeply from the 30th year onwards.

The Advantage of Early Investing:

By starting early in life we can benefit from the power of compounding. When asked about one profound secret behind his phenomenal investing success, Warren Buffet replied that he simply had the good fortune of starting early. He said that he used to visit his father’s office, who was a stock broker, from the age of nine and that had bought his first stock at the age of eleven.

So there is a clear advantage of early investing. Our elders certainly were serious when they said, “Early Birds Catch the Prey”?

Advantage of Investing Early

Mastering Greed and Fear

Value investing teaches us to master the twin emotions of greed and fear. These two emotions ruin the fortunes of thousands of innocent and uninformed people on the stock market, throughout the world. These people usually enter the stock market, lured by the desire to make a fast buck from the stock market when the market has already advanced to unsustainable heights. Invariably they would have paid fancy and unjustified prices for the stocks. No wonder the market crashes soon. Now the emotion of greed is replaced by fear. They simply dump the stocks at throwaway prices and exit the market hastily. In the process, they have ruined their capital and lives.

Value Investing teaches to keep under check the two emotions of greed and fear

The value investors, on the other hand, have mastered keeping greed and fear under complete control. They are unfazed by the market turbulence for they had bought stocks at or below their fair price. On the contrary, they profit from the folly of market participants by lapping up the stocks of excellent companies cheap. Warren Buffet invested in the preferred stocks of Bank of America during the market mayhem after the collapse of Lehman Brothers.

Conclusion

Value investing is a safe, sure and easy path to wealth and riches. Value investors achieve wonderful investing results through patient and prudent investments in stocks and bonds by employing various concepts and techniques enumerated above. You too can immensely benefit from the time tested wisdom of value investing and become a Crorepati or a millionaire.

 

Subscribe Here