Investment Style – Value Investing
What is value investing? Why Warren Buffett and Charlie Munger are value investors?
In this era of decentralized finance, bitcoin, NFTs, and other new fancy/experimental projects can create a FOMO and at the same time make you feel the old traditional way of value investing.
Let’s understand this time tested and much abused style of investing called Value Investing.
Charlie Munger says—Value investing is intelligent investing, acquiring more than for what you are paying.
Value investing is about knowing clearly what you are buying and buying that stock at a discounted price.
Benjamin Graham, termed as the father of value investing, defines it clearly as— An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
So value investing is an investment philosophy where you would thoroughly analyze a business/stock before investment to clearly understand in what you are investing in, and made sure that there would be satisfactory returns with no loose in the initial investment.
In Value investing, you make sure that you are buying your stocks at a cheaper price or buying them at a lower price than what the stock is really worth it.
Most use different valuation techniques to find out if a stock is priced lower than what it is really worth, or if it is priced higher.
If you notice here, we are valuable business/stock, which we thoroughly understand, at a low/cheap price and selling them later at a much higher price.
This may seem much intuitive now, but make would fail executing it. Not because they analyzed a stock wrongly or bad at buying low and selling high, but they fail because value investing will test your patience, a lot of it. You may never know when a stock price would be available at the price you ask for. As it is next to impossible to time the market, you have the conviction to wait till the market gives you the stock price you want to invest in. So your patience is tested a lot, while you wait for the price with money to invest in your hand.
It demands you to be financially disciplined. Since you would be waiting with cash at your disposable, you have to be financially disciplined till the time you are invested. You might have to save a lot, put a watch on the expenses and make sure you are not mixing your investing, insurance and expenses.
You should know your own psychology like your behavior, biases. As mentioned in the earlier articles, your behavior is your only enemy in the market. It impacts your decision-making more than any other thing. How you react to a policy change of the government? What you would do when a company’s promoter is selling his own stake in a company? What would be your reaction when most of the investors are panic selling? And many more things would all be dependent on your behavior.
So being aware of your biases, especially, Overconfidence bias, Confirmation bias, Availability bias would help you a lot in your decision-making. And what your instincts tell you, when the market is turbulent/volatile.
And you would have to read a lot. You have to read annual reports, investing books, blogs etc.,
Reading helps you build a conviction. A conviction with rationality makes being patient much easier.
Graham says—Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
So value investing is hard! But it gives you results. Charlie Munger and Warren Buffett, are the best examples of value investors, who practiced it for almost half a century and got rich.
The only reason why you might want to stick to value investing but not to the newer, fancier, investment styles or investments, is only that, value investors had made money while it is not the case with most of the other investment styles.
But if you think, value investing is not for you, then don’t worry, there are other investments philosophies too. You just have to find the right one for you. We are going to look at them in the future editions of the Minutia newsletter.
Until next time,
Peace out!