Thursday, 25 September 2014

Value Investing

Some years ago I was introduced to a book by Warren Buffett titled "The Intelligent Investor" written by Benjamin Graham. He recommended the book and described it as the one book that changed his life. I was searching for a life changing experience myself. I went and bought the book and took about two and half evenings to complete reading it. The chapters eight and twenty were the two most important chapters. The two most important things lead me to a better understanding of the principle of value investing around two central planks of investing. Number one: the investor and the fluctuation of the market and two, the margin of safety.

As an investor you have to develop the emotional strength or fortitude to hold your ground on an investment despite the volatility of the stock price movements of the company. Price is what you pay and value is what you should get.

You may have to remove yourself from an environment of euphoria and or excitement of any market sentiments that may impact your quiet thoughts before and after you have made an investment in the stock of a company. The value of company is not necessarily determined by the stock price. The stock price operates at the whims and fancy of the market and does not always represent the true value of the company. You want strike when this market misprice exists.   

The fear of losing money should the price of the stock decline can be countered with a margin of safety. In this case, that margin of safety means simply buying the stock at a deep discount to the book value of the asset of the company. This can be judged by the 52 week low price, low P/E ratio, low book to earnings and any other valuation metrics that may suggest it is time to buy. These opportunities generally come up when there is bad news on a company and the market beats down the company's stock price into the ground making it dirt cheap. Before you run into a cheap stock you must do some research homework to make sure the company can rebound from Mr. Market's melancholic mood.

Your research homework can start with a Phil Fisher's "Common stocks and uncommon profit" that will help you with your research approach. Phil Fisher is the other side of Warren Buffett investment skill sets and that is what made him half Graham and half Fisher. 

I will conclude by saying "buy Mr. Market on the sad days at deep discount and at margin of safety that protects you from losing too much in a declining market, but provide a bounty on the upside in a market recovery". Do your research before you jumping two feet in. Remember even when one horse enters the race, is the sole runner and appears to be a sure winner, don't forget he may jump the fence and not complete the race.

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Warren Buffett on investing:

Phil Fisher on Common Stock: