Value investing is a concept that can be applied in your approach. While the idea is simple, the executing it takes work. In this article, we will walk you through the concept and show you how to become the next Warren Buffet.
Who doesn’t love a good bargain? The rush (and bragging rights) you get from scoring a good deal on that much-coveted item is one of life’s little pleasures *chef’s kiss*. Ask any Malaysian on sale day. Great deals don’t just apply to consumer goods. Similar to a savvy collector scouring e-Bay for “mispriced” valuable items, by looking around and doing enough research, you’ll uncover some bargain assets. Then, it’s no longer called bargain hunting – it’s called value investing.
With value investing, you’re buying stocks for less than they are worth in the market. The concept of value-spotting probably goes as far back as the idea of money itself, or even as far back as the days of bartering, but the folks who first described it and applied it to the market were two Columbia Business School professors named Benjamin Graham and David Dodd. These professors discussed it in their book, Security Analysis, published in 1934. Graham further elaborated on the concept in his book titled The Intelligent Investor, which elevated him to “Father of Value Investing”. The mind-blowing concept of this nature can be exemplified by = Warren Buffett, one of Graham’s students, who became a billionaire by practicing what he learned.
Value investing isn’t unique to Buffett. Other famous value investors include Carl Icahn (fictionally represented as Gordon Gekko in the film Wall Street), and George Soros. For Icahn, his start in value investing was less direct, as he was originally involved in options trading. But, in 1978, he launched a takeover of Tappan, an appliances company that he considered to be poorly run and not performing to its full potential. That’s what sealed his reputation as a value investor.
As profound as it may be, value investing is also very obvious. And yet, not many actually practice it, maybe because it involves significant effort, patience, and discipline – it's not about flying in private jets like a YouTube guru. This isn’t a shortcut or a get rich quick scheme; it’s a tried and tested long-term strategy that has helped turn investment idols into billionaires.
What sets these pro investors apart from the rest of us is their mental approach. It’s always a long game based on careful analysis. Value investors actively search for stocks that they believe are trading below their true worth and have the potential to generate higher-than-average profits in the long term. The game is to spot market inefficiencies (similar to buying designer handbags overseas to resell here at a higher price) and capitalise on them.
You don’t need to orchestrate a takeover like Icahn, but you can apply the ideas to your investing approach.
Value investing often involves keeping a well-diversified portfolio and holding onto stocks for a long time, allowing the market to catch up and correct the “discrepancies”, thereby unlocking the full value of the stock.
To be able to do this, you must understand the fundamental factors behind the stock. Understand what goes on behind the scenes by studying a company’s financial statements, earnings potential, growth prospects, and even the management team. By diving deep into the company's fundamentals, you can gain insights into its true value and identify potential investment opportunities. Look for companies with stable revenues, solid balance sheets, and a history of generating consistent profits. Consider the company’s price-to-earnings and price-to-book ratios, dividend yield, and return on equity, among other financials.
Buffett is a very patient man. Patience is one of the most important traits of a successful value investor. Value investing is a long-term strategy that requires discipline and the ability to stay cool and hold your position during short-term market fluctuations. Generally, it takes time for the market to correct the pricing discrepancies of undervalued stocks. Therefore, it's essential to have a long-term mindset and the willingness to hold onto your investments as the market recognises their true worth.
You should also have the patience to start small. You learned to walk before you ran – same thing here. Take small bites and gradually increase your investment as you gain confidence and experience. Start researching and investing in just one or two undervalued stocks and track their performance. You will make mistakes, but that’s okay because you didn’t put your life savings into it.
While value investing offers great potential for wealth accumulation, it's crucial to focus on risk management. We’ve said this million times before, and we’ll say it again: diversification is key to mitigating risk in your portfolio. It's also crucial to set realistic expectations and not invest more than you can afford to lose.
Learn from the best. Study the strategies of well-known value investors like Buffet, Icahn, Soros and Charlie Munger. Pick up those books from the sifus that we mentioned earlier and implement what you’ve learned to develop your own strategy.
However, don’t just read those books and think you know everything. The market is constantly evolving, so it’s important to stay informed and keep learning. New knowledge will reveal new opportunities.
Becoming a value investor is a journey that requires dedication, patience, and a commitment to continuous learning. By understanding the fundamental principles of value investing, conducting thorough analysis, staying patient, and managing risks effectively, you can position yourself for long-term success in the stock market. Remember, always consult with a qualified financial advisor before making any investment decisions.